The Changing Market

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A past article in Forbes magazine stated, “The mortgage industry has been extremely volatile since early 2005 – with a boom in 2005-2007 followed by the crash that contributed to the economic downturn. As the economy recovered from the recession, record-low interest rates and government-led incentives gave a boost to the industry in 2011-2012, when homeowners rushed to get their mortgages refinanced to benefit from the improved interest rate environment and lending terms. Refinancing activity dried up soon, though, and without much improvement in the demand for fresh mortgages, Q1 2014 saw the lowest mortgage origination volumes since Q3 1997. Things did not improve much till Q2 2015 – when the impending rate hike by the Fed gave potential homeowners a reason to apply for mortgages before mortgage rates head north.”

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Then along came TRID. I am not going to take the time to rehash the background, challenges, and concerns related to the implementation of this rule; numerous articles have been published on this topic already. Suffice to say that all the parties involved, with a few exceptions, could have and should have done better. However, we are not out of the woods yet. Now we are faced with the HMDA changes and implementation of the new URLA. Enough said.So what’s next? Let’s look at the Five Trends That Will Shape the Mortgage Industry in 2016, published by Tavant Technologies:

1.) Interest rates are on the rise – There is potential for future rate increases from the Federal reserves. Rates are expected to rise by up to 1% in 2016. Increased interest rates may prevent many first-time buyers from entering the housing market. The millennials, already reeling under student debt could delay home purchases.

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2.) The rise of Millennials – Growing up in a digital age, their set of priorities and buying behavior is different to the previous generations. Born between 1980 and 2000, millennial purchasing power is at an all-time high. As the first digital natives, they naturally expect lenders to engage with them on digital platforms. Lenders are cranking up their tech muscle and developing digital platforms to capture this lucrative market. However, rising student loan debts may withhold them from immediate purchases.

3.) Marketplace lenders continue to transform the industry – Marketplaces are revolutionizing industries across business lines. Marketplace lending platforms match borrowers with investors who purchase securities backed by notes issued by these platforms. By adding critical functions in the middle, they are leveraging technology to unlock value, deliver scale and in the process take a significant market share. In a digital world, technology allows marketplace lenders to use advanced data analytics to make possible credit decisions, reduce risk and enhance customer experience. Marketplace lenders will continue to disrupt the market

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4.) Automation is the way forward – Buying a home is a complex process. It involves multi-layered, levels of approvals across a relatively long timeframe. Equipped with an array of options, the digital consumer expects speed across the loan application cycle. Lenders are looking to eliminate roadblocks and deliver superior customer experience. Lenders will leverage automation and adopt advanced technology platforms to automate credit assessment process, track customer sentiment, and detect fraud.

5.) Cheaper to buy than rent – Rental rates across the United States continue to rise. Rental vacancy rates are at a low for both apartments and houses. Growth in rental rates is higher than inflation, and buying is cheaper than renting in major urban markets. With an increasing need to be mobile and lower than average employee tenure, millennials may not want to commit to living in a single location. This could impact buying behavior and keep rentals at a high.

We also have to consider the housing market’s impact on the mortgage industry. Let’s summarize some of the predictions for 2016 and beyond. According to a report from Kiplinger, the housing market is settling into a slower, more predictable pace. Home prices are up 3% in 2016, continuing the upward trend of 4% in 2015 and 6.4% in 2014. According to Clear Capital, homes values rose in 236 of the 276 cities tracked. For the most part they are still regaining ground lost in the 2808 meltdown. However, nearly 13% of homes are underwater by at least 25%, according to RealtyTrac.

Homeowners aren’t selling. For various reasons, people aren’t moving as often, so fewer existing homes are coming onto the market, particularly at the entry level. Some of this is related to the math of job hopping. The people most likely to move when changing jobs are younger workers, and Millennials often make the move without having a home to sell first. Many entry-level homes remain in the hands of other generations, and home prices have risen to a point where some of these potential sellers can’t afford to buy that next level home in their current neighborhood.

The number of housing units actually occupied has increased by two million units over the past four quarters. We only built 1.1 million new units, so the additional 900,000 units occupied came from previously-vacant housing. We are underbuilding housing right now. The new occupancy comes partly from population growth, but that only accounts for half the increased demand.

New construction remains slow. This spring, groundbreakings stood at an annual rate of 1.138 million, while an estimated 1.5 million is needed to get supply back in line with demand. These figures are even more imbalanced when we consider that the majority of homes built in the last few years have been constructed and priced with a more well-to-do consumer in mind—too often these are not the starter homes that would allow pent-up demand to find a ready outlet.

Alex Villacorta, chief economist with Clear Capital, states “The two most important housing market trends to watch in 2016 will be the continued growth of rental rates and the moderating trend in home prices. The pattern seen in 2015 was largely characterized by a white-hot rental market, and if this continues, more households will likely choose to rent over buy in 2016. In addition to driving rental prices up and vacancy rates down, this trend disengages an increasing proportion of potential home buyers — evidenced by the lowest homeownership rate in almost 50 years.”

The industry often considers the problem of Millennials and what it will take to get them into the home-buying market in greater numbers. Perhaps the problem isn’t with the Millennials so much as with the housing options available to them. According to a Trulia survey, consumers rank interest rates a distant third among their housing market concerns. Their top two concerns? Finding a home they like and qualifying for a mortgage.

Mortgage lending has always been very cyclical in nature. Analysis has showed significant contributing factors, some of which are beyond the control of the lender and some that are the result of the lender not being able to formulate strategic responses in a timely fashion. These factors include the job market, economy, interest rates, available homes, and the ability to obtain a mortgage.

Now the landscape has changed significantly. Current, pending, and future regulatory requirements need to be addressed. The future of the GSEs is in limbo. But the biggest challenge is to tailor your product and solutions to the different segments of the population. The next President’s vision for the industry is unknown.

A rear view mirror only has value when we use that perspective to adjust our current actions. We cannot use it to lament missed opportunities. If there ever was a time to significantly embrace technology and innovative solutions, it is in front of us.

About The Author

Roger Gudobba
Roger Gudobba is passionate about the importance of quality data and its role in improving the mortgage process. He is vice president, mortgage markets at Compliance Systems and chief executive officer at PROGRESS in Lending Association. Roger has over 30 years of mortgage experience and an active participant in the Mortgage Industry Standards Maintenance Organization (MISMO) for 17 years. He was a Mortgage Banking Technology All-Star in 2005. He was the recipient of Mortgage Technology Magazine’s Steve Fraser Visionary Award in 2004 and the Lasting Impact Award in 2008. Roger can be reached at rgudobba@compliancesystems.com.