Rock-bottom interest rates have driven the volume of mortgage originations through the roof for financial institutions, but can that level of business continue in 2021?
George Charette, CEO and president of Pawtucket Credit Union, believes it can.
Charette recalled how when the pandemic struck last spring, he told the credit union board members that the institution would have to increase its loan-loss provisions – money set aside in anticipation of defaults – because he believed many homeowners would struggle to make mortgage payments in a faltering economy.
But not only did defaults remain low amid the coronavirus crisis, the credit union saw a surge in borrowers seeking new home loans or refinancing existing ones. PCU booked a record $370 million in mortgage volume for 2020, up from $277 million in 2019, which was the credit union’s second-highest annual mark.
That type of jump was seen throughout the lending industry, and Charette said he doesn’t expect the trend to end in 2021, at least not at PCU. “We’re looking at our volume being higher in 2021 than it was last year,” he said.
“Refinancing has not ended,” Charette added. “We are at 2.875% for a 30-year fixed mortgage, which is the lowest rate I have seen. I never thought I would see a number that low. And I have been in banking since the late ’70s.”
He noted that current interest rates are lower than in 2018, when they hovered around 4.75% to 5%. “So, a lot of the refinancing we’re seeing now is a lot of those loans,” said Charette.
‘The decline is going to be driven by a drop in refinance volume.’
JOEL KAN, Mortgage Bankers Association vice president of economic and industry forecasting
At the same time, Charette is not surprised the Mortgage Bankers Association is predicting that refinancing will slow considerably in 2021. After all, forecasts call for the mortgage interest rates to climb this year.
If refinancing starts to decline, it should not have a significant financial impact on PCU, the state’s second-largest credit union at $2.6 billion in assets. “We can offset whatever we lose through other means, and that is by gaining more volume on the purchase side,” Charette said.
Indeed, many economists believe that house sales – and, in turn, purchase-loan volume – will continue to grow beyond 2020 numbers, even if real estate prices and the cost of borrowing continue to rise.
It’s something Scott Mackey, an associate finance professor at Roger Williams University, has experienced firsthand recently as he was house hunting in the region and was priced out of purchasing a home.
“It’s about the haves and have nots,” said Mackey, noting that friends and family members experienced a similar fate of losing out to buyers with more money to offer. “Housing prices have really priced a lot of people out of the market.”
What’s feeding the frenzy? Mackey said some of it can be attributed to factors such as a population shift from urban areas to the roomier suburbs during the pandemic and an increase in people working from home and wanting better surroundings. Lower interest rates are giving prospective buyers more purchasing power.
And those who have already purchased have lowered monthly payments through refinancing. “I know some people who refinanced their homes twice,” Mackey said. “Unlike with the 2008 financial crisis … [people’s] personal saving rates went up and their consumption dropped” during the pandemic.
That has led to “better-capitalized households,” he said.
Still, the Mortgage Bankers Association is expecting an overall decline in mortgage originations for the next two years as interest rates increase.
“The decline is going to be driven by a drop in refinance volume,” said Joel Kan, the association’s associate vice president of economic and industry forecasting.
Kan said the forecast is that rates will climb from below 3% now to almost 3.5% by the end of the year. “That half a percentage [point] difference is going to cut off a lot of refi volume,” he said.
He warned, however, that nothing is guaranteed. The COVID-19 pandemic could spur more government intervention and actions by the Federal Reserve that could influence the mortgage industry in unexpected ways.
Mackey said the things that are certain are “rising interest rates, bond prices falling and yields rising,” as the country digs out of a recession.
Charette agreed, and echoed Kan’s sentiment, noting that “there is one wild card. That is – what will be the final impact on businesses and individuals of the pandemic?”
Charette said his bank will see some loan losses in the future, as some homeowners default on mortgages because of financial hardships from the pandemic.
“We don’t know when,” he said. “We don’t know to what extent. That may be the end of this year and into 2022. We are hoping, with the way we underwrite loans, that the impact will be relatively light.”
Cassius Shuman is a PBN staff writer. Email him at Shuman@PBN.com.
