Banks’ Hope for Better Volumes May Rest on Recent Refis

Origination declines from higher rates earlier this year have hit some top banks mortgage earnings, leaving publicly owned lenders to pin their hopes for a better fourth quarter on a recent uptick in refinancing applications from lower rates, low-cost direct marketing channels and efficiency measures.

The declines at companies like Wells and Chase are an additional blow for origination units that have already been hard-hit not only by previous declines but by thinning margins and heavy personnel cuts, said David Lykken, managing partner at consultancy Mortgage Banking Solutions.

With the drop in production, people are dropping their margins to keep the people they retain busy, contributing to downward pressure on earnings, he said. We are seeing a lot of that. Even the strong companies are contending with it.

When asked if the uptick in refis apps registered by the Mortgage Bankers Association for a stretch this fall will help when it comes to future earnings, Lykken said, I think there is a good chance of it. I dont know that it will come soon enough to help the fourth quarter.

We cant be guaranteed it will be seen in the fourth quarter, he said, noting that this will depend on how many applications get through the pipeline and actually close as well as when closings occurs. Those delayed until the first quarter may face additional delay as new rules gear up then, but seasonally 1Q volume tends to drop which may offset this.

I think they should have some decent pull-through, said Lykken. There is still a huge number of loans that have not refinanced during the low-rate cycle, even if you go up to the mid-to-high fours [in rate.]

When asked about how much significance one should assign to the drop in 3Q numbers, Lykken said, I think this is a pause more than anything else. You should still try to retool to be a purchase shop but there are still some refinance opportunities.

While purchases are still the priorities there are still low-cost ways to mine refis, he said, noting that some companies have had some success doing this through low-cost, refi-friendly online/direct marketing channels that are proactive when it comes to outreach to untapped, qualifying borrowers.

Big banks should be leading the pack on these refis but they are not, Lykken said, noting that capacity issues given their large size may be somewhat of a hurdle to this.

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