Naughty or Nice: What Will 2019 Bring for Mortgage Professionals?

Naughty Boston Terrier has eaten the door

“It was the best of times, it was the worst of times.”

If you’re like me, the famous opening sentence to Dickens’ A Tale of Two Cities
calls to mind memories of droning college lectures on Victorian literature that made you yearn for more pleasant surroundings such as the DMV or dentist chair, but it’s also a fitting description of today’s housing and mortgage markets. Given that we’re nearing the end of 2018, it makes sense to use this month’s blog post to take a look at the current state of the mortgage market and some trends to consider as we enter the new year, so here goes.

All real estate is local – except when it’s not

My favorite thing about my job is that I get to travel the country and talk with people across the spectrum of the mortgage business, from MLOs to regulators, and discuss the market with them. While often there are a few common topics of concern raised across different locations, this year was the first in a long time when MLOs in every single region of the country ranked the same two issues in order as the biggest impediment to growth: Lack of inventory and rising mortgage rates.

Of course, those issues are very closely related, as homeowners with low interest rate loans put off potential moves while the refinance market craters at the same time. The good news for mortgage professionals (according to CoreLogic data from July of this year) is that 41% of renters in the 100 hottest housing markets plan to buy a home in the next year, and with unemployment at multi-decade lows and wages beginning to show steady growth, they’re in a good position to follow-through on those plans. Unfortunately, that same data tells us that only 11% of homeowners plan to sell in the same time period, leading to the likelihood that inventory concerns will persist into 2019. While new construction may alleviate some of the pressure, it should remain a seller’s market for much of the next 12 months, even if rising interest rates do lead to a slowing of home price growth.

The incredible shrinking margin

Independent mortgage banks have had (to put it bluntly) a terrible year when it comes to origination profits. In the third quarter, IMBs recorded an average profit of just $480 per loan, which is slightly better than the $118 per loan loss posted in the first quarter, but down year-over-year. Given typical fourth quarter struggles, 2018 is on pace to be the worst year for origination margins since the crash of 2008.

The good news is that companies that own mortgage servicing rights (MSRs) are seeing strong value from them. This should continue, as MSRs tend to be a very stable investment in rising interest rate environments because loan payoffs decrease as refinance volume falls. Perhaps the most important line in the linked article above: “Including all business lines (loan production and servicing), 71% of the firms studied posted a pretax profit in the third quarter. Without servicing, that percentage would have dropped to 52%.” Unfortunately, that does not bode well for IMBs that only participate in the origination side of the business, so look for this winter to bring another wave of consolidation among that segment of the business to the benefit of the larger IMBs that service AND to mortgage brokers who aren’t faced with banker levels of overhead expenses.

Land of opportunities

Fear not, mortgage originators! While the ride is certainly choppy and likely to become more so in 2019, there ARE opportunities to grow your business over the next 12 months. The first thing you need to do, however, is accept that we’re not in Kansas anymore. If you’ve been operating in the confines of the Fannie/Freddie box and/or relying on refinances for more than 20% of your income, there are some things you can do NOW to set yourself up for success:

  1. Get out of your comfort zone. Examine the full suite of products your company offers. Read and memorize guidelines and niches! As volume and profits shrink, the credit box is expanding. To date, much of this guideline expansion has been in the jumbo QM loan market, but I expect the non-QM market to pick up significantly at all loan levels as we go through the winter. This will be the first “slow period” in a long while where the refinance market is almost all needs-based (cash-out, divorce settlements, etc.), and lenders will need to find ways to fill the refi void. If you’re the market-watching type, keep an eye on companies like Verus Mortgage Capital and Neuberger Berman as they continue to bring non-QM securities to market. If investor appetite increases for these mortgage-backed securities, expect more companies to jump into the non-QM pool with both feet. The key is to know your product offerings inside and out, be able to explain them to consumers and referral sources and lend responsibly. (State regulators will be watching.)
  2. Get back to basics. When purchase business accounts for 80% of residential originations, you can’t afford to be lax in maintaining your referral sources and looking for new ones, especially among real estate agents. No, this doesn’t mean you should consider violating RESPA’s prohibition on referral fees. What it DOES mean is that you need to be in regular contact with those who trust you and add value to their business instead of just bringing doughnuts, asking for referrals and taking them for granted. How do you add value? One of the easiest ways is to show them how your expanded product selection and knowledge can translate into more closings for both of you. With technology tools like social media and CRM platforms, there really is no excuse for not getting your name out there (in a compliant manner, of course). Don’t let others eat your lunch; market yourself like it’s 1999.
  3. Go where the business is. Work on a strategy to penetrate sectors of the market that are either underserved or outperforming (or both). Wondering where to start? Think inventory shortages. If people are remaining in their homes because their next “dream home” isn’t available, that doesn’t mean they’re satisfied with the status quo. In fact, renovation spending has been on the rise for a while now. Combine that with the fact that there’s almost $6 billion in tappable equity available, and renovation lending becomes a very attractive option to add to your suite of products. If you’re not able to go that route, consider finding ways to service the most consistently expanding demographic in home purchases: the Hispanic population. This doesn’t mean that you need to be multilingual (though there are certainly myriad opportunities to service the Limited English Proficiency – or LEP – market for those who are), but it does mean that you may need to brush up on underwriting guidelines for situations that arise more often in this community like gift funds, non-occupying co-borrowers, wage earners with multiple employers and multifamily dwelling considerations. Also, please consult management about fair lending considerations that may arise here so that you can do things the right way.

