Mortgage rates have been near record lows in recent years and should tick up only slightly through 2017, industry professionals says, which is good news for home buyers and those in the business of selling homes.

But with rates at a low point for a while now, homeowners have had ample time to refinance their mortgages if they were inclined to do so. With that in mind Mike Fratantoni, chief economist for the Mortgage Bankers Association, is expecting a large decline –47%, in fact– in refinance volume this year. “For those who have focused more on the refi business, it’s going to be a tougher year,” he says.

Mike Fratantoni
Mike Fratantoni

But he’s much more optimistic about the purchase market and is forecasting a 10% increase in purchase originations.

Fratantoni spoke with BUILDER recently about the mortgage industry status and more on where it’s heading.

BUILDER: What are your thoughts on low down payment mortgages?
Fratantoni: Low down payment mortgages have been around an extremely long time. They’ve been done successfully, they’ve been done with some problematic results. I don’t think you can paint with a broad brush and say these are all bad. Done the right way they are extremely beneficial to first-time home buyers because I think it’s very clear that that down payment constraint is a real hurdle for many first-time buyers. So if you can do it in a responsible way, it really does help the borrower and the market.

B: Do you expect more lenders to offer these types of products?
F: I do. Typically what we see is that when the industry moves from a refinance market to a purchase market, that as volume declines, lenders are looking for new ways to reach out to potential buyers and often times that would have meant new products or new types of ways of looking at credit. In the post-Dodd-Frank environment the range of options in terms of real innovation on the lending side is really much narrower. Really the only place you can go is moving to lower down payments, because things like full documentation, verification of income, employment, and assets – that’s effectively in regulation now so you have to do those things. There’s not a lot of opportunity to relax standards on other dimensions, but in a purchase market where you’re aiming to attract first-time buyers, I think highlighting your low down payment programs is one way to do that and I expect many lenders will do so.

B: How will the rise in rates affect the mortgage business?
F: I think it’s going to result in a very sharp reduction in refinance activity, but don’t expect it’s going to be much of a negative for the purchase market. The strong job market and positive demographics are going to outweigh any negatives from the increase in mortgage rates we’ve seen so far. Now, if rates were to really spike, up 2-3 percentage points from here, that’ll be a different story and I think that could be really debilitating for the purchase market. But the kind of increase we’re forecasting, another half percentage point from here, I think it’s not going to be a problem for home sales and the purchase origination market will be strong.

B: How will the Trump administration impact the industry?
F: The only thing we know with certainty so far is that since the election rates are up about half a point and that’s investors anticipating stronger growth and or high inflation over the next couple of years. So that’s obviously having an impact. Beyond that, it’s still too early to tell. Obviously, [there are] potential changes to the tax policy, potential changes to the government housing programs, the GSEs.

B: What do you make of the potential for privatizing the GSEs?
F: That’s a longer conversation and we’re obviously going to be very much involved in that. The crux of it is, we think, is congressional reform is needed to make sure we have a stable mortgage finance market for the long term. I don’t believe there’s any quick fix. There are a lot of aspects of the pre-crisis, secondary market which worked very well that we want to retain, but there are also some problems that we want to make sure are fixed as we move forward that we think are necessary to reform before we can go back to a more permanent system.

B: What’s the biggest issue facing the industry today?
F: Over the next year I think it’s the transition from a refinance market to a purchase market and that’s going to require a lot of lenders to re-calibrate their business.

Here are Fratantoni's thoughts on three industry trends and issues:

Regulations/Dodd-Frank Act: “In many cases those regulations required the reworking of business processes and the addition of regulatory compliance staff and quality control staff, which led to increases in the cost of originating or servicing a loan. Also, one factor contributing to a lot of conservatism in terms of the credit criteria that were being applied, all-in-all the mortgage lending business has much higher fixed costs than it did pre-crisis because of these additional regulatory constraints and requirements. So we’ve seen a lot of consolidation.”

Municipal banks leave: “We’ve seen a number of muni[cipal] banks decide that this is a business that’s too complex and too risky for them to be involved in, so they’ve stopped originating mortgage loans and we’ve seen the market share in the industry move toward independent mortgage bankers who this is the only business they’re in and have invested to make sure that they have the ability to comply with all the regulations that are out there.”

Customer focus: “Since 2016, the focus has been, ‘OK we’ve been paying attention to the regulatory requirements but have not been paying enough attention to the customer experience.’ So I think now if you talk to the head of a mortgage group or a lot of folks in the industry, that really is the focus – how can you improve the borrower’s experience of getting a loan and then paying down that loan over time with their servicer? So you’re seeing a lot of interesting new developments on the technology side about ways for borrowers can interact with lenders, lots of effort to try to reduce the burden of providing the documentation they need to qualify for a loan, and some opportunities to be more innovative in how you reach borrowers, how you work with borrowers, and how you get to that closing table in the least painful mode possible.”