The following piece is a print feature from MReport's September 2014 issue.
The U.S. market for originations remains the ugly stepchild of the mortgage industry as it constantly faces the uncertainty of future growth, while simultaneously experiencing stalls and starts during certain parts of the year.
The beginning of 2014 stunned mortgage professionals, leaving them hanging on the housing vine, so to speak, as interest rates hovered below 5 percent, consumers stayed on the sidelines, and the influence of new mortgage regulations stymied robust growth.
"First quarter was universally painful for everyone in the originations business," explained Brian Voss, EVP of Mortgage Network, Inc.
And Voss is not alone in that assessment. Most of the industry described Q1 as a comedy of errors defined by bad weather and economic uncertainty, both of which dampened demand for purchase mortgages and refinancing products at a time when regulations continued to pinch loan processing speeds and demand.
"The new regulations had some impact on the first-quarter slowdown, no doubt, but as lenders find their comfort zone, that will begin to fade," said David Williams, VP at RightStart Mortgage, "We're already seeing a certain comfort level in the new regulations, and this will only improve as the year continues."
"That said, credit has tightened, and some applicants on the bubble, so to speak, may not be able to qualify for a mortgage they would have easily gotten under less scrutiny," he added.
Rick Hogle, chief strategic officer of Supreme Lending, shared a similar experience, saying, "Perhaps 20 percent of the slowdown can be attributed to QM and regulations. At this point, everyone seems to have been able to comply with the new rules, granted it added time and cost."
But even with a slow start to the year, the second quarter of 2014 offered some signs of reprieve, and it seems the mortgage industry is latching onto every silver lining that it can find, all the while keeping fingers crossed for a stronger second half.
No Refinance Rebound
Refinance originations dropped in the first half but fell back to historic norms, representing approximately 20 percent of originations, said Voss with Mortgage Network.
Williams lauded second-quarter improvements overall.
"[T]his situation is improving as lenders grow accustomed to the new environment. Also, I do regard weather as a factor in the first-quarter slowdown. Not only did we see snow in the colder states (and droughts in the warmer states), but the snow took place nearly every weekend, which kept homebuyers inside and unable to look at houses," Williams added.
Williams' cautious optimism is not unwarranted. The second quarter of 2014 delivered a few doses of good news as the Mortgage Bankers Association reported improvements in credit availability for the months of May and June. Not to mention, a declining unemployment rate— with the nation's unemployment rate reaching its lowest level of 6.1 percent in six years. And lower unemployment generally equals more employed consumers, who are then able to begin playing more heavily in the economy.
"Originations improved during the second quarter," Williams said. "May and June are typically the best months for the residential mortgage market because it's the best time for families to move. The kids are out of school, the transition to a new home is easier, and parents are looking for areas with better school systems. Frankly the weather is much better during the spring and summer months too. For these reasons alone, the second quarter fared much better for us."
Still, the pain of Q1 left a lasting impression on the originations sector. Harsh weather conditions during that first period, continued shock from the implementation of mortgage regulations, and risk-conscious home buyers stifled demand for purchase mortgages.
Voss with Mortgage Network said the process became "so heavily compliance-oriented," and the burden of proving ability-to-repay slowed down efforts dramatically in Q1.
Voss remembers the processing of each loan feeling as if his staff was in effect processing three or four mortgages when, in reality, it was just taking longer to complete one loan. Still, he saw the second quarter as "stronger," but limited by a lack of inventory. "We did get a significant pop," he added encouragingly.
Still, the second quarter did little to curve overall expectations of an originations slowdown from 2013 to 2014. The MBA concluded in July that despite an improved second quarter, the trade group expects a 42-percent drop in overall mortgage originations for 2014. Refinance originations, which drove a demand surge in 2012 and 2013, are expected to fall 60 percent this year, while purchase originations could drop as much as 10 percent, according to the MBA.
Call it a psychological need for inspiration or something to hang their hats on, but mortgage origination professionals are still trying to focus on what went right in the second quarter, while hoping the first quarter is simply an outlier period.
"Mortgage rates remain low, which is providing potential homebuyers with opportunities for good deals," added Williams with RightStart Mortgage. "Based on second-quarter results, we're finding that low interest rates continue to help the housing market gain traction. Interest rates are at record lows, but they're not going to stay that way forever. Homebuyers realize this, and, for that reason, it will have a positive impact on market flow into the third quarter."
Williams believes interest rates will remain below 5 percent, giving consumers enough incentive to jump into the market. "If rates moved higher than 5 percent—up to 6 percent or even 7 percent—they would still be low from a historic standpoint," the originations executive added.
