Aug. 5: Title insurance: a waste of money? Bank capital requirements in the headlines. The thinning ranks of LOs… more to come?

As Better Call Saul and Breaking Bad fans mourn the loss of one of its characters, some are ruminating on the potential ramifications of the glut of office space, either empty or coming up for lease in the next year or two. The recent distress that has been rampant in the office sector has made it evident that maintaining office space is expensive. With such a substantial volume of loans set to mature in the near future, borrowers unable to make full repayment will need to pursue refinancing or renewal options, and it will be interesting to see how the market reacts given the volatility of the property type. Certainly, residential lenders have plenty to worry about, including having an ample amount of unused office space around the nation on which they’re paying rent. Think about continued overcapacity as the summer buying season didn’t materialize, continued high rates, no inventory, regulatory burdens, buybacks/repurchases… the list goes on and on. Let’s jump in and talk about bank capital changes, the waste of money on title policies, and the thinning ranks of loan officers.

Title policies: a racket? Iowa could be a good model

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Lenders know that title insurance is a necessary purchase when buying a home with a mortgage from a bank in the United States, and it’s seriously overpriced. For perspective, a health insurance company will pay out 80 percent to 85 percent of money collected through premiums to pay for claims made for medical care, keeping the rest for administrative costs and the profit. When it comes to title insurance, only 3 percent to 4 percent of the collected money actually pays out to claims, the rest of it going to fat profits or kickbacks. There are five title insurance companies that own 80 percent of the market, and as a whole, $20 billion a year is sucked out of homebuyers’ budgets to pay for the obscure insurance product. It’s easy to imagine a world without mandatory title insurance though, and incidentally that world is called “Iowa,” which banned it in the 1940s and opened up a public finance agency in the 1970s to orchestrate it. In the rest of America, title insurance costs $1,400 to $2,700 for the median home; in Iowa, it costs $175 for home purchases up to $750,000.

Banks and their policies back in the news with capital requirements

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Many in our industry think that the proposed capital requirement rule has far reaching impacts for the economy and the entire mortgage market that folks should notice. The MBA is “on the case” and Pete Mills highlights the impacts already uncovered but warns that there may be more.

“Rob, as you know, last week the Federal Reserve, FDIC and OCC issued interagency proposed changes to capital requirements for banks with assets of $100 billion or more. The so-called Basel ‘end game’ proposal would complete U.S. regulators’ implementation of the Basel III standards and make changes in response to the recent large bank failures. The new rules will impact more than three dozen large US banks, including more than two dozen regional banks that support the mortgage market and are not currently subject to the heightened capital standards on U.S. GSIBs (Globally Systemically Important Banks – i.e., the 8 largest banks).

“These large banks play a critical role in the mortgage market as lenders, mortgage holders, servicers, aggregators, and providers of warehouse and MSR financing, functions that could be impaired if this rule is not changed. This is not just ‘big bank stuff.’ This is a major capital proposal with potentially far-reaching implications for the economy, for housing and for the mortgage market, issued with virtually no economic impact analysis and few justifications for the mortgage-related changes.

“Here are seven reasons why should the rest of the mortgage market should care about the Basel Capital rule. The first is that the proposed changes would increase overall minimum capital requirements at larger banks by about 15-20 percent. Higher capital standards, particularly of that magnitude, will mean less lending overall in the economy with a potential to stunt overall economic growth. How much? We don’t know because the agencies barely analyzed it.

“The second is that capital rules drive business decisions: Comprehensive changes to credit, operational, and market risk capital requirements will also impact what lines business the banks will focus on… or pull back from. Which sectors could get hurt? We don’t know because the agencies provided only a cursory assessment.

“Third, the large increase in overall capital levels for regional banks will have second order effects on consumer and business borrowers. What are they? We don’t know because the agencies hardly mentioned them.

“The proposed rule changes the capital treatment of single-family mortgages, which could have significant negative implications for the broader mortgage market. The rule increases risk weights for single family mortgages well above the level in the Basel Accords themselves, and for 80%+ LTV loans, higher than the current 50% risk weight. This could impact larger banks’ participation in the jumbo correspondent business, as aggregators of conforming mortgages, and as buyers of CRA-eligible mortgages from IMBs. Mortgage market performance in the post-GFC world has been strong and resilient, delinquencies are near record lows… Why are the regulators proposing higher risk weights now? How does this affect home affordability? We don’t know because they don’t explain it.

“Fifth, the proposed rule also makes the already-punitive capital treatment of mortgage servicing rights even harsher by reimposing a 10% cap on MSRs as a percentage of these banks’ Tier 1 capital, a cap the regulators raised only 5 years ago in response to concerns about banks leaving the mortgage market. MBA believes this provision, if implemented, could further reduce MSR demand and impair MSR liquidity and valuations, to the detriment of IMBs and others that originate and sell. How will this further the goal of a diverse and robust market for mortgage servicing?

“Because mortgage banking produces an MSR asset with every loan that’s made, these changes will impact IMBs, community banks, credit unions, and their customers. Reduced servicing premiums will mean higher interest rates for borrowers. A further bank pullback from the mortgage market will also put more pressure, both market and regulatory, on IMBs. The MBA is concerned that FHFA and Ginnie, under pressure from the bank regulators on FSOC, could seek to extend these poorly conceived capital standards to IMBs. How does this make the mortgage market more resilient?

“Seventh, the large overall capital increase could also impact larger banks’ interest in supporting their warehouse lending and MSR financing businesses. These lines of business already have high risk weightings relative to the underlying credit risk and banks could quickly begin reducing or eliminating their exposure in order to get into compliance with the rules once they are finalized. Again, how does this strengthen our housing finance system?

“Just before the votes last week, based on our intelligence about the contents of the rule (that ultimately proved to be true), MBA sent a letter to the leadership of the banking agencies urging them to vote against the rules and highlighting the adverse impact on both the macro economy and the housing finance system.

“The MBA’s early opposition appears to have helped put ‘drag’ on these rules as several Fed and FDIC Board members, in voting against the proposal, specifically highlighted concerns with the mortgage market implications. The rule passed the FDIC and Fed boards on a combined 7-4 vote, including a very tepid ‘yes’ from Fed Chair Powell. By way of context, prior Basel II and Basel III proposed rules received unanimous votes from the Fed and FDIC.”

Pete’s note wrapped up with, “Comments on the proposal are due by November 30, 2023. The rule proposes a three-year transition period for compliance beginning July 1, 2025, but market participants should not take comfort that this will soften the impact. We expect banks will begin managing to the rule as soon as it is final. It’s a 1100-page rule and we have only begun to analyze it. But based on a review of the mortgage-related provisions, the MBA will express strong opposition to the portions of rule that undermine the housing finance ecosystem.”

Loan officer employment numbers, and employment overall

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On Friday we saw fresh employment numbers, but the feeling among lenders and vendors across the nation seems to be that we still have overcapacity. As 2022 headed into autumn and winter we saw large numbers of employees being cut; are we heading there again?

Fannie Mae’s Housing Reports and saw that the overall mortgage activity is down 74 percent from the 3rd quarter highs in 2021 versus the 1st quarter of 2023. Focusing on refinances, activity is down 92% during that same period. Is mortgage banking employment reflecting this?

The MBA sent out a quote from Modex Founder and CEO Dale Larson III. “14 percent of producing loan officers changed employers, and almost 12 percent left the industry entirely in the last year. Put everything together, and one thing is clear: LOs are facing one of the most significant challenges the market has seen since 2008.”

This week I was in Florida and watched a presentation on loan originator regulations which included numerical data on LOs and brokers. “Active licenses” for loan originators has dropped from 70,160 in 2022 to 57,514 this year; in 2012 there were 13,287. Active licenses for mortgage brokers increased from 4,200 in 2022 to 4,537 in 2023; in 2012 there were 1,071. My guess is that the numbers are indicative of other states as well.

Joel Kan, MBA VP and Deputy Chief Economist, has his finger on the pulse of this and weighed in on mortgage banking employment changes. “We’ve been tracking this for a few years now, with special attention to a few Bureau of Labor Statistics series that are as close to mortgage employment as there is. As of May 2023, there were 343,000 mortgage employees, down 15 percent year over year and down 18 percent from the peak in July 2021 of 420,000.

