Further, although purchase volumes are projected to increase in 2018, overall originations are expected to be less due to the decrease in expected refinances. This is not good news for struggling mortgage lenders.
According to the most recent Fannie Mae Mortgage Lenders Sentiment Survey, the answer is that lenders will continue to ease credit standards in attempts to qualify more loans.
Lenders have been gradually easing these standards since the 4th quarter of 2016. Hopefully, they don’t push the envelope too far.
Lenders believe they may continue to do so because of the reduced concerns from regulatory burdens, enhanced Agency underwriting criteria and clarification and expansion of rep and warrant relief, highlighted by Fannie’s Day 1 Certainty program. Maybe so.
The survey provided some contradictory information with the net share of lenders reporting:
- See a purchase demand declining for the next 3 months vs. the last 3 months, yet
- An expectation for an overall increase in demand over the next 3 months remaining stable.
- Those with a negative profit outlook declined and
- More lenders reporting a negative outlook than positive.
Lenders cited that the main reason for their negative outlook on projected profit margins is due to competition. Everybody is vying for a bigger piece of a shrinking pie.
So, is the answer a further easing of mortgage credit standards?
These are challenging times and the mere easing of credit standards may not be the simple answer.
Sure credit was tightened, maybe a little too much, after the crash, but the results are better quality and performing loans with much fewer delinquencies. That was the goal.
No doubt, there’s room for credit easing but within reason. Lenders must be very careful not to chase the buck at the expense of all else.
Meeting lofty, required production goals by producing riskier loans can also result in decreased profit margins. It may take more resources to produce, process underwrite and close such loans, with a much greater potential for rejections, defaults, indemnifications, and repurchases.
It’s risky business.
Look to match projected loan origination volumes to loan origination expenses. Be careful not to spend too much money chasing business. Rather than just easing credit standards in attempts to generate more loans look for ways to balance production, expenses and ways to make each loan produced more profitable.
Technology can help. Generating clean, quality, compliant loans will pay big dividends down the road. Don’t just chase business.
Set the right standards, identify your target markets, train your staff and then capture profitable loans. Loans that will be purchased the first time delivered, at the negotiated price that will perform as expected.
So, use any eased credit wisely and to your advantage. But, remember everyone will be originating loans under the same eased credit standards. These are not what will provide you with a competitive advantage.
It’s what you do, and how you do it, that will make the difference. Lend smarter my friends.