How do banks invest for the drought while making hay when it’s raining?

Mortgage lending continues to be dynamic, full of peaks and valleys

Mortgage lenders who can scale operations up or down quickly are experiencing a mini refi boom with mortgage rates currently at extremely favorable levels. However, looming in the distance are negative macroeconomic factors, which can drive operational and interest rate risks higher. 

Macroeconomic conditions have major implications for how mortgage bankers operate. From a revenue/margin perspective, lending remains an inherently cyclical business. Meaning, there are always risks to mortgage banking that need to be proactively managed, regardless of whether or not the economy is doing well.

“When the economy gets too strong, and risks overheating, the Federal Reserve may raise interest rates in an effort to cool it down. This can slow refinance applications. Moreover, the failure of income growth to keep pace with a strong economy, combined with rapid acceleration in house prices can create significant headwinds for new purchase volume,” explains Peter Carroll, executive, Public Policy & Industry Relations at CoreLogic. “On the other hand, the mortgage servicing book should be strengthened by the slowing of prepayment speeds.” 

“On the flip side, when the economy moves in the opposite direction and takes a downturn, interest rates drop, potentially easing affordability and refis,” Carroll said. “But if the downturn is too severe, people may lose their jobs and defaults can spike.” 

Despite the economic storm clouds, homeowners may not be put off by the dark headlines.  Indeed, recent housing research released from Evercore ISI estimates, after crunching data from Black Knight Financial Services, that the average American homeowners could reduce their mortgage rate by 75 basis points or more with a refinance.

“We conclude that, on average, eligible borrowers will save nearly $380/month ($4,560 a year) by refinancing to 3.5%,” write Evercore analysts Stephen Kim and Trey Moorish.

Indeed, Roostify’s partners confirm that the word is out that now is a great time to refinance, judging by the significant increase in volume our digital lending platform is processing monthly.

But there’s trouble in the current refi paradise; the surge is simply a veneer covering over the fact that lending is still plagued by an ailing and, some would argue, failing infrastructure in need of proper digital modernization. Carroll explains that many leaders in the mortgage industry are keeping an eye on the inverted yield curve as a predictor of recession and what that might mean for new loan origination volumes, as well as delinquencies and defaults in their servicing book. 

“The state of nirvana in mortgage operations remains the ability to scale manufacturing capacity up or down to accommodate demand in what will always be an inherently cyclical business,” Carroll said, adding that an effectively digitized and automated mortgage operation will put an end to the pattern of being forced to lay off valued team members in a market downturn, only to have to turn around and hire all new, potentially less well-trained, team members when conditions inevitably turn for the better.

“The fundamentals of the housing economy are still not strong, and we are late in an economic cycle with several worrying indicators: increasing deficits, economic uncertainty, low housing supply, low housing starts, and tight labor pool translating into expensive new starts. Plus, the GSEs are already lending more aggressively,” said Rajest Bhat, Co-founder and CEO at Roostify.

“Banks have to support the influx in volume,” Bhat added, “but the best ones know they have to leave money on the table to ensure that they focus on implementing structural and transformational changes to their tech and digital infrastructure.”

The questions facing banks in the wake of the surge in refinancings is whether or not their operational models can be resilient and successful when the refi boom wanes and the fundamentals catch up. And that resilience could be tested the moment the boom ends.

Roostify continues to be ready for any flux in demand and to serve our clients and work with partners to navigate, optimize, flex and proactively respond to waves of demand.

Furthermore, we have the benefit of working in the cloud which provides agility, speed, security and the ability to scale and descale with fluctuating demand.  As a digital consumer lending platform we can also help our lenders reduce costs in tandem with offering an upgraded lending experience.

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