Hogle with Supreme Lending said his company is not expecting interest rates to move much over the next six months.
The MBA also gave the industry's "glass-half-full types" something to look forward to this past summer. The trade group highlighted the fact that existing home sales grew to 4.9 million units in May (as reported by the NAR). The MBA also noted that new home sales surged to a 504,000-unit pace in May, up from 425,000 in April, according to Census Bureau data. This increase marked what the MBA calls the "highest pace of new home sales since May 2008."
The Q2 turnaround wasn't grand, but it definitely painted a rosier picture when considering overall consumer confidence plummeted just months before in the first quarter of 2014. First-quarter gross domestic product contracted by 2.9 percent on lower consumer spending and a steep trade deficit, the MBA explained in a July update.
While those facts alone may be perceived as a wet blanket for the housing market, improvements in the second quarter at least allowed some room for wishful thinking.
The MBA overall anticipates real GDP growth will reach 1.5 percent for 2014. Furthermore, consumer demand seemed to pick up in the second quarter, the trade group added.
Some of the recent gains stem from stock market improvements and home equity growth. In fact, many of the homeowners who refinanced during the wave of 2013 started to experience some benefits of having more monthly cash flow, the MBA suggested in its July commentary.
Voss notes that refinancing may have declined substantially this year, but it is more in line with historic averages. What concerns him and the rest of the industry is the reluctance of both move-up buyers—those who already have homes and who are looking to upgrade—and first-time buyers. Neither one of these groups is aggressively looking to buy homes and take out mortgages despite fairly low interest rates.
In the younger age bracket, this ongoing reluctance is attributed to the well-known economic struggles plaguing this group of Americans.
"Underemployment is definitely a problem," Voss said. "It is a hidden killer." He added that potential buyers "are not getting the bonus." "They may have a job, but they do not have the same salary."
And if they have a home, they are not going to trade-up if they fear the economy is shaky, he explained. They are going to stay in place, and maybe invest in home improvements. For this reason, the demographic of the average buyer is shifting somewhat.
The New Buyer
"The average customer this year is older," Williams noted. "First-time homebuyers in their late 20s to early 30s are struggling due to a number of factors, including high student debt, tighter credit, and the job market. Many college graduates have struggled with low wages or part-time jobs coming out of school. This discouraged group still represents over 12 percent of the labor force."
This age group faces other major hurdles to homeownership, including stifling student loan debt and an inability to qualify for a home loan in the post-Dodd Frank world.
"With mortgage lenders focused on debt-to-income ratios, college loans are a huge factor," Williams explained. "Overall student debt is at a record high at over $1 trillion, which is causing an increase in renters and fewer 20-something homebuyers. Successful homebuyers in their late 20s and early 30s were those who paid down student loans, had secure full-time jobs with better incomes, and didn't suffer from weak credit scores. But that's another reason for a low turnout in homebuyers. Some people were hit hard on credit scores due to the financial crisis and have not completely healed. Once their scores improve, and loan qualifications loosen somewhat, we'll start to see a stronger housing market."
Voss says there is another disturbing trend afoot. Since parents now have less equity in their homes to help students, fewer parents are able to tap into home equity to pay for college. As this occurs, student debt continues to soar, delaying homeownership even more once the students graduate.
Looking Ahead To The Post-Baby Boom Originations Era
Relying on older homebuyers is not enough to make up for sagging demand in other demographic groups, industry experts suggest. "[W]e did see more Baby Boomers and empty-nesters move into condos and smaller spaces because they just didn't need that much room," explained Williams. "Many of them were all-cash buyers, because they had enough equity in their homes to pay all cash for their new homes." This cash-buyer influence removes the need for mortgage originations, cutting into another potential channel for originations growth.
While Williams believes younger buyers will be able to return when their credit scores return and their balance sheets heal, no one has a definitive time frame as for when that is expected to occur.
Voss believes thinking ahead and forging relationships with future homeowners may be the only way to loop in tomorrow's first-time buyers, who are simply not ready to buy yet. "It's very hard for us to think ahead," he said of the industry. "We need to work with Realtors and the financial industry," he added. The goal of these needed initiatives would be to connect to younger buyers living at home and help them save and plan for a mortgage, Voss explained.
"It is something that needs to happen," he added, while conceding that the industry has been less aggressive in planning ahead on this point.
For now, Voss is worried about trends that have saved the originations industry in the past, which for now, appear to be somewhat hidden or unknown. "You could always count every four years on a refinance wave," Voss said. But that is no longer as certain, he told the MReport.
Furthermore, it is difficult to see an economic boom time ahead that could lift the originations side out of the doldrums, he explained. "You don't see something horrible or good, just a long period of attrition."