Why Mortgage Lenders Love A Worried Economy

The mortgage industry loves economic bad news. In the midst of the Great Recession, it was quantitative easing, with the fed purchasing trillions of dollars in agency MBS, as well as treasuries, that drove rates low in an effort to stimulate economic recovery.

The truth is that the irony of bad news in the economy was a boon to commission-based loan originators and their employers.

As the economy gained strength, a refinance drought began under the pressure of interest rate increases from the Fed. We saw mortgage rates steadily rise beginning in 2018 to just over 5 percent. Most economists predicted mortgage rates to remain there or higher through the next few years.

Practically put, the booming economy was a negative for the mortgage industry

The rise in rates, driven by the strength of the economy, literally shut down the volume of refinance-able loans, putting significant revenue pressure on mortgage lenders across the country. The impact was so significant that one larger-sized independent mortgage banker remarked to me late last fall that “everyone was for sale”, referencing the inability for most lenders at the time to produce marginal profits.

Another CEO/Owner of an IMB told me that he was going sell in the next couple of years as he could not take much more of this. Practically put, the booming economy was a negative for the mortgage industry.

Fortunately for lenders, but not so for the prognosis of economic change, this has all changed at least for now. In a June 2019 article from the UK publication Quartz the emphasis on global risks to the economy is emphasized by noting that flight to quality concerns has pushed more than $12 trillion of global bonds into negative yields.

The story highlights concerns of bankers, stating: “They want central banks to know they are concerned. Concerned about the strength of the global economy. Concerned about the US-China trade war. Concerned about geopolitics, particularly in the Middle East. Concerned about persistently low inflation. Investors are rushing to get their hands on the safest assets available, such as government bonds.”

This flight to quality driven by global economic uncertainty has brought the ten-year treasury down close to 2% in recent weeks, and brought out revised forecasts from many leading economists in the sector.

Mike Fratantoni, MBA’s SVP and Chief Economist, states: “In the Federal Reserve’s statement following the June meeting, they recognized that the economic outlook has become more uncertain, particularly given the weakening in business activity in recent months, both in the US and abroad.” He adds: “It does repeat Chairman Powell’s phrase that the central bank will ‘act as appropriate to sustain the expansion.'”

Mike went on to say that he expects two fed cuts this year. “The slowdown will continue and will eventually force the Fed to act in line with market expectations,” he said. “Longer-term rates are likely already pricing in several rate cuts. Thus, mortgage rates may be more volatile in the months ahead.”

Bad economic news over global concerns about a US-China trade war and expectations of recession looking forward can only be exacerbated by the recent tensions with Iran. The threat of a US military response resulted in a spike of oil prices this week only adding to the global discontent with this unpredictable environment.

The good news is that lenders who originated any loan over the past – almost two years – may have an opportunity to encourage their clients to refinance in the near term. This would help drive volume to some cash starved lenders, and could help the purchase market as well.

Former Freddie Mac Chief Economist and current Chief Economist for Core Logic Frank Nothaft stated as much today, saying: “Fixed mortgage rates have fallen by more than one percentage point since November and are three-quarters of a percentage point below one-year ago. Today’s lower rates have improved buyer affordability compared to last spring and has sparked a pick-up in home sales. The rate drop has also sparked a jump in refinance activity. The decline in mortgage rates since November’s peak means there’s about $3 trillion of home mortgage debt that is ‘in-the-money’ to refinance.”

We’ve written about the inverted yield curve as an indicator for future recessions. In a Mortgage Media interview I conducted last fall with Mark Zandi, Chief Economist at moodys.com, he made clear his expectation for recession in the next two years. The about face of the Fed, the volatility of trade, oil, and the impact to the cost of goods and services domestically as well as short term export concerns for US firms have accelerated the view from many that the risks of a slowing economy loom larger today.

The mortgage industry is one filled with irony. It often does its best on the backs of what is bad news for the economy. Flight to quality and Fed moves help bring stimulus to bear that works to stabilize or protect against a downturn. The MBA forecast is clear in its view and has increased its expectations for refinance volume in 2019, it has also revised its longer term outlook for mortgage rates predicting they will average 4% this year and move to 4.1% in 2020, well below the 4.8% level for 2018.

Perhaps this is all best reflected as was quoted by Harry Potter, “One man’s meat is another man’s poison.” More to come.

 

Dave Stevens

David H. Stevens, CMB, is an Advisor to Mortgage Media. He has held various positions in real estate finance, including serving as SVP of Single Family at Freddie Mac, EVP at Wells Fargo Home Mortgage, President and COO of the Long and Foster Realty Companies, Assistant Secretary of Housing and FHA Commissioner, CEO of the Mortgage Bankers Association.