This week, mortgage lenders reported that demand for home loans was at a three-year low.
Demand for home refinance loans fell to the lowest point since second quarter 2014, according to a survey by mortgage giant Fannie Mae.
With home loan rates in 2018 rising to the highest level in seven years, the fall off in the mortgage business shouldn't be a surprise. The cost of financing a house is expected to continue increasing through the end of this year and in 2019.
Impacted companies, industry insiders say, are expected to respond by reducing workforce to reflect the new level of business activity.
"Lenders remain bearish this quarter as they continue to face headwinds from rising mortgage rates, tight supply, and strong home price appreciation, which have drastically reduced refinance activity and restrained home purchase affordability," Doug Duncan, senior vice president and chief economist at Fannie Mae, said in the new report. "These factors have combined to squeeze mortgage origination volumes and have increased competitive pressures.
"We expect this will prompt businesses to turn to cost-cutting as a means of managing their bottom lines, with payroll reduction likely to assume a more prominent role in future belt-tightening efforts."
Mortgage companies have already started cutting their staff as business has dried up due to the decline in home refinancing. That's particularly bad news for North Texas, which is one of the employment capitals for the country's home loan business, with thousands of local industry workers.
Just last week, the home loan division of New York-based Genpact said it is laying off 124 mortgage service employees in its Richardson office. Late last year, Capital One pulled the plug on almost 950 jobs at its Plano operation as the company exited mortgage and home equity business and closed a call center.
Other mortgage companies are likely trim staff this year as they "rightsize" operations to accommodate a lower level of business.
"We are starting to see some consolidation — some of the smaller lenders are simply going out of business," said Rick Sharga, executive vice president with California-based Carrington Mortgage Holdings. "We expect a lot more consolidation between now and the end of the year.
"We expect the mortgage volumes to be off by hundreds of millions of dollars."
Sharga and other mortgage industry executives spoke this week to a meeting of the National Association of Real Estate Editors. They said with average long-term mortgage rates near 4.5 percent and expected to climb to 5 percent at the end of the year, fewer people are refinancing their houses.
That's causing the mortgage industry to suffer declines.
"The forecast is not rosy for a lot of the loan origination companies," Sharga said at the meeting in Las Vegas. "There are significant layoffs anticipated.
"Interest rates will have gone up a full percentage point year over year."
The Federal Reserve is expected to boost short-term interest rates at least once, or even twice more before the end of the year. And the Fed has signaled that as many as four rate hikes might be coming in 2019.
You can expect lenders to fight over the customers still in the market to buy a house or do a cash-out refinance of their current home.
"There is going to be ferocious competition for the home loan purchase business," Brian Simmons, one of the founders of an online mortgage platform, called Ask A Lender.
Simmons said mortgage companies will have to find creative ways to lure homebuyers as they try to make up for the drop in refinancing. He said he sees no huge layoffs right now.
"But it's the calm before the storm," Simmons said.
He also worries that, since the head of the Federal Housing Finance Agency is expected to step down soon as his term expires, the Trump administration could appoint a much more conservative overseer of the government-sponsored home finance companies including FHA, Fannie Mae and Freddie Mac.
"This person could take a negative view on the government's involvement on mortgages," he said. "They could make a number of moves to make it more unaffordable."
Coupled with the higher interest rates, that would mean even fewer home loans.
The mortgage business is also being held back by the tight supply of homes on the market.
"Forty percent of homebuyers have been shopping for their dream home for over seven months," said Brad Sivert with Realtor.com. "That's because they can't find the home they want. This obviously rolls down and impacts mortgage companies."
In previous home cycles, a bump in mortgage rates has actually spurred home sales and mortgage activity as buyers rushed to get ahead of further interest increases.
"When rates are going to rise, rates are going to rise, we see fence sitters jump out and try to buy properties," Sharga said. "I'm not sure there is anything for them to rush out and buy. If there was a lot of inventory out there, you might see a wave of home buying."
Also, the higher the mortgage rates go, more homeowners will decide to stay in their current house rather than move up to a newer or more expensive property with a bigger loan.
"If we do see rates jump up significantly to 6 percent or more, we are going to see what economists refer to as 'rate lock,'" Sharga said. "You have millions of homeowners sitting on a 3.5 percent mortgage rate. They are going to say, 'The heck with it, I'm staying where I am.'"
