The refi surge is taking a little longer than we were all expecting (and hoping for), but once the Fed finally lowers rates, virtually everyone who bought a home in the last 18 months will be eager to take advantage. As the market shifts, mortgage lenders could be looking at as much as $500 billion in up-for-grabs refis.
But lenders will have to work a lot harder than they did in 2020 to capture those refis. And underneath that golden opportunity sits a tremendous risk: With a huge volume of practically new mortgages likely to turn over, loan servicers could see a number of recent loans running off their books while lenders face enormous early pay-off (EPO) penalties if they can’t hold onto their existing customers when they refinance.
Mortgage market will accelerate as Fed rates fall
After 11 rate hikes starting in March 2022, the Fed was unequivocal last week about its intentions to lower rates through 2024. The mortgage market responded almost immediately to the news: 30- and 15-year fixed rates, as well as the 5/1 ARM rate, dropped in the days since the announcement.
After two-plus years marked by rising rates and rising housing prices, mortgage lenders are naturally optimistic about the coming year. “We expect that this path for monetary policy should support further declines in mortgage rates, just in time for the spring housing market,” Mike Fratantoni, chief economist at the Mortgage Bankers Association, told Bankrate. The National Association of Realtors predicts home sales will rise by 15% next year, as falling rates bring hesitant buyers off the sidelines.
A very different kind of refi surge
But the real golden goose will be the oncoming wave of refinancing. Nearly every homeowner that bought in the last 15-18 months did so with an explicit plan to refinance as soon as the highest rates in decades began falling.
How big is that refi opportunity? If rates drop below 6.625%, organizations working with Total Expert will be looking at an estimated $81 billion in refis up for grabs—and that opportunity jumps up to $190 billion if rates get below 6.0%.
But this refi surge is going to play out a lot differently than the one we experienced in 2020-2021. That was a true tidal wave: 2020 saw $2.6 trillion in inflation-adjusted refinance originations. Refi customers were pouring through lenders’ doors, and the only strategy then was: “try to keep up.”
In 2024, lenders will see a lot more competition for that $190 billion in up-for-grabs refis. They won’t be able to sit back and wait for refis to come to them; their competition will be out stealing those opportunities.
A major opportunity that could quickly turn into catastrophic risk
Mortgage lenders are going to have to balance two priorities: attracting new borrowers who patiently waited for rates to drop and retaining previous customers who impatiently waited for rates to drop. Both groups present major opportunities, but focusing too much on either could have severe and long-term consequences. Only focusing on new homebuyers means risking losing existing customers and incurring massive EPO penalties. Whereas ignoring new borrowers for the sake of retention means missing out on a huge slice of the new purchase pie.
That’s because the 2024 refi surge will differ in another important way: Nearly all refis will be on mortgages originated within the last two years—with a huge portion originating within the last six to 12 months. Losing refis is always a hit to long-term revenue, but losing these refis will bring a wave of EPO penalties that will quickly overwhelm lenders that may already struggle to be profitable in the current market.
Given the volume of at-risk mortgages, the damage could quickly get serious. With the industry-average retention rate hovering around 20%, a mortgage lender that originated 1,400 loans above 6.5% over the last 15-18 months stands to lose over 1,000 of those refinance opportunities—adding up to $280 million on lost loan volume (assuming an average loan size of $250k). If 800 of those loans are less than six months old, they are at risk of paying out roughly $4.8 million in EPO penalties.
Proactive engagement will win the battle
Whereas 2020 was a bit of a “rising tide lifts all boats” situation, 2024 will see a sharp divide between winners and losers in the mortgage lending industry. And for once, winning won’t be all about new originations and new customer acquisition: The top priority needs to be holding onto existing customers’ refis to prevent EPOs from torpedoing revenue and growth from below.
That means engaging customers proactively—now, not when rates finally drop—to help them understand what’s coming in 2024. Help them make the cost-benefit calculation of refinancing at a lower rate versus waiting four, six, or eight months for rates to fall further. This is the kind of genuinely useful, educational engagement that earns loyalty—and will outshine the low-rate competitor offer guaranteed to be sitting at the top of your customer’s inbox every day in 2024.
Prioritizing refi retention: Put the mechanics in place now, or risk playing catch-up
Refi activity will accelerate quickly once rates start to drop in 2024. Your competitors will have their fingers on the trigger of their refi acquisition campaigns, aiming to be the first to entice your customers with low rates. But while they wait to steal your customers, you can start engaging and educating customers TODAY, positioning yourself as their best resource for when they’re ready to refi.
Want to see the four things that will define the winning mortgage lenders of 2024?
Read our latest refi guide: https://info.totalexpert.com/dont-send-your-refinance-opportunities-into-orbit
