Overcapacity: Make The Right Choices To Succeed

When Refis return — and they will — you want to be appropriately staffed

Insider

Contributing Writer

At the Mortgage Bankers Association’s annual convention, the word “overcapacity” was discussed a lot. As a matter of fact, we have been dealing with this word for 24 months or so within this industry. All industries have slumps. But the mortgage industry seems to be unique with its feast or famine nature.

Even real estate cannot rival the mortgage industry’s ups and downs. For example, if real estate sales fall by 20%, this is considered a deep slump. And that slump carries over to the mortgage industry. However, if a refinance boom ends at the same time — our volumes can and did contract by well over 50%.

For example, in the 4th quarter of the year 2020, origination volumes hit approximately one and one-third trillion dollars. In the first quarter of 2023, it was approximately one-third of a trillion dollars, with the most precipitous drop happening in the first quarter of 2022. You can do the math on the percentages. I challenge any other industry to survive such a volatile environment. Yet, we must survive because people will still need to finance homes. We are not Blockbuster.

Not all slumps are accompanied by a drop in sales and a drop in refinances at the same time. As a matter of fact, the recovery from the Great Recession generated very significant refinance activity and I expect refinance activity will return to the market perhaps even before real estate sales begin to recover. The problem is, we don’t know if this will happen three months from now, or a year or so from now.

Thus, we continue to hear the word overcapacity, despite the fact that just about every mortgage company has cut to the bone quite recently. Do we cut into the bone, or do we gear up for the coming refinances? If you believe refinances will not take place for 18 months or so, you may be more inclined as a manager to cut now. If you believe that elevated refinance activity is right around the corner, then you might be strengthening your sales staff and keeping some overcapacity in place.

Interestingly enough, the longer it takes for rates to ease somewhat, the stronger the refinance period will be. With so many present homeowners at 4% or less, a short-lived increase in rates would not have produced many refinances. But each month we go with “higher for longer” rates, the greater potential for more refinances in the future. And, of course, lower rates are likely to boost real estate sales as affordability could return to more sane levels. Lower rates can also encourage present homeowners to remove equity at a faster clip.

We must survive because people will still need to finance homes. We are not Blockbuster.

We should even have more owners listing when rates do fall. Though many these owners may purchase their next home with cash, the availability of inventory will help the real estate crunch tremendously.

So, managers and executives of the mortgage industry, you have some thinking to do. If you guess wrong, Ricky is likely to approach you and say —

Lucy, you have some ‘splaining to do!

If you guess right, you will be in a position to take advantage of the next curve the industry throws your way. There is one thing for sure — there is no way to predict the future. How many forecasters predicted a recession this year? Without any ability to foresee the future, I am expecting most managers and executives to take a middle road here, keeping this closer to the vest but leaving their options open.