Just how bad could the mortgage industry get in 2018?

The mortgage industry should expect significant volatility that could result in a wave of lender consolidation in 2018, warns an analyst at risk management technology vendor LoanLogics.

Origination volume will continue to decline amid rising interest rates this year, which will leave lenders strapped for cash to fund ongoing operations, particularly among nondepository mortgage companies, Les Parker, the senior vice president of industry relations and consulting at Trevose, Pa.-based LoanLogics wrote in a recent industry analysis.

"2018 just may look like 1994 to mortgage bankers," said Parker, referring to the end of the early 1990s refinance boom. That pickup of refi volume helped nonbank mortgage lenders first gain prominence in the industry, but the sector suffered setbacks when rates began to rise later in the decade.

Should history repeat itself in today's shift to a purchase-driven market, declining values in originations suggests lenders may not have enough loan volume to stay in business as interest rates continue to rise through 2018, and many may ultimately force lenders to close or consolidate with stronger partners.

Further complicating lenders' prospects is the market for mortgage servicing rights, Parker said. While independent mortgage banks can liquidate MSRs to fill short-term gaps in cash-flow, there's a potential for too many sellers and not enough buyers driving MSR values down. However, this trend may eventually provide a good buying opportunity for some savvy MSR investors.

What's more, regulatory uncertainty and compliance obligations will continue to challenge lenders, and "bring about unintended consequences of dislocation and illiquidity," Parker said.