by Tim Moreland
By all accounts, 2018 will see more competition among lenders for fewer loans. Of those, significantly fewer will be the easy refinance loans that lender have enjoyed writing and rewriting in the past. We’re entering the purchase money market that experts have been warning us about for a long time. For lenders that don’t understand how to win purchase money business, time is quickly running out. For title companies that don’t know how to serve lenders under pressure, the same thing is true.
In looking forward to the state of our industry in the year ahead, we find that there are some significant trends that will change the way the title business is conducted, primarily because they will impact the lenders and real estate agents that title agents serve. Understanding these trends will allow any title executive to be better prepared for success in 2018. And so we share our forecast for next year with you in this short article.
Loan volume to be lower overall in 2018
Executives from the Mortgage Bankers Association addressed a full house during the first general session of the trade group’s 2017 Annual Convention and Exposition in Denver. Nearly every seat was filled in the Mile High Ballroom and executives lined the walls to hear about what the business would look like in the year to come. According to the MBA, it will look better for purchase money lenders, but worse overall.
During the convention, MBA economists released their estimates for the coming year. The organization expects to see $1.2 trillion in purchase mortgage originations during 2018, a 7.3 percent increase from 2017. In contrast, MBA anticipates refinance originations will decrease by 28.3 percent from 2017, to approximately $430 billion. In total, mortgage originations will decrease to $1.60 trillion in 2018 from $1.69 trillion in 2017.
For 2019, MBA is forecasting total originations to rebound to $1.64 trillion, with purchase originations of $1.24 trillion and refinance originations of $395 billion. But by that time it will be too late for lenders and their title agency partners who entered 2018 unprepared.
"We are projecting that home purchase originations will increase at a faster clip in 2018, nearly double the rate that they increased in 2017,” said Michael Fratantoni, MBA's Chief Economist and Senior Vice President for Research and Industry Technology. “The housing market has been hamstrung by insufficient supply, with inventories of homes remarkably low given the home price growth we have experienced. The job market remains strong, demographic trends are quite favorable, mortgage credit is becoming more available to qualified borrowers, and home prices should continue to rise. All the pieces are in place for stronger growth in 2018 and beyond.”
This is generally good for the title industry as lenders will be requiring more title searches and tax searches in the year ahead. Closings will be somewhat more complicated which opens the door for the best closing companies to earn more money there as well. But the outlook means something quite different for lenders and Realtors.
A recipe for more intense competition
MBA based its forecast in part on an expectation of overall economic growth at 2.0% for 2018, continued low inflation and a tight job market. Fratantoni said MBA expects the Fed to raise rates in December 2017, 3 times in 2018, and twice in 2019. This will pretty much shut down refis. But the economy will still be relatively strong.
"We forecast that monthly job growth will average 125,000 per month in 2018, down from about 150,000 per month in 2017, and that the unemployment rate will decrease to 4.0 percent by the end of 2018.” Fratantoni said.
Another potential drag on originations next year will be a lack of trained mortgage professionals, MBA economists said. As the business swings further toward purchase money loan origination, more trained staff will be required. This could pit lenders against each other in terms of recruiting efforts, increasing their costs.
What this all boils down to is an environment in which lenders will be competing for every loan. And they’ll have to move quickly because real estate agents will be selling a limited number of homes to a set of prospective buyers who will be competing against others in a seller’s real estate marketing. Getting the loans closed on time, every time, will become even more important next year.
This means title and closing agents are going to have work very closely with their customers and do their very best to stay on target as the deals move toward the closing table. We don’t expect lenders or real estate agents to be very forgiving is deals are delayed.
A bright spot for the industry
While originating purchase money loans will be difficult as they are more complex and lenders have fewer trained loan officers who know how to sell them effectively, there is one product that is likely to be a lifesaver for the industry next year. With rising home values and a stronger economy helping borrowers pay down their mortgages, we’re seeing historically high levels of home equity sitting on lots all over the country.
Homeowner equity increased to $13.7 trillion in the first quarter of 2017. It’s just a matter of time before they begin to tap into it.
Freddie Mac says that limited housing supply and robust demand has led to strong home price appreciation across the country, with the FHFA house price index rising 6.6 percent from the second quarter of 2016 to the second quarter of 2017. Many markets have seen 10 percent year-over-year growth and a few have grown beyond that. Freddie pointed to Seattle, a city that achieved percent home price appreciation this year. Overall, Freddie Mac predicts average US house price growth at 4.9 percent next year.
Further analysis from Freddie Mac indicates that in the second quarter of 2017 borrowers cashed $15 billion out of their home equity, up from $1.2 billion from the first quarter, but down from $19.1 billion in the fourth quarter of 2016.
We saw 1.6 million new HELOC borrowers in 2017 and this business will get better next year and thereafter. Estimates put the number of consumers expected to originate a new HELOC between 2018 and 2022 at 10 million, more than double the 4.8 million written over the past 5 years.
A new study from TransUnion suggests that HELOC volume could spike by 30% in 2018, with 1.6 million new customers taking out loans within the next 12 months.
More HELOC business means more business for title companies if they have the information lenders need to make fast decisions and close the deals before the consumer takes it elsewhere.
Other trends to bear in mind next year
In addition to these macro trends, the industry will still be subject to the drivers that have been present throughout the recovery. These include the need to ensure full compliance, the drive to cut costs (internally and for our customers), the pressure to recruit qualified applicants and train them effectively, and the need to turn around our work very quickly.
We expect to see title companies providing more current owner searches and Current lien searches in 2018.Most title companies will seek out partners for this work as they can better control costs when they outsource.
Property tax information is likely to surge, with or without a tax certificate. Since not every title agency may have the time or expertise to deliver a complete report, we expect to see more outsourcing here as well. In these cases, due diligence in choosing the right third party partner will set the best agencies apart from the rest.
The time to solidify your lender client relationships is now. Find out what products they expect to need and what they will expect in terms of turn time. Then seek out the partners that can help you deliver in 2018. It will be the best way for title companies to succeed in the year ahead.
About the author
Timothy Moreland is Senior Vice President, SLK Global Solutions, a firm that provides technology based solutions for the real estate lending and settlement services industry. Tim can be reached at http://[email protected].
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