In its latest Insights Report, mortgage advisory firm STRATMOR Group connects the dots between lender profitability and business mix and details how the coming purchase market will impact lenders that are not prepared. In “Prepare Now for the Storms Ahead: Build Your Purchase Business” Garth Graham, STRATMOR senior partner, reveals the data that makes clear the causal link between high refinance volume and high profitability.
“There are storm clouds on the horizon, and those storm clouds are going to create a climate that will require lenders to compete more aggressively on purchase loans,” Graham writes. “It’s not just that the refinance loans are going away and that there will be less total volume. It’s also that lenders are worried about how they are going to keep up their volume and their profit margins in a purchase market. As the market shifts, it will create a storm that not all lenders will survive.”
In the article, Graham highlights industry data from the Mortgage Bankers Association (MBA) that clearly links refinance business volatility to shifting profit margins for lenders.
“The purchase market is predictable, with year-over-year adjustments that do not break the business plans of purchase-centric lenders,” he says. “The challenge is that when the refinance business skyrockets (or falls back to earth), it upsets the entire origination market.”
That’s not good news for lenders that primarily focus on refinances because all indicators point to a significant drop in refinance business next year. However, lenders can build a plan to grow their purchase volume and predict their success more accurately, Graham says.
“The biggest impact of the drop in refinances will be a decrease in profits overall,” Graham writes. “Here’s the rub for most lenders: Purchase loans are harder to market and convert, harder to process, and they generate lower revenues and higher expenses.”
Lenders need to prepare for this coming storm now, he says. In his article, Graham lays out specific recommendations for lenders to guide them through the process of preparing their teams for the coming purchase money market.
The article includes specific advice regarding personnel training, process auditing and tech stack tuning for lenders to shift their focus away from easy refinance business to the more complex purchase money market ahead.
“We can argue about what day the refinances will finally all go away, but smart lenders are already focusing on their purchase money business, preparing to weather the storm that will wash away the lenders who only know how to originate refinance business,” Graham says.
A second Insights article by STRATMOR Group MortgageSAT Director Mike Seminari, “Are You Prepared to Meet the Purchase Market?” offers an apt analogy: “The mortgage industry has been making lemonade out of lemons for quite some time now. Despite the forecasts over the past 18 months predicting a severe refinance drop-off, there always seems to be just a few more drops of juice left in the lemons.” Seminari adds that it would be foolish to think the record refinance volume is sustainable. He answers the question: “How can lenders shift their focus to purchase business?”
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