Tuesday, January 21, 2014

Loans and Oranges

If you were to pick any industry and shrink it by 30%, chances are that it would have a dramatically negative effect on the participants in that industry. Let’s take citrus as an example.  If the predictions in the country for citrus consumption for the foreseeable future dropped by a third, you can probably imagine what that would do to citrus farmers.  Many of them would likely sell their farms and exit the business. 

In addition, what would happen if the government started telling the citrus farmers exactly what size, color and shape of oranges were allowed to be sold in the open market? You would likely see a percentage of these farmers getting out of the industry because their product no longer conformed to government requirements.

The analogy about citrus farmers is not all that far off from what the mortgage industry is experiencing right now.

The Mortgage Bankers Association recently dropped their 2014 forecast for loan originations.  They expect that the volume of loans originated this year will be a full one-third less than what was originated in 2013.  The main reason is that interest rates are rising and there is very little refinance activity.  Also, on January 10th the CFPB's Qualified Mortgage Rule went into effect which eliminates certain types of loans that mortgage bankers and brokers originated in the past.

So what’s going to happen to those lenders that spent 2012 and 2013 riding the wave of easy refinance business?  Who knows for sure, but many of them are likely to go away. What will happen to lenders who did not prepare for the recent regulatory changes in the industry? Some of them will be closing shop too. 

This all sounds grim, but fear not! Even though many lending companies will likely close shop or be forced out of the industry, there are many others who have planned well and are prepared for the changes in our industry. This is why it is important to align yourself with a lender that is intensely focused on helping homebuyers become homeowners.  For example, our business model at Homeowners Financial Group has been the same for over a decade.  Sure, we are happy to help our clients when they need a refinance, but we never lost focus on our commitment to homebuyers and our partners in the home buying process, real estate agents and builders.

In 2014 and beyond, make sure you work with a lender that has the know-how, commitment and “staying-power” to succeed in today’s market. 

1 comment:

  1. Much like with the financial crisis, the current environmental / regulatory changes will rid the industry of the"dead-wood" and only those organizations that embrace change and are best suited to adapt will remain. However, market "shake-ups" also create the climate for market innovators to capitalize on the subsequent vacuum. These are interesting times for loan originators! For those who remain, it's important to balance production and growth with risk management... We can never revert to the prior model where compliance / risk were merely organizational bit-players. Good post, Chris.