A Roundtable Discussion: Housing Market Dynamics
By Mike Sorohan
July 16, 2018
MBA Insights recently held a roundtable discussion with several industry executives for their perspectives on the housing market, mortgage technology and the future of real estate finance.
Amy Crews Cutts, Chief Economist with Equifax, Atlanta. Cutts joined Equifax in March 2011, responsible for analytics and research relating to the consumer wallet--assets, income, credit and spending along with macroeconomic factors affecting the consumer. She is also responsible for macroeconomic forecasting and the economic analysis of employment and wage trends, home equity and real property, and small business credit trends. She brings more than 25 years of economic analysis and policy development experience.
Matt Johner, President and Co-Founder of BankLabs, Little Rock, Ark. He is responsible for corporate strategy, branding and growth plans including the execution of all sales, marketing, business development and customer success activities, with the goal of reimagining banking products of the future through community-oriented technologies that create new fee income, attract deposits, expand loan opportunities and differentiate the financial institution from competitors.
Joe Melendez, CEO and Founder of ValueInsured, Dallas, a provider of down payment protection services. He has more than 30 years of industry experience. His background includes work in investment banking, real estate development and insurance. Prior to forming ValueInsured, Joe spent a decade developing residential properties.
Jeff McGuiness, Chief Sales Officer with Embrace Home Loans, Houston, responsible for the company's production channels, including retail, consumer direct and bank fulfillment. He previously served as CEO of Lenders One Mortgage Cooperative.
Jorge Ponce, Director of Business Development with FirstClose, Austin, Texas. He has more than 15 years of experience in bank operations, mortgage and risk-based consumer lending and is responsible for driving adoption, client communication and product development
The transcript has been edited for clarity and cohesion. Crews Cutts joined the conversation at about the halfway mark.
MBA INSIGHTS: Thank you all for participating. It's been a very volatile home-buying season so far this year. What have you seen from it?
JOE MELENDEZ, VALUEINSURED: We are actively involved with nearly 20 lenders and more than 4,000 loan officers, and what we're seeing is that it's a tough market out there. It's not only about inventory being tight, but there is a general concern in the market about where prices are, about [potential home buyers] sitting on the sidelines and certainly all the volatility we've seen in other financial markets that hasn't been helping overall confidence in the market. That is some of the feedback we're getting from our people who are sitting across the table one-on-one with borrowers.
JEFF MCGUINESS, EMBRACE HOME LOANS: I would echo those sentiments. You could call it ‘volatile;' I would probably categorize it more as ‘uneven.' One dynamic we're finding that is beyond the normal spring purchase season and how sporadic it seems to be, depending on where you are in the country, is the lack of refinance activity, which is adding to the pain. Usually in markets where we've seen an uneven introduction to the spring market, we've had a robust refinance market to kind of float us through. The stark contrast of that spring volatility, along with the lack of refinance buy-in to smooth out the transition is really where the pain point is.
MATT JOHNER, BANKLABS: I'm based in Dallas, where we're seeing things happen here and across the country. One is, our younger team members--26, 27, 28--are trying to buy homes, townhomes or small homes and they're making offers over market price and still losing. That's disconcerting, because that's the entry point for a lot of subsequent home buying. Second, we are seeing a lot of new construction activity and I think that's great--it's making up for shortfalls in existing inventory, but it has to extend down to the entry-level buyer.
JORGE PONCE, FIRSTCLOSE: We have an inventory problem in a lot of markets. The other part of it, the refi boom, we're kind of out of that. Spring home buying season was just not what it used to be, and I'm sure all of us can attest to that.
INSIGHTS: We have low inventories of existing and new homes. It's improving a little bit, but how can the industry jump-start home availability?
JOHNER: New construction is the fastest way. We're starting to see some more new construction and some of it are spec homes, which are coming back. So, who's financing that? Who's building that? Are they five-home-a-year builders? Are they national builders? Are they in the middle?
We're seeing more nonbank lenders getting involved. We're seeing credit unions using their status to get more involved in construction lending. With a good economy, we're starting to see some self-financing of construction.
