What Goes Down Must Come Up

July 25, 2016

Financial Industry Compliance Lender Challenges

Mortgage Origination Market

As most are probably aware, Info-Pro Lender Services operates in an environment that is highly dependent on the mortgage origination market. Predicting future mortgage origination volume is a very difficult task, even for the most renowned economic experts. When reviewing historical data and looking ahead, it is likely that the mortgage origination market is moving into an unfamiliar territory—something Info-Pro has not witnessed in many years.

The chart below, consisting of data from the Mortgage Bankers Association and Freddie Mac, highlights a few interesting trends. It shows overall mortgage origination volume (red bars), refinance share of mortgage originations (thick green line), refinance share percentage trend (thin green line) and 30-year mortgage origination rates (blue line). The information is presented over a 25-year period, from 1990 to 2015.


The two interesting trends in this chart are the “Average 30 Year Mortgage Rate” (blue line) and the “Refinance Share (%)” (thin green line) trend. Over the last 25 years, these two trends have been moving in opposite directions. As mortgage rates dropped, homeowners received multiple opportunities to refinance their mortgage, enabling them to lower their payment, reduce their term (30-year to 15-year, for example) or upgrade to a new home that became more affordable due to lower rates. Although there have been minor increases in mortgage rates over the last 25 years, the overall trend has been going down.

At the same time, the refinance share of mortgage originations rose (relative to purchase originations), with the highest volume in refinances occurring from 2009-2012, after the housing bubble burst, leading to the Great Recession. Since 2013, the refinance share of mortgage originations decreased as mortgage rates rise from historic lows, but mortgage rates hit historic lows again in 2016, resulting in another spike of refinance activity. 

The most interesting question from this chart is whether mortgage rates can change course and start to rise over time. According to industry projections (Fannie Mae, Freddie Mac, MBA) every year for the last five years, 30-year mortgage rates were expected to rise considerably, but didn't. This has largely been due to global economic uncertainty.

Home Supply

The Great Recession resulted in a lot of people losing their homes as foreclosures sky-rocketed. The market took a while to correct itself, but the United States is now moving into a territory where the supply of homes is low (see graph below from the Federal Reserve).


This is bad news for buyers as a lack of supply leads to higher prices, but it is good news for home sellers and businesses that benefit from new home construction. If the market contains a large amount of homes for sale, this will lead to low prices on existing homes, and new home construction will suffer. When the home supply is low, potential buyers have two options; 1) find a home on the market that suits your needs and hope you have the winning bid against other buyers; 2) build a new home. This is a significant change from 6-8 years ago when the market was flooded with homes for sale at a bargain.

There is no road map for what will occur in the housing market in the future. While it would be unfortunate to see historically low mortgage rates go away, it would likely be the result of a stronger global economy, which is a good thing. The good news is that Info-Pro is strongly positioned to handle whatever the future holds.