Mortgage Refi’s Have Peaked: Time to Scale Back?
The Mortgage Bankers Association recently published its prediction for 2013 mortgage origination activity, and it raises some concerns for community banks and credit unions.
Mortgage lending has been a lucrative revenue producer for many community banks and credit unions, and many have jumped on the bandwagon since the refi boom exploded in 2009. For many institutions, the income from originations, asset sales and interest on the warehouse balances was a big part of their profitability in 2012.
It remains a top priority going into 2013. From our recent industry survey, mortgage origination was ranked the second highest growth strategy for community banks and the fourth highest growth strategy for credit unions.
Now we learn that the MBA predicts refi activity to drop precipitously and, while new mortgage activity will increase, they predict new mortgages won’t be enough to offset the refi drop.
To be fair to our friends on the production side who are still working 60 hour weeks with huge application volumes, the MBA predicted a $300 million drop in applications last year and mortgage applications actually rose $500 million in 2012 to $1.7 trillion. So they could be way off.
But it does raise a good question. Will you know when to scale back your production resources?
Community banks and credit unions historically are quick to hire in a boom and very slow to fire (or reassign) in a downturn. We’ve been bank consultants and credit union consultants through several boom and bust cycles, and our experience is it often takes three to four quarters for banks and credit unions to adjust their production resources to decreased activity levels. Back when ROAs were 1.5%, you didn’t feel much pain if you were a bit late making those adjustments. In this environment, you don’t have that luxury.
So how can CEOs, CFOs and mortgage line of business execs spot the difference between a one or two month aberration and the beginnings of a downturn?
The answer lies in some key data points in your mortgage loan software. The simplest leading indicator to track is the number of mortgage loan applications, and you should be looking at both the number of new mortgage apps and the number of refi apps by month (if you’re a high volume shop, you’ll want to look at these metrics on a weekly basis). And if you’ve been adding originators, you’ll want to also look at those numbers on a per originator basis.
You can then compare your application trends to regional or national trends. If you want to get real fancy, you can incorporate leading indicators into your mortgage line of business scorecards (which would also include metrics for production volume, efficiency, performance, profitability, etc.). Side note: a dashboard of your bank or credit union’s production data compared to leading national indicators will become part of your enterprise risk management (ERM) dashboard in coming years.
Here’s a very simple illustration of how you might use leading indicators to spot trends. The sample data below suggests that this institution’s applications peaked in August due to a slowdown in refi apps. This is largely consistent with their state wide trends though at the state level there was a bigger year-end kick than at this institution and new purchases had stronger growth at the state level.
This would serve as an early warning for the mortgage group. A few possible takeaways from their leading indicators:
- No need for them to do anything drastic yet, but they’ll want to watch the total monthly apps number closely. When the total number of applications start consistently dropping below 52-53 per month, they should revisit their production resources and staffing levels.
- With a shift from refis to purchases, they probably need to reallocate their marketing efforts to include more purchase-focused campaigns.
- They also need to dig in and see why their purchase app volumes are not growing as fast as the state numbers. Perhaps drill down and compare purchase app volumes at their MSA level to get a feel if it’s a geographic issue – or an internal one.
- They might need to coach some of their younger originators who might have stayed plenty busy the last three years just taking refi call-ins on how to get out and network with realtors and builders.
This simple illustration highlights one of the great frustrations in our industry. Banks and credit unions are awash in data, yet devoid of actionable intelligence. The vendors in our industry provide virtually no trend information on the data within their systems much less incorporate industry statistics from third parties. If my nine year old can calculate a simple 3 month moving average, surely the vendors’ programmers can build it into their report writers. That goes for all vendors – not just loan origination vendors.
Bank and credit union executives need more than accounting data. They need actionable intelligence from leading indicators to respond quickly and to navigate today’s environment.
Vendors, do you hear that opportunity knocking?