MELENDEZ: Certainly new construction is going to help fill some of the void. I was a builder myself, so I understand the market; the whole game fairly well, but I really think the bigger opportunity lies in unlocking inventor. And the challenge that we have and what we hear about inventory is that people think it's a great time to sell, but a lot of people don't think it's a good opportunity to buy.
That's all around fear; that's all around the risk of losing the appreciated equity in the house you're about to sell; and buying a much more expensive house and thinking that money is going to be at risk; and if the market does collapse, you're going to be out of the equity that you put into the new home. Part of what we're dealing with and what some of our clients are working on is using our products to unlock inventory, because if you can take the risk out of home buying, or trading up or trading down--"right-sizing," we call it--then you can get people to move and open up additional inventory. And we've got some pretty aggressive realtors who we're working with who are doing exactly that.
INSIGHTS: Is it realtors, or lenders, who are more open to that?
MELENDEZ: It's actually lenders who are coaching their realtors into understanding there are products out there that can take risk off the table for home buyers and home sellers. We work very closely with the lenders, but the lenders are primarily working with realtors and builders directly. They're teaching those folks how to use these tools to unlock inventory in the markets they're in.
INSIGHTS: We're seeing people stay in their homes longer. A report recently came out saying the average tenure of a homeowner living in their house is approaching nine years. We hear a lot of people say that it's a good time to sell, but if they're staying in their houses longer, does it also suggest they might not believe that?
MELENDEZ: No. Actually, we just did a study. We publish the ValueInsured Homebuyer Confidence Index on a quarterly basis. One of the things that came out of the most recent report is that basically, home buyers do believe it's a good time to sell; what they're worried about is buying.
If you live in a house that you paid $200 per square foot, and now you're looking at buying a smaller house at $400 per square foot, you can see the net cost and you know the risk associated with that appreciation. If you can take that risk out of the equation, you can unlock inventory. So that's what it's really about--it's not that people are unwilling or afraid to sell their homes; it's that they're afraid to buy a replacement home at today's prices.
PONCE: It also depends on the current situation. We are at a point where people have the most available equity in their homes since pre-recession times. We're talking about the lowest unpaid home equity balances probably since 2003. So, when someone's sitting on a lot of equity, they have two options: if they need more home, they can either go out and buy more home or they can build more to their existing home.
JOHNER: It's also akin to the baby boomers and jobs and health care. There's a point in time where that puts pressure on the economy in a negative way and then the flip side of that is that when the curve starts to go downhill, baby boomers start to truly retire-not just another job at age 65, but really retire. And when they truly retire, it opens up a lot of jobs in the economy.
When I look at the housing market and I see folks staying in their homes longer, it has a lot of collateral effect. When Baby Boomer start to retire and sell their homes, we'll see a bump in new home buying.
PONCE: But the Millennial generation is the largest cohort of buyers in the history of this country. So, to think that the Boomer generation, of which I happen to be one, is going to be able to augment or fulfill the appetite of this cohort is probably somewhat short-sighted.
INSIGHTS: Why do you think it's short-sighted?
PONCE: There's just not enough housing stock out there to meet the need. If you think about it, a good parallel would be what happened during the automobile crisis, where you had the average car being 12 or 13 years old. There was a shortage of inventory to satisfy replacement of [them], so we ended up with this massive boom in auto production. I think you have the same situation going on [with housing]. You have the largest cohort, Millennials, who have sat home waiting to buy homes, and you have a lack of new supply coming into the marketplace--and the supply that is coming into the marketplace is not tailored for the Millennial or first-time home buyer. Then you have immigration going on, with population growth. So there's a series of cohorts [facing] a prolonged shortage of housing, or at least, a potential change in the mix of how we consume housing from renters to owners.
[AMY CREWS CUTTS JOINS CONVERSATION]
INSIGHTS: Amy, we've been talking about the housing market, about how people are staying in their homes longer. A recent Equifax Consumer Credit Trends report showed home equity loan originations are well up from a year ago. What are the factors you see influencing that kind of growth?
AMY CREWS CUTTS, EQUIFAX: I think it's a perfect combination of rising interest rates that make cash-out refinancing less financially sound than it might have previously been. Cash-outs are expensive and hard to do, right? You have to pay origination costs, so they're expensive to the consumer as well.