More market information

If you like forecasts and economic news, there’s certainly no shortage of it this time of year. Here are three of my must-reads:

  1. Freddie Mac 2019 Market Outlook
  2. Fannie Mae Research and Insight
  3. NAR National Housing Forecast

As the year comes to a close, I want to thank all of you for your support of Real Estate Institute and my monthly ramblings. It’s because of you that I look forward to coming to work every day and pursuing my passion for residential finance and education. I wish you all a safe and happy holiday season, and I’m looking forward to continuing this journey in 2019!

Happy Originating,

Peter



Real Estate Institute offers top-rated Mortgage Loan Originator Continuing Education and Pre-License courses in all three formats: Classroom, Live Webinar and Online, Self-Study. These courses were designed BY loan originators FOR loan originators covering topics you need to know to navigate today’s ever-changing lending landscape.

Reg Relief a Reality – Now What?

Blue_Sky_CloudsOn May 24, the President signed the Senate bill known as the Economic Growth, Regulatory Relief and Consumer Protection Act (S.2155). You may have read a previous article I wrote that summarized the key points in this piece of legislation. However it’s worthwhile to reexamine them here before using a proven scientific method to predict what will happen next in the world of mortgage regulation.

Keep in mind that, while there are some significant provisions in this bill that benefit both consumers and the mortgage industry, the regulatory structure and disclosure regimes you’re used to at the federal level have not been affected. The CFPB is still the CFPB (albeit with a radically different approach to its mission under Acting Director Mulvaney), TRID is still TRID and the answer to the ultimate question of life, the universe and everything is still 42.

So, without further ado, here are the five parts of this much larger bill that are likely to affect originators and mortgage compliance professionals.

  1. Transitional MLO licensing. Without a doubt, this is the most important change for anyone on the front lines of our business, and one that the Mortgage Bankers Association has been advocating since the SAFE Act went into effect. The provision gives MLOs who work for depositories a 120-day window to originate loans after transitioning to a nonbank while securing their state license, meaning they would not need to lose valuable work time and income fulfilling the licensing provisions before speaking to consumers. This same 120-day grace period will also apply to currently licensed originators who wish to obtain a license in another state. 
  2. A small bank exemption from expanded HMDA reporting. Banks that originate fewer than 500 HELOCs and closed-end mortgages in a year have been exempted from reporting the expanded HMDA data points that went into effect with originations after January 1, 2018. Despite what you may have heard, this does NOT exempt these institutions from Regulation C altogether, merely from reporting the new data points such as disaggregated demographic information. This provision does not make any changes for other institutions, including nonbanks. 
  3. Eliminating the need for an additional 3-day waiting period when the APR decreases. Before you jump for joy at this one, the legislative language applies directly only to High-Cost mortgage loans. Although given the current leadership at the Bureau, it is likely to clarify through regulation or official interpretation that the same provision applies to loans that are not High-Cost as well (the Bureau has taken that position informally since TRID was enacted).

  4. Allowing consumers to freeze their credit reports without cost. This provision is a direct result of the massive Equifax data breach that shook the country in 2017. While credit freezes (that stop anyone from accessing a consumer’s credit file) have been around since the passage of the Fair and Accurate Credit Transactions Act, there has been a cost associated with them. Removing this cost will likely lead to more consumers placing freezes on their reports (and more MLOs needing to ask clients to unfreeze them to proceed with an application). Under the law, the bureaus are also required to inform consumers that these no-cost freezes are available.

  5. Providing Qualified Mortgage protection to bank portfolio loans. Depository institutions with assets under $10 billion receive QM protection on loans that they retain in portfolio without needing to follow all the documentation requirements in Appendix Q of the Qualified Mortgage rule. Before you start reliving 2007 however, keep in mind that such loans will still require verification of applicant income and assets, comply with prepayment penalty restrictions in the QM rule and not carry any interest-only or negative amortization features.

Where do we go from here?

While Congress is likely done with financial regulatory issues (at least for this session), the CFPB is, of course, under no pre-midterm election pressure. In fact, they’re scheduled to reexamine the QM Rule in 2018 due to the mandatory five-year review period specified in the Dodd-Frank Act. We know through various speaking engagements by Acting Director Mulvaney that this process is likely to lead to significant changes to the rule, although the scope and extent of those changes are not yet known. One of the areas of the rule that seems ripe for change is the 43% Debt-to-Income requirement exemption given to loans eligible for sale to Fannie Mae and Freddie Mac. Remember, this exception is temporary and is currently scheduled to sunset in January 2021. Thus, if not extended or made permanent, Fannie and Freddie loans would begin to be subject to the 43% DTI cap for QMs at that time. This could have a big effect on the marketplace by moving otherwise qualified loans out of the conventional conforming space and into FHA (adding risk to taxpayers), so look for this to be one of the focal points in an amended QM rule.

While we’re on the topic of regulation, remember the United States has a dual regulatory system where both federal and state governments have a say in regulating many financial services entities. It’s very likely that, as the CFPB pulls back on certain regulations, some states will move to continue or tighten them. Thus, compliance managers and MLOs alike need to remain focused on statehouses across the country for potential changes affecting rules in states in which they are licensed. This is especially true if there are leadership changes at the state level as a result of the off-year election results in November.

See you next month!


Peter



Real Estate Institute offers top-rated Mortgage Loan Originator Continuing Education and Pre-License courses in all three formats: Classroom, Live Webinar and Online, Self-Study. These courses were designed BY loan originators FOR loan originators covering topics you need to know to navigate today’s ever-changing lending landscape.