Hire now for next refi wave, operations leader advises

October 7, 2024 5:31 AM

The share of mortgage refinance loans had been on the rise over the past several weeks, and now make up more than half of new applications. But because volume is rising from such a low point, no one is calling the situation a boom yet.

Overall volume is expected to end the third quarter only slightly higher than three months prior, according to Fannie Mae's September forecast, because purchases have not come back in any great numbers yet. But mortgage lenders need to prepare now, including by staffing up, for when those refis start rolling in, especially coming from anyone who purchased a home in the last couple of years.

The Fannie Mae forecast expects fourth quarter refi volume to be around $138 billion, well ahead of the $85 billion in the third quarter. In the first three quarters of 2025, refi volume should be $150 billion, $174 billion and $164 billion in each period, before ending the year at $161 billion.

Jay Venkateswaran is the business unit head of banking and financial services at operations management company WNS Global Services. In that role, he handles anything from strategy to execution to client relations.

The following are excerpts from a conversation Venkateswaran had with National Mortgage News. Both questions and answers were edited for length and clarity.

What is WNS?

We run business functions for other companies at scale across the world. We have over 60,000 people in over 60 offices across the world. We run various different business functions, activities that may be a little bit less core to [our clients'] own business, which can run cheaper, faster, better and, most importantly, most effectively. We help them reach their business objectives, be it better customer experience, be it more digital influence over the process, so on and so forth.

Following the FOMC September meeting, mortgage lenders are getting calls from consumers. Refis are up but it is not quite a massive refi environment yet. What can they do?

There's an estimated 2.9 million loans at 6.75% or above in terms of interest rates. So that's pretty much everything that originated over the last 12 to 18 months. These 2.9 to 3 million loans really will be the ones who are most eager to refinance.

What we're seeing from our mortgage clients is that they're very much gearing up for a refi boom. We haven't seen it in the volumes yet. At the core of it is, has the Fed rate cutting cycle started in earnest? Most believe that it has.

If the rate cutting cycle continues down this path, it's not about this quarter, right? It's about the next three or four quarters; as we go down below 6%, that's when we think we'll see a lot more activity.

But think about it as a consumer. If you're sitting on a 30 year loan at, say, 6.5% or 6.75%, the question is, when do you want to refinance that loan? Do you want to refinance it when you get a 25 basis point reduction from your current rate, or are you going to wait for a 50, 75, 100, basis point cut? Because there is a cost to refinancing. There is paperwork involved, there is process involved. So it's just a question of figuring out exactly when that consumer thinks that they are ready to refinance and when do they [mortgage companies] prepare, right?

The first thing that people are ramping up on are loan officers. Through this rate hiking cycle, most mortgage companies downsized their loan officers very substantially. So that's the first thing they're building back up. I think that's a two-quarter process to build up that capacity.

So even if consumers aren't ready to refinance yet, lenders should staff up now?

Exactly, because there's a pretty long lead time to hire your loan officers, and then staff up the entire origination cycle. The loan officers are the ones who sign off on the underwriting, but before they come in, there's a bunch of other people involved in the entire underwriting cycle.

It takes time to scale up all those people. The expectations that what has started as a 50 basis point cut, will be followed by maybe 25 basis points every quarter, so long as inflation remains under control.

Once we get to that point where volume sees an uptick, no mortgage originator wants to be caught out without the capacity to support that refinance boom when it comes.

Even if the capacity is not being utilized today, it will be utilized in the next two to three quarters. So the bigger, more mature companies who have seen a couple of cycles are starting to build that capacity.

Fannie Mae’s September forecast now has rates going under 6% by the second quarter, and they would still be in the high 5% area by the end of next year. So is that something lenders should be looking at, maybe tempering expectations a bit for business as well?

This is a very, very good time to study history. There are very few industries that track history the way mortgages do as an industry. That history keeps us all quite well informed.

I was just looking up the average rates [at the time of the interview] from Freddie Mac. The national average is 6.09. It's very close to dropping below 6% which could very well happen in the next quarter or so. There already you can shop around and find some 30-year [mortgages] just below 6% so I think maybe we're one more rate cut away from the beginning of the refi boom. Those 2.9 million loans who are already paying above 6.75% will be the first ones out of the gate, because at that point, they'll be paying 100 basis points above the market.

