Homebuyers weren’t the only ones who lost out due to rising interest rates in 2018.
On an annual basis, the average profit for loans originated by independent mortgage brokers and subsidiaries of big banks was $367 per loan in 2018. This was down from the average profit of $711 per loan originated in 2017, according to the MBA.
Worse, independent mortgage brokers or mortgage loan originators (MLOs) reported an average net loss of $200 on each loan originated in the fourth quarter (Q4) of 2018. This is a reversal from Q3 2018, which saw a net gain of $480 for each loan originated, according to the Mortgage Bankers Association (MBA).
Q4’s dismal report shows the worst quarterly profits (or in this case, losses) for independent mortgage brokers since MBA’s reporting began in 2008.
Much of the loss was due to fewer mortgage refinances, as higher interest rates made refinancing less attractive. In California, just 36,400 mortgages were refinanced in Q4 2018, less than half of the 79,700 refinances closed one year earlier.
The good news for 2019 is the Federal Reserve (the Fed) has signaled they are done raising rates during this rate cycle. This decision has been partially responsible for the fallback in mortgage interest rates in the first half of 2019, which have encouraged potential homebuyers and refinancers to consider making a move this spring.
However, the bad news is the reason behind the Fed backing off their interest rate hikes. The Fed watches various economic factors, including job performance, incomes, inflation, and, yes, interest rates. These factors are pointing toward the increasing likelihood of a recession in the next 12-18 months.
Important housing market factors, like home sales volume and prices, begin to decline in the months leading up to an economic recession. In the second half of 2018, California home sales volume and prices both began to decline on a monthly basis, the trend continuing in 2019. Today’s slowing housing market is discouraging homebuyers, sellers and refinancers alike.
The result is inevitably detrimental for MLOs, who rely on a steady stream of originations to make a living. Unlike real estate agents, who can easily transition into property management, foreclosures or short sales, MLOs have a fairly limited scope of professional work — unless they are licensed by the Department of Real Estate (DRE), rather than the Department of Business Oversight (DBO). DRE-licensed MLOs may branch out into other types of work when lending is slow.
MLOs who will succeed in 2019 and the leaner years ahead will be more creative than their peers, and more willing to provide competitive rates and terms. Small brokerages unable to undercut the competition can focus on providing better customer service, something buyers are willing to pay higher rates for, according to a survey by Carlisle and Gallagher Consulting Group. Gaining a solid word-of-mouth reputation will help boost origination volume, even as sales continue to decline in 2019-2020.