A Year in Review and Look at What Lies Ahead
Year end is a popular time to reminisce about all that happened during the year and what lies ahead. This subject provides great fodder for writers of many topics including politics, show business, and sports. While mortgage banking might not make Letterman’s top-10 list, I can’t think of any industry that has gone through more change in such a short time. As a consultant to the industry, I have a front-row seat for observing what senior executives worry about and how the industry is progressing. Here are a few personal observations:
2013 – Light at the End of the Tunnel
It was only a year ago that more than 5.3% of all mortgages in America were in some form of default. Lenders were investing millions in loss mitigation and foreclosure processing. Regulators were suing originators and creating new rules to fulfill the promises of the Dodd Frank financial reform bill; ensuring that consumers had the ability to repay and that servicers responded quickly and fairly to borrowers in trouble. Politicians were focused on the $137 billon spent to bail out Fannie and Freddie, and promised that the two GSEs would be wound down as quickly as possible. At the same time, the GSEs and mortgage insurers were rescinding coverage and demanding that lenders buy back faulty loans. Lenders were reacting to all the pressure as best they could by adding thousands of servicing people, pushing back on repurchase demands, spending thousands on lobbying efforts to influence the ultimate definition of Qualified Mortgages (QMs) and Qualified Residential Mortgages (QRMs), and building loss reserves. All while enjoying the last wave of refinancing while 30-year, fixed-rate mortgages hovered at 3.3%.
One year later we are looking at a very different scenario. Sixty-day delinquency rates as measured by TransUnion have dropped by 23.3% from 3Q 2012 to 3Q 2013. Just last week, Bank of America announced that it has cut the number of delinquent loans in its portfolio by 50%. And lenders, the GSEs, and mortgage insurance companies have announced huge settlements regarding buy-back claims, as all parties move to put that aspect of the financial crisis behind them. Also last week, HUD published final guidelines for QM. Despite early fears, it now appears that lenders are likely to start making non-QM loans to boost production and balance sheets to offset the huge drop in originations caused by the 100-basis-point increase in mortgage rates. In another surprise, the GSEs have become wildly profitable – so profitable in fact that they have reimbursed the federal government for almost all money invested in them. While Congress refuses to acknowledge that the debt is repaid, there are big changes in the wind as Ed DeMarco, the acting head of the FHFA and a fiscal conservative is replaced by Mel Watt, a liberal democrat. DeMarco’s parting move was to increase GSE guarantee fees in the hopes of attracting new private capital to replace the GSEs. This strategy has so far failed to do anything but increase the profitability of Fannie and Freddie while increasing the costs and barriers of obtaining a loan. Watt may have different ideas.
So What about 2014?
With the financial crisis largely behind us, lenders face a new set of challenges in 2014. The biggest of these is the drop in origination volume and the shift in focus on the purchase market. Loan officers and lenders are going to have to develop new strategies and sales processes to attract and retain referral sources in light of the drop in refinances. This shift favors credit unions, community banks, and lenders that have a strong retail base. Lenders that have focused on internet channels, refinances, and HARP loans will need to retool for the new realities of a purchase market.
Lenders will also need to build new processes and controls to stay compliant with all the regulations that become effective in the New Year. Rapid shifts in regulations, credit risk, and competitive environments will require lenders to develop effective ways to keep loan officers, processors, closers, and servicing personnel up to speed on new regulations, changes to products, underwriting guidelines, and servicing standards.
The GSEs will also continue to experience substantial change. Perhaps we will see a relaxation in some scorecard criteria including the mandated shrinking of the GSEs’ Multi Family balance sheets. Given the high demand for moderate and low income rental housing, this mandate may actually be reversed. I suspect that we will not see further increases in G-fees, and that the drive to privatization will slow down. That said, I think it’s likely the GSEs will continue to develop new risk-sharing structures to attract private capital. Simultaneously, I expect a substantial increase in private securitizations especially with respect to jumbo loans and that the mortgage insurers will play a more active role in these structures.
Finally, I predict that the shift to non-bank ownership of mortgage servicing rights will continue driven by Basel 3 and the new capital requirements needed to keep these assets on bank balance sheets.
It is always tempting for forecasters to call for more of the same. And while many of these trends are already revealing themselves, there is always the wild card event that can change the course of an industry. Federal Reserve policy, political interference, a surprise in loan performance, or a severe drop in housing values have played havoc with this industry in the past and could do so again.
As we look forward to the holiday season, mortgage executives would be wise to enter 2014 hoping for the best while planning for the worst. And, either way, I wish you a happy and prosperous New Year!
*Mortgage rates based on data published by Freddie Mac