As the mortgage market prepares for 2014, a wary air is settling over market participants, with some sensing opportunity, while most see reasons to worry.

For the overall housing market, 2013 was the best year in half a decade, with home prices and sales seeing solid gains, distressed sales on the decline and more owners climbing out from underwater.

Combine that with record-low interest rates, and the spring market was one of the healthiest the mortgage industry had seen in decades. But rising rates in the second half of the year brought an abrupt halt to the refinance boom, and many mortgage lenders are facing a more uncertain future in 2014. 

The biggest cause for optimism, lenders said, is that signs point to an improved overall economy and an increase in inventory that should help sustain the housing recovery when it comes to purchase loans.

“I’m seeing a lot more property on the market, a lot more inventory,” which will help boost purchase loan applications through the year, said Jerami Marshal, 2013 chair of the Massachusetts Mortgage Bankers Association (MMBA) and senior vice president for warehouse lending at  Santander Bank. 

Brian Koss, managing partner of the Danvers-based Mortgage Network, said his firm anticipates increasing its purchase volume 20 percent or more over the next year. “I’m optimistic about that,” he said.

But potential headwinds exist on the purchase side. The Federal Reserve Bank’s decision to wind down its bond purchase program, announced at its December meeting, may have been prompted by signs of renewed strength in the overall economy. But analysts expect that it will drive interest rates up in the second half of the year. Rates north of 5 percent may be fairly typical by historic standards. But after four solid years of sub-4 percent rates, some fear that a climb back to average could scare off buyers.

Marshal, for one, isn’t worried. While rates will undoubtedly rise over the year, he thinks we may be back to a more measured market. “I think we’ll see a ribbon effect [with interest rates] instead of spike and dips,” he said, which should make for a steadier and more predictable purchase volumes.

Of more concern to almost every player in the industry is how the refi drought is likely to shake up the markets.

Rich Vetstein, a Framingham-based real estate attorney, said his own volume was down more than 20 percent, and he has a strong purchase side. “Refis just got absolutely slaughtered. [A] lot of loan officers to [will] be dropping off the face of the earth,” he said.

‘Moving Away’

The refi drought could leave mid-size players and non-bank lenders in a particularly tough bind. Already, productive loan officers with a strong volume of purchase clients are looking around for new homes.

“Some of them moving away, some moving to banks,” said Marshal. And it’s not just individuals who find themselves in competition, he said. “Major branches are jockeying for position” within institutions as well, in the face of potential layoffs and closures, he said. Already, major national banks including Bank of America, Wells Fargo and Citi have laid of thousands in their mortgage units, while local mainstays like East West Mortgage – whose catchy radio jingle infested a generation of New Englander’s ears – have shut down. Many expect that 2014 could see a further wave of consolidation.

In the meantime, that could make things difficult even for players who remain healthy. Lenders who are in a fight for their survival will do crazy things to survive, said Koss, and he’s already seen rate quotes and terms being offered on loans that seem “ill-advised” and out of whack with the overall market. That can make things tough for the lenders who do want to lend responsibly, he said.

But even if market forces are pushing lenders to take further risks with borrowers, there are four little letters that ought to make them pause: C, F, P and B. The Consumer Financial Protection Bureau will finally begin seriously enforcing many of the thousands of pages of new rules it’s written in 2014, and that prospect looms as one of the biggest worries for the mortgage world headed into the new year.

In particular, the new definition of a “qualified mortgage” and new rules around loan affordability kick in this week. What remains to be seen is whether lenders desire to stay well inbound of the new rules will help curtail overall lending.

“I think we’ll be able to roll with the punches,” and adjust, said Louis Chinappi, Massachusetts State Manager at CATIC and incoming 2014 chair of the MMBA. While many lenders are taking a wait-and-see attitude for now, Chinappi thinks that as the year rolls on, lenders will become more comfortable with how to underwrite under the new regime, keeping lending at a sustainable level.

Email: csullivan@thewarrengroup.com