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Thought Leader Home Mortgages

A Big Change in the Mortgage Industry

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Recently, a major trend in the mortgage lending industry reversed rather dramatically; something that happens only every 7-10 years and it changes the landscape of mortgage lending. It’s a change that every consumer should be aware of.

Cal Haupt, President and CEO of Southeast Mortgage

Cal Haupt, President and CEO of Southeast Mortgage

With the historically low mortgage interest rates over the past few years, the number of refinanced mortgages has risen astronomically. With rates as low as they had been, it made sense for many homeowners to refinance their homes to take advantage of those rates.

But over the past few months as rates have increased, the number of refinances has dropped just as dramatically. As you can see from the chart, the sharp upward trend just from May to June has now started to drop. Many companies have seen their business drop 65 to 75 percent.

 

refinancechart

These are companies that primarily deal in refinances and over the past few years have been staffing up their offices with people to answer the phones and handle refinances. Their business model is built around generating leads and getting the phone to ring. They market through radio, TV and print ads and through the Internet and hire people who follow through on those sources or referrals from Realtors. The name of the game is volume.

But because these companies are seeing such a fall in the refinance business, many are opting to begin offering new mortgages, called purchase loans, as well. While you may think that would be an easy switch, companies that handle purchase loans, are actually built on an entirely different business model.

At Southeast Mortgage about 90 percent of our business is from purchase mortgages. We have to train staff in servicing our clients, not just handling volume. The method for closing a purchase mortgage and one for a refinance is very different and can be much more involved and complicated. Just to name one major area of difference, with a purchase mortgage we have specific timelines and have to meet a closing contract date.

With a refinance, the closing date is flexible. No one is moving in or out of a home and no one is coming from out of town to sign paperwork. There is no buyer that may suddenly change his mind and try to back out of the contract. While you may want to have a specific date to close on a refinance for your home, changing it to a later date would not cause you major inconvenience or the need to find an interim place to stay.

So it’s not as easy as just switching the type of loan you handle. It’s switching your entire business model, which requires making major changes to the company.

Rick Roque with MenloCompanyGlobal.com wrote recently about this development in an article by Rob Crisman in MortgageNewsDaily.com. He has been getting a number of calls from people with companies that want to switch from the refinance side to the purchase side. He does his best to discourage the switch.

“Naturally, these firms haven’t touched a purchase loan and aren’t staffed to underwrite FHA competently in various markets, and would need to staff up ($$) to accommodate this; they haven’t developed a retail strategy ($$), so this would have to be done; and there would need to be the HR ($), Accounting ($), technology ($) and branch support structure ($$$) and recruiting structure ($) to grow and support retail,” he said. “So, my advice has been:  don’t do it unless you simply have 8-10 months to burn money before you even break even, and then probably another 6+ months to recoup your original investment.  And, to do this in a rising rate, margin sensitive environment, is again, almost ridiculous.”

The reason consumers need to be aware of this change in the mortgage industry landscape is that they may soon be dealing with a company that is in the process of switching their entire business model and doesn’t have much experience handling purchase loans. You may want them to learn on someone else.

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