MBA Sees Modest Housing Growth, Increased Pressure on Servicing Profitability

ORLANDO–The Mortgage Bankers Association forecasts modest growth for the U.S. economy, with stronger demand for housing despite anticipated increases in mortgage interest rates.

“The U.S. economy feels like it has a lot of momentum right now,” said MBA Vice President of Research and Economics Lynn Fisher, speaking here at the MBA National Mortgage Servicing Conference & Expo. “There is concern over a potential global shock, but in general the economy is strong, which bodes well for the housing industry.”

In general, MBA expects the U.S. economy to grow modestly over the next several years, with slowly increasing interest rates–even more slowly than thought a month ago.

“It’s been a volatile first few months of the year,” Fisher said. “The U.S. economy is driven by household spending, and that has been the highest level of GDP growth over the past few years. There is evidence that the labor market is tightening, and jobless claims have continued to drop, which could lead to wage pressure.”

This scenario is good news for housing demand, Fisher said. MBA revised its 2016 mortgage originations forecast this week, with total originations falling to 1.483 trillion from 1.6 trillion in 2015. The forecast shows a continued drop in refinancings, to but an uptick in purchase originations, eventually topping $1 trillion in purchase originations by 2017.

“Increases in interest rates will certainly result in a decrease in refinances, but overall housing demand will continue to increase,” Fisher said.

Despite that volatility, key mortgage interest rates dropped last week to their lowest level in more than a year, triggering another reaction in refinancing applications. “These little boomlets are quite small compared to the refi activity we saw back in 2013,” Fisher said. “We think most people have refinanced already.”

House prices have largely recovered, Fisher noted. “In general, people have more equity in their homes and that is going to allow for greater turnover and liquidity in the housing market,” she said. “The housing recovery has not necessarily reached some cities and the ‘sand states,’ but in general, activity is improving.”

MBA forecasts existing home sales to rise modestly in 2016, to 580,000 units from 550,000 in 2015. Housing starts, on the other hand, have remained below expectations; MBA expects a 15 percent increase in housing starts in 2016, to slightly more than 800,000. Purchase activity continues to be muted as well, Fisher said, but that could change soon. “When we saw the last purchase market boom, in the mid-2000s, interest rates were between 5 and 6 percent,” she said. “This indicates that if people are confident about the economy, they will purchase homes despite higher interest rates.”

Looking ahead, Fisher said household formation should continue to drive housing demand over the next 10 years. “There is tremendous opportunity for the industry over the next decade,” she said. “Households over the next 10 years will be increasingly older and increasingly diverse.”

MBA’s outlook for interest rates has also changed, with MBA now forecasting just two increases in the federal funds rate, from four after the Fed raised rates in December.

MBA Vice President of Industry Analysis Marina Walsh noted mortgage production profitability jumped in 2015, driven in part by a rise in profits from large independent mortgage bankers, which in turn influences mortgage servicing.

“IMBs are gaining market share on both the purchase side and refinancing, but they are also retaining servicing,” Walsh said. “That group is taking advantage of the Home Affordable Refinance Program, and taking advantage of specialty servicing to grow their businesses.”

All this has implications for mortgage servicers, Walsh said. “You have independents and banks holding loans in portfolio or in servicing–and you have to service these loans,” she said.

Servicing profitability, meanwhile, has largely stagnated over the past several years, Walsh said. Between 1998 and 2007, net operating income rose steadily, peaking at $523 per loan in 2007. Since then, NOI has declined, bottoming out in 2012 at just $155 per loan, improving slightly in 2015 to $203 per loan.

“This has put pressure on the servicing business to increase profitability,” Walsh said. “Revenues have stayed relatively stable, helped by higher loan balances. If you have new production coming in, that helps the bottom line, and ancillary fees have come down.”

Direct servicing costs have fallen as well–primarily people–falling from $205 per loan in 2013 to just $164 per loan in 2015. “We’ve leveled off, with room for improvement,” Walsh said.

Fully loaded servicing operating costs of performing and non-performing loans show tremendous disparity; MBA’s Servicing Operations Study and Forum for Prime Servicers found that in the first half of 2015, servicing operating costs for performing loans totaled just $151 per loan; for non-performing loans, that total jumped to $2,260 per loan (including 30-day, 60-day and 90-day delinquencies). The good news, Walsh noted, is that foreclosure and claims costs have fallen to just 15 percent of default-related direct servicing costs, while unreimbursed foreclosure/REO losses fell to 30 percent. Customer retention has also improved, from a low of 16.9 percent in 2014 to 21.3 percent in the first half of 2015, but still well below the peak, 36.5 percent, in 2012.