The last thing mortgage bankers in the US need right now is rising interest rates. But it appears that after several quarters of record low rates the gravy train could be over and an industry that has been living off the fat of refinancing its existing customers may soon face the music – or not.
As I’ve noted before in this column, predicting where rates are headed is a game for only fools and economists, and often the fools are just as accurate as those with finance degrees from Wharton or Harvard. Make no mistake about it, refinancings account for 80% of all loan applications and have for most of the year. In normal times the ratio is usually 60:40 in favour of purchases but we haven’t seen normal since
The greatest fear facing home lenders is the unknown. What happens when the refinances dry up?
Americans continue to avoid buying homes for three reasons. They believe prices will continue to fall and they don’t want to overpay, they fear losing their job or they don’t have a job to begin with. Our national unemployment rate recently topped 9.8%.
In early December the yield on the 10-year Treasury bond rose to 3.2%, the highest rate since the spring. And since mortgage securities compete against the 10-year Treasury bond as an investment instrument, if one rises so does the other usually.
It may be too early for lenders to hit the panic button, but over the past three months many have been hiring new loan officers to handle the
steady and sometimes overwhelming flow of refinancing applications.
Meanwhile, the Treasury Department is about eight weeks away from releasing its master plan to revamp and restructure, or possibly eliminate, Fannie Mae and Freddie Mac, the two government-chartered mortgage giants that buy or guarantee 70% of all residential loans.
These government-sponsored enterprises continue to lose money and have been wards of Uncle Sam for 27 months. To date, the tab has been $150bn in taxpayer assistance with another $30bn to go perhaps. The good news about Fannie and Freddie is that they’re actually losing less money these days because all the new loans they’ve been buying over the past two years are of pristine quality and have a slim chance of default, knock on wood. It’s even possible one or both of them will return to profitability next year. Both continue to complain privately about the dividend payments they make to the Treasury, but that’s what happens when Uncle Sam gives you $150bn in capital to keep your net worth above zero.
So what exactly will Barack Obama do with Fannie and Freddie? All sorts of proposals are being bandied about, but few in Washington and the
mortgage industry think they will be eliminated outright.
Mortgage bankers tend to be uber-capitalists and they hate the government meddling in their business, but they also love government guarantees on their loans and securities. Stay tuned.
And lastly, it appears that with all the carnage in the mortgage industry, none other than IBM is sticking its big toe in mortgage waters.
A few weeks ago I broke a story about IBM taking over the processing monthly servicing chores on $40bn worth of home mortgages controlled by JPMorgan Chase.
IBM has yet to discuss what it’s up to in the mortgage space, but that hasn’t stopped others from talking, including some inside JP Morgan. his
much is clear – IBM wants to become a large servicer of home mortgages, acting as an outsourcer to existing firms. Big Blue believes with its
technological prowess, it can do the job cheaper and more efficiently than current servicers.
But the big question is whether IBM will own servicing contracts and mortgage servicing rights or whether it will be strictly a third party servicer or subservicer.
For years IBM has eyed the mortgage industry, trying to find an angle on how it can make money from it
Like I said, IBM isn’t talking and so far the general business media hasn’t put any pressure on it to come clean. Could it be that IBM hopes to be a bottom feeder buying servicing contracts on the cheap?
It’s no secret that with the housing bust and foreclosure scandals, dozens of sizeable players are contemplating exiting the servicing business at least to some degree, while remaining a lender.
For years IBM has eyed the mortgage industry curiously, a technology giant trying to find an angle on how it can make money off residential finance.
Two decades back the technology giant was even toying with the idea of buying a mortgage origination and servicing franchise but passed.
Now it smells opportunity in the wreckage and because it’s a non-bank, it won’t have to deal with pesky regulators at the Federal Deposit Insurance Corporation, which oversees most depositories. Then again, as a servicer of home mortgages it must adhere to state laws. Needless to say, IBM is a company to watch in the mortgage space. Now if only it would open its mouth.