And there's also rising home equity. You have to start with having a diverse base of home equity--and I think we're finally there--and with the way home prices have been rising, a larger share of the country is finally getting a piece of it. There are still places like Las Vegas and pockets of Florida and other place around the country where they have not recovered from the pre-recession high--or the recession low, I should say.
The engine is rising interest rates, which make all other forms of borrowing expensive. Credit cards have never been cheap, but now you're getting 12-13 percent interest rates and in many cases, 15 percent interest rates. There's a lot of competition from fintech organizations offering unsecured loans up to $50,000, but they are also very expensive. So for families that have equity in their homes, it's a cheap way to borrow a large sum--and when I say large sum, I'm not talking about a $4,000 or $5,000 loan; it's $15,000 or more.
INSIGHTS: And we saw a lot of that in the early-mid 2000s where people were taking out home equity loans to pay for vacations or consolidate debts. Are you seeing any different trends this time around?
CUTTS: Well, even though originations are up on a percentage basis, they are still trivial compared to what we had prior to the recession and almost none of them are what we called "simultaneous seconds." As we were leading up to the recession and the housing bust, a much larger share of loans were being taken out at the same time as the first loan was originated...we're not seeing much incidence of that [now].
INSIGHTS: What do you think the implications will be once the new tax/regulatory relief law gets more digested within the financial community and homeowners start to understand the tax impact of taking out HELOCs?
CUTTS: So for a large proportion of families, the new law means they will no longer be itemizing because they get a much bigger standard deduction. And so, mortgage interest and the non-deductibility of some second-lien interest really won't matter to them at all. The second part I think is important if the loan--and I'm not an expert on this--but my understanding is that if it is used to ‘materially improve your home,' it can be deducted, subject to [normal] limits. So if you want to buy a car with it, that wouldn't be deductible, but the interest rate on your home equity loan, as interest rates rise, may still be much better than doing a car loan, or more importantly, a credit card or a student loan.
PONCE: Amy, in your study, what was the average draw-down on a HELOC?
CUTTS: They tend to run, at their peak, about 50 percent of the limit, on average. But in aggregate, below that level.
INSIGHTS: And are these instruments more akin to being structured like an adjustable-rate mortgage, or are they more on a fixed rate?
CUTTS: I believe they still mostly adjustable rates, but the key here is that more lenders are offering amortization, as opposed to interest only. The problem with interest only is that you've got this really nice low payment until the recast, and then it becomes amortizing. Now, we saw very few defaults arising out of recasts. There's turbulence around that time as people get used to the new payment, but typically they only went 30 days late and then quickly improved back to current. But I do think lenders, in part because of regulatory pressure, have thought more carefully about how to structure these and have made them safer for borrowers by offering more of those amortizing, so you're paying it down over time.
INSIGHTS: And it's a shorter time, right?
PONCE: I think that depends.
CUTTS: Yes. So I think the easiest answer is that there's a much larger diversity in home equity products now across the board, but not necessarily more risky. Some offer fixed; some offer ARMS, some offer amortization, some offer shorter terms, but I don't think there's a standard. There was a greater standard before, but it came at higher risk--and that was the interest-only piece.
MELENDEZ: Amy, do you see an inverted yield curve, basically knocking out those types of instruments and focusing on refi if we go to an inverted curve?
CUTTS: Well, the inverted curve wouldn't help refi because so many people have really low rates, below 3-1/2 percent on their fixed. Inverted curves don't cause recessions, but they often predate them. So I could see lenders shutting the door as a result of that. But from a borrowers' standpoint, if I've got a 3 percent or 3-1/2 percent 30-year fixed on my first mortgage, I don't know that I'm going to be wanting to refinance that whole loan and do a cash-out, particularly if rates are climbing above 4 percent, 4-1/2 percent. That becomes very expensive to do. Whereas a $50,000 HELOC is not so expensive because it's only the $50,000 that would pay the higher rate. And if you're really risk-averse, do an installment loan with a fixed interest rate. There's no reason to take out a HELOC unless you think you're going to be spending money over time or have multiple things you want to spend it on.
INSIGHTS: Do you think most borrowers are aware of these options?