“Additionally, we monitor a series from the CSBS NMLS and call report data. This is based on licensed MLOs who have originated at least one loan in the quarter, and that count is down to 92,331 in Q4 2022 from a peak of 124,727 in Q4 2021.

How about the jobs data from Friday? To sum things up, it is hard to have a recession when unemployment is down to 3.5 percent, pick apart the numbers however you will.

NRA, uh, I mean NAR Chief Economist Lawrence Yun wrote, “More jobs were added in the past month, but more recently, the pace has markedly slowed down. The 187,000 net new payroll jobs created in July and 185,000 in June are the slowest two months of job additions since the start of the COVID lockdown over three years ago. Additionally, there have been steadily fewer job openings, standing at 9.6 million recently compared to 12 million two years ago.

“It is still the case nonetheless of more help wanted signs than the 5.8 million Americans who are searching for a position. The labor shortage therefore continues. The count of those who are not in the labor force rose a bit in the past month. This is the reason why the unemployment rate fell even with slowing job creation. More importantly, this is why the number of those not in the labor force remains stubbornly high, with around 5 million more not searching for work compared to pre-Covid levels.

“The wage rate rose by 4.4% to an average of $33.74 an hour. With consumer price inflation running at 3%, it marks an improvement in the standard of living for working Americans. It is a nice turn after two years of falling living standards when inflation was eating more of a paycheck. The economy is chugging along but is certainly not robust. It could turn into a job-cutting recession if the Fed continues to raise interest rates. If the Fed decides to halt the rate increases, then the housing sector can grow and provide a cushion for the economy.”

Mark Palim, Deputy Chief Economist at Fannie Mae, sent, “The labor market continues to soften modestly, in line with our expectations. In particular, the July job growth figure of 187,000 represents a slight deceleration from the pace seen over the past few months. Additionally, job growth over the prior two months was revised downward by a combined 49,000, another sign of gradual slowing. The biggest gains were seen in the private education and health services (+100,000 jobs) sector, while the temporary help services sector (-22,100 jobs) saw the biggest decline.

“In the household survey, the unemployment rate dipped back down to 3.5 percent in July and the labor force participation rate held constant at 62.6 percent, where it has remained for a few months now. The number of workers who hold a part-time job but who would prefer full-time employment fell by nearly 200,000 in July, a positive sign for labor demand. Additionally, residential construction employment, including specialty trade contractors, grew by 7,800 in July, similar to the prior month’s pace, representing robust job gains in a sector that should help homebuilders alleviate supply constraints.

“Finally, wages continued to grow in July at a robust 4.4 percent year-over-year pace, a level similar to previous months. We believe such a strong wage growth figure remains above a level that would correspond to the Federal Reserve’s 2 percent inflation target.”

Joel Kan’s reaction to the employment conditions in July? “The diffusion index, a measure of the breadth of payroll growth across industries, was 57.2 percent, the sixth consecutive month of a reading less than 60 percent and less than 2022’s average of 69 percent. This measure indicates that a narrower band of sectors are adding jobs, and historically, downward trends in this metric have been consistent with recessions or weakening economic growth. The unemployment rate for July inched down to 3.5 percent over the month but remained close to its year-to-date average.

“Construction employment in July grew by 19,000 jobs, with a significant portion of these jobs in the residential contractor space. The ongoing shortage of housing inventory for prospective buyers has helped spur an increase in home building and home improvement activity.

 

“The incoming economic data continue to convey conflicting signals about the strength of the economy. Indicators of manufacturing and service sector health remain lackluster, measures of inflation have moved lower, while GDP growth in the second quarter was stronger than expected and consumer spending remains resilient.

“Job growth is weakening, and wage growth is holding steady, but both are still above the pace that would be consistent with the Federal Reserve’s inflation target. However, we expect that the FOMC will hold the federal funds target at its current level given the declining trend in inflation.”

My friend said she wouldn’t eat a cow’s tongue because it came out of a cow’s mouth. I gave her an egg.

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Rob Chrisman