A tale of two origination stories in one year

As one looks back to early 2019, any mortgage professional would acknowledge that early in the year the residential origination market slowed down more than expected: lenders were right-sizing personnel while losing money and warehouse banks were panicking that many of their counterparts were headed toward closure or acquisition. Then about halfway through the year things changed, and origination volumes went from famine to feast. As one mortgage industry expert put it: “100 basis point drop in rates certainly helps.” It truly was a tale of two very different origination stories in one year!

2019 will be remembered for high volume, historically low interest rates, Millennials starting to make significant inroads with home purchases, and an economy that hummed along (albeit at a slower pace than other economic expansions). We now have home builders declaring that they want to be part of the solution by committing resources to help first-time homebuyers. Initiatives like Freddie Mac and Fannie Mae’s Duty-To-Serve are also expected to help increase the number of first-time homebuyers.

What impact will 2019 have on 2020?

Let’s take a look at a few topics that I anticipate will spill over into 2020 and beyond. The LIBOR Index will be going away January 2021, and the current leading replacement – to be announced by June 2020 – is an index called SOFR (Secured Overnight Financing Rate). SOFR is calculated using actual transactions and is considered a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities. LIBOR, on the other hand, is set by a panel of banks submitting estimates of what they think their borrowing costs are. SOFR is just one rate — an overnight borrowing rate. LIBOR, on the other hand, has many maturities, ranging from as short as overnight to as long as 12-months. Because SOFR is an overnight rate, SOFR has been biased lower. All else being equal, shorter maturities tend to have lower yields.

The ongoing saga of GSE reform will continue. Recently, FHFA Director Mark Calabria said the Treasury Department will not be doing a profit sweep to allow both Fannie Mae and Freddie Mac to build up the capital position necessary to begin recapitalizing the GSEs and releasing them from conservatorship. These and many other initiatives will set up the foundation for what the residential mortgage market will look like in the future.

Disruption to increase efficiency?

We can’t discuss any industry today without mentioning the “disruptors” that continually attempt to change how we do business in mortgage land. There are many fintech firms and data providers that promote ease of use and increased efficiencies which seem to be gaining momentum. The digital mortgage is a popular topic of discussion; technology firms are clearly changing the way we sell loans into the secondary market, whether it’s best efforts or mandatory sales to one of the aggregators.

The roles of hedge advisory firms, lenders/originators and aggregators changed dramatically in 2019. Product and pricing engines, along with the lender/aggregator bid process, have become more integrated within lender/originator LOS (Loan Origination Systems), which has clearly increased efficiencies. One can argue that many of the inefficiencies in selling loans have been eliminated through automation. This development will be interesting to watch as we look to the future.

Non-QMs continue to grow

The major storyline regarding products and programs in 2019 was the exponential growth of the non-QM segment of the business. Overall volumes have doubled every year for the past few years, but non-QM still only represents less than 5% of the overall residential origination market. In the early part of the year, lenders were scrambling to look for other menu options as acceptance rates for many of these loan programs grew. Many industry experts feel that when interest rates rise and acceptance by investors grows, this market segment will become even more favorable to lenders.

In summary, 2019 started very slow but is ending on a more profitable and higher note for most industry participants. A nice post-Thanksgiving gift for lenders was that the GSE loan limits were raised 5.3% based on a FHFA formula to $510,400. This will certainly help the purchase market as we head into next year! This is one of the largest increases I have seen in my over 35-year career in the mortgage sector. What a great way to keep the momentum going as we enter 2020!

Lloyd San

Lloyd San - Retired MGIC Mortgage Market Manager

A 30-year mortgage industry veteran, retired in 2021, Lloyd San served as Mortgage Market Manager for Mortgage Guaranty Insurance Corporation (MGIC). Overseeing a national effort, he was responsible for managing all client-related capital market activities in the areas of bulk and correspondent loan referrals, investor introductions, structured products, whole loan sales, as well as product and personnel introductions.

In addition, he is chairman of the California Mortgage Bankers Association, Secondary Marketing Executive Committee and also serves on the Western Secondary Conference Committee.

A graduate of San Diego State University in California, Lloyd received his MBA in Financial Management from National University. He also holds a California Real Estate Broker’s License.