This article series examines how mortgage origination providers will survive the ongoing downturn in mortgage originations. This first part explains how the recession will impact mortgage loan originators (MLOs), and the timing of the mortgage industry’s recovery from the 2023 recession.
The mortgage industry staggers into the 2023 recession — and avoids zombie status
A recent firsttuesday poll asked readers about the biggest obstacle in 2022’s real estate market. An overwhelming 71% of respondents blamed interest rates.
While placing blame is more arguably leveled at pandemic period conditions which precipitated adverse conditions — such as interest rates — the scarcity of mortgage origination fees is not in dispute.
2022’s rapid pace of interest rate increases — yet to be absorbed by an offsetting decline in property prices — has left mortgage-reliant homebuyers floundering with no present way to engage. As evidence, based on mortgage rate hikes alone and not mathematically asymmetric property prices, a current typical California homebuyer is limited by the amount of their income to borrowing 31% less purchase-assist mortgage money than a year ago when all interest rates were still distorted at near-historic lows.
This buyer purchasing power tumble has collapsed directly onto the mortgage industry. For mortgage loan originators (MLOs), a multiplier effect accelerating the implosion of fees was the fast decline in home sales volume and near instant evaporation of any financial logic to justify homeowner refinancing.
The irretrievable, record level of mortgage origination fees in 2020-2021 was very juicy, thanks to the surge in refinancing. Now, all that is fully depleted with 2022’s resumption of rising rates in the current half of the historical rate cycle. What’s next for the mortgage industry?
Mass exodus
2022 is projected to end the year with refinance volume at one quarter of the amount experienced in 2021, according to the Mortgage Bankers Association (MBA). As a result of the deep slash to mortgage originations and thus MLO fees, the MBA anticipates a 25%-30% decline in mortgage industry employment in 2023-2024. For a trade organization which is typically driven by fervent optimism in the mortgage market, that’s saying something.
Related article:
Mortgage lenders expect the housing market to worsen in 2023
Already, mortgage originators are cutting staff or exiting the business altogether as MLO employment will more likely see a 50% decline by 2024, roughly twice the share forecasted by industry leaders.
The short term aside, lower bank earnings are expected for the next two-three decades. However, bankers will certainly attempt to keep rising consumer mortgage interest rates appealing to emotional and status-driven homebuyers in an effort to maintain a profit margin for the business of originating home loans.
Low earnings by bankers and servicers will be further complicated by increased mortgage delinquencies.
During the pandemic, the foreclosure moratorium and forbearance programs kept millions of homeowners in their homes while not making mortgage payments. With forbearance programs, mortgage servicers agreed to temporarily halt the foreclosure process while homeowners attempted to find jobs and bring their mortgages current.
But no such grace will be granted during the 2023 recession, as politicians will seek to avoid excessive stimulus and consequential hyper-inflation. When property values decline — to square with purchase-assist mortgage amounts a typical homeowner qualifies to pay — and homebuyers who purchased in the past three-to-four years fall underwater, mortgage delinquencies will certainly rise, along with the fallout of short sales, foreclosure sales, and real estate owned (REO) inventory for sale.
But the reality is not all gloom and doom. There are plenty of opportunities for California Department of Real Estate (DRE) licensees with MLO endorsements — you just need to know where to pivot.
The 2023 recession got a head start in real estate
Mortgage originators who want to avoid becoming a negative statistic need to adjust their survival strategy — fast.
Heading into 2023, an economic recession is not yet on the books. But its effects are already causing waves that are damaging real estate transactions, including:
- severe cuts to buyer purchasing power;
- degenerative home sales volume;
- failing turnover rates for tenants and sellers;
- plummeting home prices; and
- inadequate single-family residential construction;
Further, while home prices surged on the bountiful geyser of record-low interest rates in 2020-2021 — known as the “Fed Put” — firsttuesday forecasts prices to fall like dead weight, not finding a bottom until around 2025.
Here in California, depending on region and price tier, home prices are already down 4%-10% in August 2022 from their May 2022 peak.
To survive the tumultuous years ahead, mortgage originators who are DRE licensed with an MLO endorsement first need to accept that the extra income generated by refinances is gone. Going forward, to offset the downward spiraling fees from purchase-assist mortgage originations, DRE licensed MLOs will need to tap into some creativity.
Related article:
Economic recession or not, the housing market recession is here
Concurrent services rendered to maintain income
When income begins to slip, the only thing you can do — other than find a new job — is to achieve results producing income from still-running segments and upcoming recession-related services in the real estate and mortgage market.
Preparing now for reduced MLO income will set you up so your mortgage business survives in the years ahead before home sales and future financing recovers. As fees from mortgage originations continue to plummet, lost income needs to be covered either by a greater share of the volume of mortgage originations — extremely difficult in a recessionary environment — or by pursuing alternative forms of income.
This series on MLO side hustles aims to shift your focus from traditional forms of income during recovery and boom periods to those alternative income streams for real estate services arising during recessions and over the course of a slowdown in mortgage origination fees.
During today’s recessionary market, this includes fees for:
- arranging home sales with carryback financing;
- assisting with short sale mortgage discount negotiations as a facilitator for negative equity homeowners;
- taking listings on REO inventory held by servicers/lenders;
- arranging private money mortgage originations for funding business and investment purposes, not consumer mortgages; and
- working for equity purchase (EP) investors purchasing homes from sellers-in-foreclosure. [See RPI e-book Buying Homes in Foreclosure Chapter 16: Assumptions: formal and subject-to]
Having peaked in March 2022, watch for mortgage origination volume to continue to slow through the 2023-2024 period, with falling property prices bottoming in 2025. A sustainable recovery for the housing market will occur once end users sense prices have bottomed, launching the next rise in mortgage origination volume and prices to take off around 2026-2027.
To learn how to use your MLO experience and mortgage lending contacts to shift your focus regarding the type of services needed by homeowners, buyers and sellers, watch for Part 2 of this series in next week’s Quilix newsletter.
Related article:
