2007 predictions for the mortgage lending industryLee Howlettborrowing, security, secondary market, sub-prime
Lenders who want to finish 2007 with a smile on their faces need
to spend the next 12 months listening and reacting to the
marketplace. Already fickle consumers will be more demanding and
less loyal if you don't treat them right. To succeed in 2007,
lenders will need to pay attention, look around and get in front of
trends. Here are a few trends we can already foresee:
The return of functional borrowing
We anticipate that borrowing in 2007 will be more functional; by
that, I mean applying for home equity loans for education, debt
consolidation and home improvement. The tax deductibility factor in
home equity lending will keep it an attractive source. It will be
unlike the past few years when consumers were heating up the market
by refinancing first mortgages with short-term equity lines of
credit. Next year, we predict a more traditional marketplace with
refis being for traditional mortgage products rather than as home
equity liens or loans. The primary reason for this shift is the
change in the interest rate environment. Recently, the first
mortgage refi rate has gone to six percent; prime is 8.5
percent.
Security will be king
We expect all lenders to be more concerned with security than ever.
These fears have been fueled by continuing stories about
compromises of customer data. We forecast that lenders will want
higher levels of security and, most likely, encryption for all
data. In fact, in anticipation of this demand, we will be
encrypting all of the data we exchange with the lenders we serve,
whether or not they request it.
Continued streamlining of the mortgage
process
There will be a continued need to get customers hooked in by
closing the deal as soon as possible. Lenders will be looking at
streamlining and doing things better because the slowdown in the
market means increased competition for each customer. We know the
drop off in the refi market will continue. We expect that to lead
to increased competition for every loan. And lenders will be
playing in an environment where that competition will come from
some unusual places, like the new banks in Wal-Mart stores.
Home prices nationwide to rise slightly in
2007
We expect price appreciation to weaken, but remain positive in
2007. Fiserv Chief Economist David Stiff is forecasting a modest
1.2 percent price appreciation next year for most of the United
States. This contrasts with a 7.1 percent appreciation in 2006. He
does, however, expect prices to fall in metro areas where
speculators and investors have driven up prices over the last few
years. He foresees that this home price correction will hit some
metro areas, like Boston and Detroit, in late summer. He expects
this to be the leading edge of a home price correction that will
hit about 90 metro areas later in the year. These are mostly places
where speculators and investors drove up prices to unsustainable
levels. Most California and Florida markets will experience price
declines over the next two to three years. Other areas where he is
forecasting declines are Las Vegas, Phoenix, New York City and
Washington, D.C.
A slow return to home buying
Homebuyers who have been sitting on the sidelines will slowly move
back into the housing market in 2007. That's because the
fundamental housing demand drivers are strong. These include
increasing rates of household formation, a moderately strong job
market and, although mortgage rates are rising, they are still low
by historical standards. Purchases of primary residences should
slowly recover as prices stabilize, but investors and speculators
have been driven out of most markets. This means that markets where
recent demand was driven mostly by speculators (e.g., Las Vegas and
Miami) will see lower sales activity for a long time.
A strong secondary market for non-conforming
loans
Most Wall Street firms are reporting record volumes of loan
acquisitions in 2006 and are planning for another record year in
2007. To facilitate this goal, we see many Wall Street firms either
purchasing mortgage companies (like Merrill Lynch's recent purchase of First Franklin Mortgage) or taking a
financial stake in mortgage companies (Goldman Sachs recently
acquired an equity stake in Down-Home Financial). Wall Street firms
are generally becoming more creative in their ability to maintain
high volumes of mortgage acquisitions. This trend will continue for
the unforeseeable future.
New competition from Wall Street in the sub-prime
arena
Wall Street will get into the brokers' space by buying up
origination channels for sub-prime lending. So instead of buying
portfolios from sub-prime lenders, they'll use their own
channels.
Diversity spending will become a major initiative for
more banks
Banks will aggressively cultivate loans to more diverse markets in
response to the changing demographics of their customer base.
Spurred on by growth in both the African-American and Hispanic
populations, as well as President Bush's push to increase minority
homeownership, minority homeownership reached a record rate of 49
percent in 2002. That growth will continue. Lenders will initiate
major marketing campaigns aimed at these groups in 2007. In
addition, they will seek to do more business with minority-owned
outside vendors who are already familiar with the factors important
to minority borrowers.
E-signatures moving toward reality
Banks will continue to struggle to implement e-signing of loan
documents in 2007. Consumers have been slow to accept this
technology, so lenders have chosen to introduce electronic
documents gradually. They started by sending federal disclosures
electronically. The form is nothing more than a precursor to
acknowledging a mortgage, but by having consumers accept it, banks
are getting the consumer in the habit of using the Web. It's
another step toward e-signatures.
More RESPA violations in 2007
Affiliated business arrangements are still complicated by
regulatory restrictions. The Real Estate Settlement Procedures Acts
(RESPAs) impact on affiliated business arrangements will remain a
significant consideration in the formation of joint ventures.
Despite the need to find additional revenue streams, the hard and
soft costs need to be weighed. Vendors who do not maintain true
standalone business status will continue risking regulatory
sanctions in 2007 because we do not foresee any changes in RESPA in
the next 12 months.
Locking in the consumer
Success in 2007 will come from meeting multiple needs for each
customer. This trend has been taking shape for the past few years.
Consider Bank of
America's recent statement that customers will get free stock
trades from their broker/dealer or Wal-Mart's recent announcement
that they will offer customers $4 prescriptions. Why would
enterprises of that scale do these things when the market isn't
even asking for them? Because they canthey are taking a market
position that only others of that scale can offer. They are also
doing this because adding multiple services cultivates a growing
dependence by their customers. They will continue to use their size
and power to hook the customer in 2007, making it harder to leave.
There are two lessons that lenders will need to take to heart in
2007:
1. Learn ways to provide value in the marketplace from other
industries; and
2. Know what the customer wants before he knows it himself.
Innovations in customer relationships
In 2007, we expect the emphasis to be on the expansion of the
relationship with the customer, not in the product arena. Like
Wal-Mart, successful lenders will go after more penetration of a
customer's needs. They will ask themselves how they can do more for
the customers they already have. By giving these existing customers
more value, they will be able to strengthen and broaden the
relationship.
The continued proliferation of home value Web sites will lead to
headaches for lenders With the rise in the number of home value Web
sites, consumers will become more informed, curious and confused
about how much their homes are worth. Value estimates among home
value Web sites can vary by 20-40 percent, so there will be more
borrowers value shopping before applying for home equity loans and
refis. We see this phenomenon having an impact on loan approvals
because it will encourage borrowers to challenge lenders' value
limits. This will affect lenders who don't have clear collateral
valuation policies and alternative valuation, low-cost products in
their cascade. Lenders who don't respond quickly and satisfactorily
to value challenges will lose precious prospects to
competitors.
Like it or not, all of us involved in the mortgage lending
industry will be playing in a Darwinian arena in 2007. Survival of
the fittest will reign. Lenders will need to be better aware and
more responsive to the quick changes in the market. If they listen
closely, they'll be able to tune into leading-edge opportunities,
product innovations, regulatory issues and industry trends that
will have a positive impact on their future.
Lee Howlett is the president and COO of Fiserv Lending
Solutions Fulfillment Services Division. For more information,
please visit www.fiservlendingsolutions.com.
