The mortgage industry was prepared and braced itself for a more than 20% drop in overall residential mortgage originations for 2016. The closing process for mortgage originators would change forever due to TRID, which was going to be fully implemented and perfected by the lending community by the end of the first quarter. Closing times were certainly headed in the right direction after the Consumer Financial Protection Bureau enacted the TILA/RESPA Integrated Disclosure Rule, also known as the Know Before You Owe rule.
Then there were the unintended consequences of TRID regarding selling loans into the secondary market. Some mortgage investors refused to buy home loans at risk of violating new consumer disclosure rules. The problem appeared to be worst among nonagency jumbo loans purchased by private investors.
With the expected downturn in business, combined with higher compliance costs and lower volumes, there was a lot of talk from industry observers/analysts that merger and acquisition activity would be on the increase throughout the year and that the lender landscape would change. Many due diligence firms predicted that more “fintech” firms would appear in 2016, challenging traditional mortgage lenders by offering marketplace and consumer-direct solutions. The well-documented Millennial market would grow homeownership in 2016, but not at the level of expectation.
Many experts anticipated increased interest in second mortgages, consumer loans, student loan refinancing, marketplace lending and piggyback purchase lending. The term “marketplace lending” was used more within residential lending, as it is synonymous with “peer-to-peer” lending — or “P2P,” as it’s known — where borrowers get matched online to lenders. A case in point is a national mortgage lender that referred to itself as a “marketplace lender” in trying to brand itself differently from just a mortgage lender. The reason is simple: If and when it did an IPO (initial public offering) to raise capital, being viewed as a marketplace lender could fetch more dollars and interest in the capital markets, as opposed to being viewed as a mortgage lender. This is a significant market development as the national lender was not able to pull off an IPO structure in either scenario.
In an early 2016 Reuters poll of economists, the Federal Reserve was projected to raise interest rates only 3 times this year, as it faced a more subdued outlook for both the US and world economies. As you may recall, during the last Fed rate hike, it was discussed that they would strike 4 times throughout the year. We may yet see a rate hike in December 2016.
Let’s fast-forward to mid-to-late 2016. I’m reminded of the 1988 World Series, where Vin Scully, famous, recently retired Los Angeles Dodgers baseball announcer, had this to say about injured pinch hitter Kirk Gibson’s home run, “In a year that has been so improbable… the impossible has happened!”
That’s how 2016 has played out for the mortgage industry. Most industry forecasters predicted higher interest rates, lower overall volumes and increased lender consolidation. None of that occurred. Forecasters eventually saw that reality brought on historically lower interest rates, higher volumes with more refinances than anyone expected and a lack of consolidation activity due to lenders and buyers not being able to agree on price and terms. Potential sellers felt they were worth more than what many buyers were looking to pay, according to industry analysts.
The 30-year fixed-rate mortgage saw interest rates fall to the lowest level in 3 years, as expectations for the Federal Reserve’s June meeting and Britain’s potential exit from the European Union drove investors to the safety of US bonds.
In the first week following the historic Brexit vote, rates plunged and new mortgage refinance activity soared to the highest level in more than 4 months. The sharp decline in interest rates in the wake of the Brexit vote caused some unrealized headaches: consumers backing out of rate locks and worries that some lenders could be hit with margin calls on loans backed by servicing rights.
Large servicers that paid too much for those Mortgage Servicing Rights were fearful of the many writedowns that some of them ultimately had. A few of the larger publicly traded nonbanks experienced this in a very painful way. Due to historically low rates, the non-QM space is still struggling in aggregating volume, as we see with a few of the nonbanks that heavily promote this segment of business. Although many of them are more optimistic than ever before, the bottom line is actual volumes within this space have not met expectations.
Shifting gears, what was once unthinkable actually happened, as the United States Court of Appeals for the District of Columbia Circuit handed an earth-shattering victory to PHH declaring the CFPB’s leadership structure unconstitutional and vacating a $103 million fine against PHH. The CFPB’s single-director structure represents an unconstitutional concentration of executive power, a federal appeals court said. An independent agency managed by a single-director is a no-no, according to this court ruling. If the ruling stands, it could have far-reaching impact on other government agencies such as the FHFA. Of course, the CFPB later appealed the decision.
What many consider an improbable scenario happened with the recent presidential election, as a result — banks may actually have a renewed interest in mortgage lending due to higher rates and possibly a different tone in Washington regarding regulatory enforcement. President-Elect Trump has suggested he is looking for regulatory relief and will be taking a pro-growth strategy regarding economic decisions which could impact how the CFPB functions and change Dodd-Frank. We haven’t even brought up the possible implications to HUD, FHA, and the DOJ with their extensive use of settlements going after larger banks and mortgage companies using the False Claims Act as a vehicle for penalties against allegations of improperly originating FHA-insured loans.
As of now, 2 large national nonbanks continue to rebuke charges by the DOJ that they were involved in any wrongdoing. And let’s not forget after what happened immediately following President-Elect Trump’s victory —rates going up 50 bps in a week! The hope of an economic growth plan is behind the euphoria: infrastructure spending, regulatory relief and major tax reform for businesses and individuals.
2016 is shaping up to be one of the most exciting and unthinkable years I have ever been a part of in the mortgage industry. I can hardly wait for 2017!