MBA mortgage applications rose 18% in March

MR - Mortgage Apps 5 yearEnlarge Graph

Mortgage applications, as reported by the Mortgage Bankers Association, rose 18% year-over-year in March as purchase activity increases, even as refinancing activity dries up.

Mortgage applications are primarily interest-rate driven. They increase as rates fall because homeowners take advantage of the drop in rates to refinance. Conversely, they fall as rates rise.  They also exhibit a seasonal pattern, correlating with purchase activity during the summer selling season. This year, we are seeing strong origination volume growth even as rates climb back towards 2% on the 10-year bond. The mix of purchase activity versus refinance activity is becoming more purchase-driven. This favors the mortgage bankers who have a strong retail branching system, and works against the lenders who go direct to the consumer.

Transition to a purchase-driven market

Mortgage bankers had an extremely profitable 2012 as rates fell and real estate prices bottomed. Much of the activity over the past five years has been the “serial refinancer,” or someone who has equity in their home and has taken advantage of refinance opportunities as rates have fallen. These borrowers are highly price-sensitive and tend to go with consumer direct lenders who offer low rates and reduced application fees. These consumer direct lenders will struggle in a purchase environment, and have been laying off staff in anticipation of a drop in volume.

The purchase market is much more relationship-driven. This market requires a branch system of local professionals who have a large network of realtors, real estate attorneys, etc. These bankers compete on the basis of price and service. It also means that there is competition for independent brokers and bankers. A mortgage banker can grow very quickly through M&A activity.

Big opportunities ahead for the mortgage REITs who focus on origination

The mortgage market is undergoing a massive transformation as the private label mortgage market returns. Ever since the bubble burst, mortgage origination has been almost exclusively government-driven. If a loan could not fit in the conventional (Fannie Mae or Freddie Mac) or government bucket (FHA, VA), it probably was not made. Originators typically do not hold their mortgages. They either sell them to the big banks or securitize them. Since the securitization market was dead, they had no outlet for non-agency mortgages. Redwood Trust (RWT) has been the only issuer of private label (securities backed by mortgages that are not government guaranteed) mortgage backed securities and they have focused exclusively on high quality jumbo loans.

In the past few weeks, we have seen private label deals from JP Morgan (JPM) and Everbank (EVER). We’ve also seen the first sub-prime deal since the bubble burst. The private label market was a $1.1 trillion per year market prior to 2008.  Since then, approximately $1.5 billion has been issued in total. The return of the private label market opens the door for borrowers of all stripes who have been shut out because they do not qualify for an agency or government mortgage. This particularly helps out the REITs who focus on origination, but it also helps out those that invest in non-agency mortgage backed securities.