Home Lending Shatters Records in 2020

Amid historically low interest rates and a red-hot real estate market, homeowners are refinancing their homes in record-breaking numbers. A report from Black Knight indicates that 2.7 million homeowners refinanced their mortgages last quarter, along with millions more who took out home loans.

At the same time, pricing wars among mortgage brokerages have only intensified, as rates are slashed, origination fees reduced, and bottom lines shrink. The 2020 housing market showed no signs of slowing right up until the end.

A Record-Shattering Third Quarter

Refinancing and home buying incentives led to a record-breaking quarter, putting the United States on track to reach $4.4 trillion in first-lien mortgage originations by the end of the year—the highest volume on record.

“As our rate lock data had suggested last month, Q3 2020 originations hit record highs in purchase, refinance, and overall lending as record-low mortgage rates and a delay to the normal spring home-buying season spurred both the purchase and refinance markets,” said Ben Graboske, Black Knight Data & Analytics President.

In Q3 alone, some 2.7 million homeowners refinanced, bringing the total number of households up to 6.4 million in 2020. Black Knight projections push the total to above 9 million by the end of December. And it’s possible that number could accelerate even more. With the current interest rates and pricing wars, it’s estimated that 19.4 million 30-year mortgage holders can qualify for refinancing—likely allowing them to benefit from lower payments and interest, as well.

Refinancing originations during quarter three reached $867 billion, while home purchase lending accounted for $455 billion. That means total real estate lending exceeded $1.3 trillion over the course of just three months.

The Ensuing Pricing Battle

When the market is ripe and the public is in a scurry to purchase and refinance homes, mortgage brokers find themselves in both a bright spot and a predicament. According to Black Knight’s data, mortgage brokers failed to retain more than 80% of their current customer base—competitors offered better rates, faster originations, and excellent service and technology.

Ben Graspoke notes that mortgage brokerages face unique challenges during hot markets, saying:

“Despite record levels of incentive and lending, mortgage servicers continue to struggle to retain customers, losing the business of more than 80% of homeowners who refinance. Pricing appears to be a significant factor in servicers’ ability to retain customers, as homeowners who changed lenders received noticeably better rates than those whose business was retained. In today’s rate environment, and up against fierce competition, lenders need the most precise product and pricing intelligence available. That said, successful retention likely goes beyond pricing to also include a positive customer experience.”

Losing these customers becomes very costly for mortgage brokerages, as with any business. Targeting and acquiring customers is significantly more expensive and challenging than simply retaining them. Even though brokers are collecting fees for the vast amount of volume in the market, they’re likely spending a growing percentage of revenues on new-found bloated marketing budgets and the development of new technologies to make transactions more seamless and personal. This is inevitably hurting their bottom lines.

While it may seem surprising, we could see some brokers go out of business this year or next, despite the rampant market.

A Sense of Fear About the Future

Rising markets and strong economic performance in the real estate industry is welcomed and exciting to see. But is there a point where one has to consider that activity might be a little too high?

Housing bubbles often begin when it becomes exceptionally easy to get financed for a home, inventory is low but demand is sky-high, or prices appreciate. All of which is happening as we speak.

When there’s projected to be $4.4 trillion of new public debt in the housing market—waiting to get paid off—and a soon-to-end foreclosure moratorium on FHA loans (which happen to be the easiest mortgage loans to get), it should stir up some tension.

While there have been numerous laws and regulations passed since the housing bubble that led to the Great Recession in 2008, the coronavirus pandemic is an unprecedented event that required the unprecedented response of pushing financial transactions through to ensure the economy stays afloat (i.e., dramatic interest rate cuts and moratoriums). Could we have placed ourselves in another bind?

We’ll see what happens in 2021.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.