From a business process standpoint, they have these customers. It's now just going to be a question of how successful are they going to be in getting the next loan out of them.

Exactly. The market leaders have a very well oiled machine to identify those loans which are attractive for refinancing. They have a process in place to call these people on a regular basis, talk them through what their options are, and then hand them off to a loan officer to close out the deal.

I think the timing is right now to start to build capacity. If inflation goes back up, there's no telling what's going to happen tomorrow. But as long as inflation remains under control, and the rates remain directionally downwards, then I think the timing is perfect.

You talked about studying history. One thing I've learned is you really can't predict where rates are going to go.

That 2020 to 2021 refi boom was very, very painful, both on the way up and on the way down. We saw every major mortgage company hire like there was no tomorrow, and fire as well, because of that big upswing and subsequent downswing when rates started to go up. Since the management teams are all pretty much the same as what they were three or four years ago, it's still very fresh in people's memory.

I don't think that mortgage companies are that keen on going to a similar experience over the next two or three years as the cycle kicks off. Companies are looking for more efficient ways to do this. How can we bring in more technology, more AI, artificial intelligence, into these processes? How can I do more with less people, is the question that most companies are asking.

When you're in the middle of a refi boom, there is no time to think. There's no time to act. There's no time to change technology and platforms. Most of the best companies in the industry have been going through the technology upgrade cycle over the last two years, when things slowed down. That's the right thing to do because you're preparing for the next upward trend, and before that happens, you want to be stable with your new systems.

While, as you mentioned, some companies have been upgrading, when business slows down others don't have the money to upgrade. They're the ones that may be caught short in the next cycle.

That's why the leaders continue to separate themselves from the laggards in this industry, because they have the deeper pockets. They have the balance sheet to upgrade their tech stack when the chips are down and they're ready to pick up volume when the market comes back.

One thing that we're driving very aggressively with our clients is to say, let us bring in the technology and underwrite your outcomes and make your cost more variable. Instead of staffing up and stuffing down and worrying about people costs, why don't you focus on volumes, right?

This is really the big dream for tech for mortgage companies, because they would ideally like all of their costs to be variable, so that they can move up and down with volume.

We're bringing OCR and computer vision technology to help automatically ingest data from application forms and from W-2s and other documents that are submitted by borrowers to make it easier on processing to then review the data and sign off on that application rather than entering everything from scratch.

We're trying to cut down on the number of manual data entry tasks. Those are the ones that are ripe for technology to reduce. If we can reduce 70%, 80% of that through technology, that's a big win. Those are exactly the sort of pilot programs that we're running for some of our clients.

We've had a big tech evolution in the industry over the years, from systems that need to be housed internally to now cloud based systems that the vendors themselves are, for the most part, managing for their customers.

Another interesting thing that we see on the technology front is, there are many software vendors in the marketplace, but there's an equal, if not bigger, number of homegrown systems that mortgage companies have built.

That creates such a fragmented environment, no two mortgage companies look alike inside because of this. Even if they have broadly two or three shared vendors, things look different because they built some pieces of technology in house. They bought bits and pieces outside with homegrown ideas, and it's all a mishmash of multiple types and sources of technology.

What we always advocate for is to first set your assets to their maximum potential. If you are tied into two or three core pieces of technology, do everything you possibly can on those platforms and only go outside of that when you've completely exhausted all the capabilities within that platform.

Was there anything else you wanted to add?

One last topic is around analytics and risk management. That's an area which is still highly under penetrated by mortgage companies. They're sitting on so much data, but they're always caught in this cycle of volumes going up and coming down that very few of them are able to really make the most of the rich data sets that they have in house, or the third party data sets that they can buy.

I think that's another huge data analytics and AI play coming beyond this cycle, maybe in the next cycle. It's an area we're already starting to invest in. That's where we think that bringing technology, data and analytics together in a meaningful way can move the needle.