July 7: Letters about the competitive environment, Texas real estate, and subprime making a comeback

Starting off with something a little unusual…For anyone who thinks there isn’t life after mortgage banking, you’re wrong. I was on a flight recently with Virgin America, and lo and behold the flight attendant was Tonya Murphy. Many of you may remember her from “back in the day” with companies like Aurora Loan Services. She’s as happy as can be and welcomes anyone who’d like to say hello – click on her name and send her a note!

Mortgage credit

Lots of people who have been in the business for many years are concerned about the industry sliding back down the credit curve to support business. Or to lure potential loan officers who want to be able to offer that type of product. I found this note sent to me a few years ago by John Hudson by Roy DeLoach of the DC Strategies Group titled, “Hang-in there, Millennials – The New Sub-Prime Mortgage Wave Is Coming.” Roy is a former CEO of the National Association of Mortgage Brokers.

“Hang in there, Millennials and all you other wanna-be first-time buyers still residing in Mom’s basement. The Federal Reserve, Fannie Mae and Freddie Mac could soon be riding to your rescue. Well, not just your rescue, but perhaps more importantly, to save the economy, too. Which is the real reason they want you to take your ‘rightful’ place in the chain of life known far and wide as the ‘Housing Ladder.’

“Actually, Fed Chairwoman Janet Yellen is perplexed ‘why so many Millennials choose to rent’ rather than purchase a home. There was a collective chuckle in the room when I heard her make that statement at a recent House Financial Services Committee hearing. I only pray there are some in Washington who are not only not as confused as the Fed Chair, but also are seeing the very same statistics I am looking at and coming up with the same answer. The way I read the tea leaves, housing is in deep trouble and will likely fall apart sometime in late spring 2016 — just in time to become an election year issue.

“I suspect those leaders not so perplexed in Washington are cooking up a new super-easy scheme – excuse me, mortgage product — just to move potential homeowners out of the basement or out of that high-priced rental they share with several others and onto the first step of the housing ladder. And why not? When people buy a house, they also spend a lot of money on such other things as paint, carpet and new furniture. They also hire local people to maintain their lawns and white picket fences. All of this helps stimulate the economy. It’s called the ‘Velocity of Money,’ which, by the way, is at its lowest point since 1959.

“That is why a new government approved sub-prime mortgage product is coming. It must!

“Some more statistics are in order here. Mortgage Bankers Association figures show the cost of making a single mortgage loan is now over $7,000. [Now $8,500.] Lenders are not immune from the increased costs of doing business resulting from, just to name a few, new Labor Department regulations, health insurance cost increases coming in 2016, and edicts from the Consumer Financial Protection Bureau. Increased scrutiny by the CFPB alone – the Bureau if looking for any mistake it can find in the mortgage process – has increased attorney and technology costs dramatically.

“Congress has even slipped in a hidden tax on homeowners via a charge Freddie and Fannie hide inside every mortgage coming through their doors. Known as a G-fee, this charge is being taken directly into the federal piggy bank to fund whatever programs need to be funded. But they are tacked on to your mortgage rate and you pay it each month, year in and year out, until you refinance or sell and move on.

“Ironically, many of today’s problems in housing finance can be traced directly back to the Dodd-Frank Financial Reform Act, which was supposed to repair a ‘broken’ system. But when government tries to fix something, it usually makes things worse, if only because, in the case of the housing finance system, it has driven the cost of making a mortgage to unparalleled levels.

“More stats. A recent ‘State of the Nation’s Housing’ report from the highly respected Joint Center for Housing Studies at Harvard University shows that the ownership rate has drifted down to 63.4 percent, the lowest in 48 years. If you take out those owners who are 65 years old or older, the rate drops to the lowest in American history.

“On the flip side, 15 percent of the nation’s 25 to 34-year-olds are still living at home, according to the Census Bureau. The Pew Research Center just reported that a record number of young women are living with their parents. You need to reach back 74 years to find a similar situation. And no wonder: Income, adjusted for inflation, is back down to where it was in 1989.

“None of this is good for housing. Neither is one last statistic: A report released in late summer found that renters are spending a record share of their earnings – more than 50 percent – on a place to sleep! It seems strange to me how this is not worrisome, yet spending more than 43 percent of your income on a home of your own is illegal as outlined by Dodd Frank and CFPB regulations.

“Funny how Wall Street figured out long ago that under the rules, it will be easier to pay half of your income or more to rent than spend just 43 percent to buy. So the big investment banks/hedge funds bought up tens of thousands of apartments and single-family homes for lease rather than for sale, and they are raking in billions.

“Lastly, add to this witches’ brew the ungodly amount of student loan debt many young people are carrying, and you come away with a full picture of why I believe the housing market will soon be idling in neutral, especially at the lower end. And it’s why I suspect we are heading back to the days when all a prospect had to do to obtain financing was literally fog a mirror.

“The impetus for this will come from the White House, which will push the Federal Housing Finance Agency, the conservator of Fannie Mae and Freddie Mac, the two secondary market institutions which touch an inordinate amount of loans these days, to create a new mortgage product tailored for all those basement dwellers. It remains to be seen whether Fannie and Freddie will end up looking the other way on lower credit scores, lower (no) down payments, higher debt-to-income ratios, or some combination of the three, to keep the housing market from hitting the wall.