PONCE: Well, as a previous product manager, it's really about how well lenders do their job in letting borrowers know those options...you don't see a lot of piggybacks or 80-10-10s as you once did before the recession; a lot of those programs have gone away. A lot of lenders, after the recession, had knee-jerk reactions and got rid of 80-10-10 percent lending--forget even 90 percent lending, or 100 percent; it just doesn't exist anymore except for very small pockets.
The other thing I will add is these new products, these hybrid products are starting to come out more from the lender side. These are basically products in which you can take out a line of credit and "fix" a portion of it. Sometimes they refer to it as a fixed-rate loan option or a hybrid HELOC. And it comes down to how well the lender informs the borrower inform the borrower. There are gaps.
INSIGHTS: Jeff, we're going to shift gears a little bit. According to MBA's latest Mortgage Performance Report, the cost to originate loans is at historic highs and it's cutting into lender and servicer profitability. Do you see any simple steps that lender can do to cut costs and help become more profitable?
MCGUINESS: You know, Amy mentioned the emergence of fintech in our space, and it's certainly played a role in ongoing efficiency. I think primarily the industry has focused on post-closing adaptation. Most lenders took a hard look at post-closing adaptation. Invariably, it meant additional bodies, additional touchpoints on the loans.
We looked at one study that suggested the average underwriter was making more than 10 decisions per day, pre-recession; post-recession, it was one-and-a-half decisions per day. Invariably, that made its way into most lenders' cost structures. As fintech has started to come on and play a more meaningful role, the early-stage adaptation was by way of that customer experience. It was to facilitate the necessity to fully document every loan and to not place undue burden on the consumer. And where I see a lot of the fintech play happening now is around that efficiency for the lender. So I do think that will play a significant role.
I also think the market itself will push a lot of that dynamic. We're seeing significantly compressed margins year over year, and invariably in our industry that forces most lenders to take a short propensity to cost infrastructure. And lastly, it is around the cost of our originators themselves. Over the past five to eight years, compensation and commission rates for loan officers have gone up. That really has to do with access to customer, and the ability to get out in front of appropriate referral sources and develop a robust pipeline comes at an additional cost. There will be continued pressure on commission structures.
PONCE: There's a second piece outside of direct origination, which is Fannie Mae and Freddie Mac and the costs associated with risk transfer and the [Loan Scorecard] that's been imposed on Fannie and Freddie with respect to meeting risk transfer requirements. And as the risk transfer piece gets broader, you're going to see costs come down, and I would hope you also see LLPAs [Loan-Level Price Adjustments] come down as the risk transfer becomes wider and broader. I think that could help mortgage originators on the other side of the ledger by just lower their costs of disposing these loans once they originate them.
INSIGHTS: You mentioned Fannie Mae and Freddie Mac. It's been more than 10 years since they've been placed under federal conservatorship, but they still seem to be dictating a lot of how lenders do business with them. How are your companies adapting to this new kind of normal?
MELENDEZ: We at ValueInsured are very engaged with the whole risk transfer discussion. We think ultimately, effectively figuring out how to manage risk transfer will invigorate the mortgage-backed securities market so that there's more than just two or three options where you can sell securities or sell whole loans.
There was an announcement recently that Arch Insurance Co. did a deal called "Imagine." It's a pilot program with Freddie Mac. What it does is they're writing the risk cover for over 80 LTV loans directly with Freddie versus using a mortgage insurer, and they're doing it at a significantly lower rate. So these are the types of innovations that are consistent with the goals of the Federal Housing Finance Agency with respect to the Scorecard for the GSEs, but they're also ultimately good for the originators and the consumer because they're taking the cost out of them. And part of that is because you're now using a broader, more market-sensitive approach to handling the risk that the GSEs in 2006 bore in totality.
INSIGHTS: Your company and Madic are offering various types of insurance for borrowers throughout the home buying process. Is there any particular kind you see as taking hold?
MELENDEZ: I think what Madic is doing is they're just taking a traditional product--homeowners insurance--and they're changing the way it's being delivered. It's becoming part of the origination process. There's another firm called MyLo that's partnering with a lender where homeowners' insurance is going to be embedded in the mortgage origination process. But those types of things are all about technology delivering products that haven't changed in 50 years.
