There are a lot of predictions, as of late, as to how rising rates will impact the mortgage industry in 2017. On the origination side, most economists are forecasting that refinances will decrease about 40% as a result of higher rates – however, pent-up demand from first-time home buyers means purchase loans are forecast to increase by as much as 20% in the coming year.
But how much of an impact will rising rates have on the mortgage servicing industry? Again, it depends who you ask, but, unlike the origination side, most people on the servicing side are saying rising rates will help more than they will hurt.
Then again, most mortgage servicing folks will tell you they are “biased” on the topic because, for reasons that are sometimes not so obvious, rising rates most always help servicers capitalize on their positions to realize higher profits.
During a recent interview with MortgageOrb, Kevin Brungardt, CEO for RoundPoint Mortgage Servicing Corp., talks about how rising rates will impact the servicing industry in 2017 – and why this rising rate environment is so different from the last time around.
Q: From where you sit, what do you see as being the shorter-term and longer-term impacts of the rising rate environment on mortgage servicers?
Brungardt: On a macro level, I think it’s a real good thing that we see a Fed that is comfortable with raising rates because monetary policy is mostly reactionary – it’s a reflection of the state of the economy, and it is highly correlated to how sound or how strong the consumer is, which, at the end of the day, is most fundamental to our business. So, a Fed that is comfortable with raising rates is a Fed that is comfortable with the market, that is comfortable with the inflationary outlook, that is comfortable with the labor market – and it feels the economy is stable. Those are all really good things.
I think people tend to knee jerk in the short term (when rates increase). They see that refinances are going to dip because we have more borrowers who are now out of the money versus in the money. But that’s not as bad a thing. I’ve been in this business a long time, and we were much healthier when the coupons were normalized – you know, this abnormally low, 30-year money versus what we’ve seen – and it is a reflection of very loose monetary policy.
But again, that monetary policy was put in there to prop up a faltering economy and get us through a Great Recession. But now, we’re emerging out of that: We have an unemployment rate that’s at 4.6%, and you see labor slack going out of the market, and you see wage inflation – it’s not great, but at least it’s steady. These are all great things, and they are signs of a healthier consumer.
I think in the short run, we’re going to see a dip in the refinance market, but in the long run, I think we’re going to see a healthier purchase market, a more normal-sized market.
All we’ve been, for many years, is a market that reflects refis. And I would love to see private money come into this market. But you’re not going to get more private money or more securitizations – or more new products – without the right cost of funds. There must be a normalized 15- and 30-year rate. Like I said, I’ve been in this industry a long time, and we were a much healthier market when the coupons were normalized at 7%, 8%, 9% for 30-year money than we were at 3.25%.
But again, monetary policy is a lag indicator – it’s a reflection of the health of the state – and eight years after the start of the Great recession, I think we’re finally doing a grind-up. It’s a slow, gradual recovery. You’re seeing a risk on trade, with money moving out of the bond market and back into the equities again, and I think that’s all healthy for our industry. Yes, there will be a short-term dip in the refinances – and that’s fine. But I think as far as home builders, construction and purchase money go, I think we’re going to see a more robust market, long term.
Q: Would you say this low-interest-rate environment has dragged on for so long that it is now finally starting to feel “abnormal”?
Brungardt: Yes, absolutely. Because the 10-year used to average somewhere around 4.5% in the years prior to the Great Recession – and we’ve been at a low of 1.34% to 1.35% – we’ve been hovering at sub-2.0% for so long, this, again, is feeling like a catch-up. But this recovery feels more “real” to me than it did compared with some of the short-term recoveries we had, such as in 2013, when Bernanke announced that he was going to let up the gas on some of the QE stuff.
Q: So, what’s your prediction for rate hikes in 2017? How many are you anticipating?
Brungardt: We see two more rate hikes coming in 2017. I know the Fed added a third, but I still think they’ll stick with two. I think it will be a gradual rate rise, and by the end of the year, we’ll be range-bound in the 2.65%-2.95% range for the 10-year. And that’s going to be a very good thing for our market.
Again, I think if we can return to a normalized rate environment, it is going to reflect a much healthier market than we have been in, which is just a plain vanilla government-sponsored enterprise government market – the refi market of the past six or seven years.
Q: So, what impact will a rising rate environment have on servicers’ operations? If refi volume goes down and everything is performing – and with the advent of automation, everything is more efficient – does this mean things will sort of quiet down for servicing in 2017? And will this “slow period,” in terms of defaults, give servicers an opportunity to find further business efficiencies?
Brungardt: I think so, but there are two things to consider. One is, if you hold a heavy, mortgage servicing rights-long position, a rise in rates is good for you – on a non-cash basis – because you have an asset that has healthy price appreciation in it and longer duration, so the consumer is going to be on your platform longer, which is a good thing because it gives you the opportunity to provide other products and services. And you have a longer relationship, just by way of the rate rise. Second, without the heavy refi cycle, you don’t go through all of the boarding, de-boarding, payoff statements, payoff inquiries – there are a bunch of consequences in activity to the constant dips.
I think we’re getting into a much more normalized CPR environment, which will be much better for us. You don’t want to be in the 20s or mid-20s kind of CPR – there are a bunch of activities that create inefficiencies associated with that.
The other thing is, a rising rate environment reflects a stronger economy and a healthier consumer, which, in turn, should translate into lower delinquency rates. Plus, as a servicer, you have more options because there should be more equity in the property, if the consumer does get into some sort of a life-altering issue.
In other words, we will return to “normal,” in that we won’t be seeing strategic defaults – it’s going to be life events that cause defaults. Loss of employment, divorce, illness, death – those types of events will cause defaults, not the strategic defaults that we saw in the post-crisis years. This time around, there’s going to be a strategic interest to stay in a property, as opposed to a strategic default scenario.
You have to remember that – depending on the stage of delinquency – it can be five- to ten-times more expensive to service a delinquent loan, from an operational perspective. So, every point that you go up, in delinquency or in your portfolio, has a material effect on the cost of servicing your portfolio.
Q: What is your prediction with regard to consolidation in the servicing space in 2017?
Brungardt: I think firms that are originators – that are pure retention – that have had three or more good years running, as rates slid and slid and slid, are going to be the survivors. And I think those companies that have been narrowly focused on the refi market are going to see some mass consolidation. It’s a different story for those firms that are mono-ligned into refi – or even 50% into refi – I mean, half their businesses could go away, which means we’ll see some consolidation.
I think as we get into a normal environment, the firms that will survive are going to be balanced institutions that can originate, service, subservice and offer homeownership products to consumers. You can’t just be a mono-ligned, one-trick shop.
We’ve been looking forward to this rate rise environment because it’s more normal. And you have to understand that I’m biased to a rate rise; I’m sitting on a $5 million position. I think it reflects a much better market than we’ve had in the past.
I think this rising rate environment is, net-net, a positive for servicers, especially those that are originators and that have subservicing positions. If you’re a full-suite banking institution, I think this is a very positive development.