If the defining mantra of real estate professionals is “location, location, location,” then a similar kind of refrain that could be attributed to financial planners is “diversify, diversify, diversify.”
Sadly, we fear that the mortgage industry in the past few years has done a poor job heeding the advice of their financial planning peers.
Businesses, like portfolios, need diversity to survive. Sure, every successful business has its one or two areas of expertise, a niche in which it excels. But we guarantee you that the pizza shop around the corner that’s world famous for its pepperoni pies, for example, also sells a variety of other pizzas, calzones and subs. Not everyone likes pepperoni, after all.
Nevertheless, too many mortgage brokers and bankers have concentrated too heavily on the refinance market as their area of expertise – at the expense of the rest of their business.
At the tail end of 2009 and throughout 2010, we couldn’t avoid the screams from the mortgage industry to “Refinance today! Rates will never be this low again! Don’t miss this historic opportunity! Go Go GO!”
And for a while, we listened. Eligible homeowners came out in droves (or so it seemed), rightfully eager to jump on the chance to negotiate better mortgage terms and improve their personal finances.
But the mortgage industry’s refinance marketing blitz now seems to have worked too well. Put simply, the pool of eligible homeowners has been drained. And with rates on the way back up, odds are that pool won’t be filling back up any time soon.
Making matters worse, rising rates and slack refi demand is coming at a time when home sales – and corresponding purchase loans – are dragging along rock bottom. Mortgage brokers are looking at refis to be their lifeline to drag them through this rough patch, but the line is proving too short as this prolonged period of anemic sales keeps dragging on… and on… and on.
The hard truth is that the mortgage market, even shrunken as it is from the brutality of the past few years, still remains over-saturated – a product, no doubt, of the heady days of the boom when mortgages were being passed out like so much economically fattening candy on Halloween. The longer this perfect storm of rising rates, scarce demand and poor sales rages, the more it begins to resemble a Darwinian game of mortgage musical chairs. When the music stops, there are just not enough places to sit down.
In other words, sadly, someone (or more likely, many some ones) is going to lose. It’s just illogical to assume that even in a Utopian community, homeowners that have already secured a favorable rate are going to keep refinancing just to keep their friendly local mortgage broker in business.
Unless, that is, the mortgage industry can find ways to diversify its business – to expand its menu, so to speak, beyond the refi and purchase mortgage staples.
Perhaps reverse mortgages are the answer, given an aging population and an entire generation of soon-to-be retirees probably desperate at this point to bolster their income in their impending golden years.
Or maybe, as underwriting standards get ever more strict and down payment requirements continue to rise, we’ll see a return to the piggyback loan days of yore – albeit in a more consumer-friendly kind of way.
But, more likely we’re afraid, there probably is no ready-made solution. Supply has simply outstripped demand, and capacity has to be cut. Such is the hard truth that nobody, ourselves included, wants to acknowledge.