What we're doing is we're actually innovating and providing value not only to the consumer in the form of risk transfer at the consumer level and taking the risk out of homeownership for the consumer, but we're also working with our lender partners to let them differentiate themselves in the marketplace by providing loan products that are unique and different from basically all the commodity-type loans that are out there today. It's where you can differentiate yourself; innovation, and not just use technology that everybody expects today. Everybody expects that you should be able to do everything on a mobile device, but it's the true innovative product that changes the risk tolerance or the risk dynamics of homeownership.
INSIGHTS: How has compliance and regulatory actions affected your business over the past couple of years, and do you see this move by the Consumer Financial Protection Bureau to kind of deregulate itself as being helpful in achieving a better balance between sound regulation and consumer protection?
JOHNER: In our world, the regulators are definitely tightening up a little bit, at least in spirit, and I think the general sentiment is, "This is 2006, now we have to skip 2008 and go to 2010. Our customers are asking more questions; they're looking at concentration maps--"are the banks lending with a lot of concentration in any specific areas?" They're definitely more interested in concentration and mix and balance and outstanding loan balances and those types of things.
INSIGHTS: Any concern on your part that less government oversight could open the door for less scrupulous players to come into the arena and give everybody a black eye?
JOHNER: I'm not sure about "less scrupulous." With anything, there's going to be bad apples, but what we're seeing--and I don't want to associate this with "less scrupulous"--is foreign investors, China being one. China's not going to be allowed to buy a bank of any real size, so we're starting to see them come in where [the builders are]...there's a lot of wealth in China, trying to get into a safe haven and to essentially export their deposits and capital; we're beginning to see that in a real way.
A friend of mine owns a real estate development firm and he just did his first-ever commercial deal with Chinese money and not community banks. It's turned out to be a good experience for him so far. I think you're going to see more and more of that as lending tightens up, due to fear of overbuilding. You're going to see other sources step up and pick up much of the demand.
INSIGHTS: Where does everyone see in the next six months to a year?
CUTTS: I definitely see supply and demand issues. Lenders are more open to supply and demand and borrowers are definitely starting to look [for homes]. But home improvement is going to continue to grow, as people see it as an alternative to moving. It's not going to grow in a crazy way, but as a steady trend continuing to grow through 2018 and 2019.
MELENDEZ: I see continued volatility. The appreciation of housing has been driving it over the past 18 months as more lenders look to ways to go to their borrowers and say, "look, there's a way you can own a home without all the embedded risks, and we have these new loan products that have down payment protection or equity affiliated protection with it." I believe we're looking for a pretty bright year.
PONCE: I'm going to circle back to home equity. We're probably going to see one of the biggest productions years since pre-recession. I think we're already on our way there and all the signs are pointing to that. As fintech becomes a bigger part of the business, lenders are going to have to rely on technology in order to become more efficient and in order to get better margins out of their products, especially because there's just a tremendous opportunity for home equity lenders right now. Fintechs--companies that do provide, such as ourselves, ways to lower origination costs, ways to streamline the lending process--are going to continue to grow, coupled with the opportunity that home equity lending offers this year.
JOHNER: I agree with what everyone's said. I'd like to see more balanced growth. Price points are getting a little high in the entry-level markets. People are staying in their homes longer--that could be good in a lot of ways down the road for any collateral services companies. Construction lending is very active right now-not just on single-family, but also on general one-to-four family construction and multifamily. So that's an opportunity for other lenders, mortgage companies, credit unions, etc. to pick up the pace.
We're seeing credit unions waiving [private mortgage insurance]. They're not under the same regulatory environment that everyone else is. So we're seeing more interesting products coming out.
MCGUINESS: We see our challenges in delivery of efficiency, not the least of which is fintech integration. We also see a challenge for these loan originators who have been in the industry for a decade or less. This is the first sustainable upward-rate environment that they've experienced, so there's a challenge inside of that in terms of the educational process relative to their individual sales approaches. Lastly, it will be around ongoing competition. We see some opportunity for consolidation and for those that are well-capitalized and have already made a lot of their efficiency investments, I think they will weather the storm well. But we do see some opportunity for increased market share around potential consolidation.
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA Insights welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at firstname.lastname@example.org; or Michael Tucker, editorial manager, at email@example.com.)