“But whichever way they choose to act, subprime will be back, perhaps just as ugly as it was last time around. Only this time, with the private sector mostly shut out of the market, subprime will be almost totally controlled by Uncle Sam. But as I said earlier, tinkering with the market tends to make things worse, not better. So I am fearful that the result will not be pretty.”

Thoughts on the remainder of 2018

Rich Cowan, president of A-1 Mortgage, observed, “The Texas housing market has been pretty strong for a while now. Demand for housing exceeds supply in parts of Texas. North Texas is probably one of the hottest areas in the state, especially Dallas-Fort Worth, where home prices continue to climb. Dallas was even one of the top housing markets in the country last year. I think the Dallas-Fort Worth market will continue to be strong throughout the summer, but then slow down a little in the fall as most families want to be settled in their new homes by the time school starts.

“The Houston housing market is stabilizing after last year’s flood, and home prices are going up. The average days on market for homes for sale dropped to 58 days in May and there was a one percent rise in home sales and new record highs for home prices per data from the Multiple Listing Service of the Houston Association of REALTORS. The group reported the average home price for single-family homes edged up 1.3 percent to $305,511 in the greater Houston area in May. Houston isn’t as red hot as Dallas-Fort Worth, but it’s still a solid housing market.”

Rich finished with, “Austin remains competitive in terms of housing and San Antonio is also strong. One of the reasons A-1 opened a Texas office is because we see growth there, and so far, we haven’t been disappointed.”

And Gagan Sharma, CEO of BSI Financial, has input on individual issues. “From a servicing perspective, one of the most significant changes [during the first half of the year] has been the requirement to send monthly statements to borrowers in bankruptcy. As a special servicer, we see portfolios and borrowers that need assistance and help in the bankruptcy process. We have invested significant effort in training, setup and technology changes. The other major change has been the rise in rates, and reduced prepayments.

“All indications [for the second half of the year] seem to be that we will continue to see an increase in rates. As a result, prepayments are down. In parallel, we have seen an increase in prepayments due to borrowers selling their existing homes to move, up-size, downsize or other life situations. The continued improvement in the macro economy is also reflective in delinquencies continuing to be low.

“We worry about natural disasters [in the second half of 2018] and making sure that we are sufficiently prepared to meet borrower needs. More broadly, we believe that our industry must focus on improving and streamlining the borrower experience. That may involve a combination of technology investments, process re-engineering and staff training. Consumers expect ease of use, and being able to access information when they want it, how they want it. As an industry, we need to provide that, while keeping costs under control.”

From Connecticut Michael Dubeck, CEO and President, Planet Financial Group, penned, “It was arguably one of the most difficult first two quarters that we’ve seen in the industry in several years. When overall volume declined, we saw companies carrying unprofitable branches, excess operations and corporate support cost structures raise margins as much as 200 bps to offset negative profitability. Margin compression was certainly a factor, but not a significant contributor. Significant adjustments to pricing, for example, directly impact the branches, which have the choice of making concessions to stay competitive or seeing volume drop even further. Companies with diversified revenues lines, including a substantial retained servicing book, probably fared the best.

“[In the second half of the year], companies may continue to reduce staff or exit business lines completely to maintain competitive margins. Others will continue to hang on because they believe volume will increase in the second half of the year. Conversely, other companies may keep higher margins to reach profitability, which poses a challenge to sales MLOs in retail branches.

“Based on what new branches are asking us, leadership is now becoming much more important because people want to know the company has a plan and is committed to a direction.


They’re also asking if we retain servicing, which is ironic because Planet Home Lending was a Ginnie Mae servicer before it became an approved issuer. That tells us others agree that to grow in an otherwise shrinking market, you must have a multichannel platform and diversified revenue streams that hedge against the challenges we saw in the first half of 2018 and will continue to see through the rest of the year. For us, that’s servicing, retention and distributed retail, correspondent and commercial lending.


“Certainly, [the major challenges for the second half of 2018] are rising rates, challenges in managing liquidity and the ability to maintain margins. You can’t be an eternal optimist. When rates are rising, margins are compressing, and you have supply issues in competitive housing markets, you cannot manage the business impulsively.

“This isn’t a typical year where you have a terrible first half and you make up for it in the half second half. It’s July and it’s still an extremely difficult market. Even after Q2, some companies will continue to shed costs and look for exit strategies. Some lenders will respond with irrational and unsustainable pricing.

“This is a much longer cycle. We expect the challenges of lower volumes and margin compressions to continue. It will take experienced leadership, managed liquidity and a strong balance sheet to see it through. At Planet Home Lending, we’re fortunate to have the ability to continue to invest in our retail growth during this time.”

Patrons at the zoo were astonished to see an old man jump over the bars of the lion’s cage. Seemingly oblivious to the danger, he walked among the fierce creatures holding the latest bestselling book in his hands, intently perusing its contents.

The spectators were beside themselves.

“What in the world is he doing?” shouted one.

“Is he crazy? He’s going to get killed!” yelled another.

“Don’t worry about him,” replied the man’s son. “That’s just my dad. He likes to read between the lions.”

Visit www.robchrisman.com for more information on our industry partners, access archived commentaries, or to subscribe to the Daily Mortgage News and Commentary. If you’re interested, visit my periodic blog at the STRATMOR Group web site. The current blog is, “With Regulations, Be Careful What You Wish For.” If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.


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Rob Chrisman