SAN DIEGO — The old joke that economists are like accountants, but without the sense of humor, certainly does not fit Doug Duncan, a familiar mortgage industry figure and a senior vice president at the Mortgage Bankers Association in Washington, D.C.
A native of Minnesota, Duncan possesses the dry wit millions of Americans have come to know (and sometimes love) from the likes of Garrison Keillor and his weekly Prairie Home Companion radio broadcast from Minneapolis.
So, it was, with witty cushioning that Duncan was able to deliver what amounted to devastating news to mortgage bankers and other industry professionals last week at a technology trade show in San Diego, when he presented his periodic economic analysis of what has happened and what is about to occur in the home finance business.
“Where I come from it was an honor when I was growing up to dance with Lawrence Welk at the end of his television show each week, when all those bubbles were coming up,” Duncan recalls with a sly grin. The nostalgic reference describes his view of today’s high-priced housing market consisting of “tiny bubbles.”
Despite the shtick, Duncan’s bottom line was nothing to laugh about: A shocking 56% fall-off in residential mortgage originations this year, compared to the high-water mark in 2003. Back then, $3.9 trillion worth of originations flooded lenders’ shops; this year that number will be a relative trickle of $2.2 trillion.
It means, says Duncan, that “more mid-size lenders will go out of business,” unable to maintain operations that have been fattened on years of sizzling sales. There will be layoffs too, the economist predicts, although some firms will attempt to hold on to workers in hopes that the downturn is not long-lasting.
The overall housing finance market can expect to see structural changes as well: One a continuing, higher refinance percentage of originations; and the other, a continuing, higher percentage of adjustable-rate mortgages.
Indeed, nearly half of all subprime loans now are of the adjustable-rate variety. That has already attracted the attention of federal regulatory agencies concerned about “payment shock,” when rising rate resets occur. However, according to Duncan, the industry is ahead of the feds, already having built that factor into their spreadsheets.
Get ready for more delinquencies too. They will rise for three reasons, the economist postulates:
- Half of all outstanding loans are less than three years old and have not hit their “delinquency peak period” of three-to-five years.
- ARMs have a higher delinquency rate.
- There are more subprime loans, which have historically higher delinquency rates.
On the technology front, some mortgage companies will limit their spending this year, worried about declining business and costly overhead. Others, however, will recognize an opportunity to better automate their processes in preparation for the next up cycle (although $2.2 trillion isn’t peanuts).
Duncan says technology is the reason for subprime growth. It has:
- enabled lenders to run simulations to find the most profitable yields and assess the actual levels of risk;
- drawn in significantly more capital from the secondary market
- helped lenders segment loans/households and better determine ongoing distribution of needs;
- improved automated underwriting thus making more time to work on exceptions (hard cases); and
- lowered the cost threshold to serve nonprime borrowers.