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Create new customers while you sleep: a step-by-step guide

National Mortgage Professional
Jul 12, 2005

What's normal about a $2 trillion market?John M. Robbins Jr.homeownership, residential real estate market, increase wealth Home: more than just a destination at the end of the day. The true meaning of the American dream has significance for every individual who has purchased a house. I still remember the day my wife and I stepped through the doorway of our first home. We were excited and nervous. A sense of pride made us feel that we had truly made it. As homeowners, we felt that we could raise a family in a stable environment. Our home also represented opportunity we were investing in our future and that of our children. Each year, many Americans fulfill their dream of homeownership. The purchase of this tangible asset evokes various intangibles emotions that make the housing industry one of the pillars of our nation. Woven into the moral fiber of this country are communities of homeowners who seek the same ideals: family, friendship, safety and freedom. More than ever before, people are regarding their homes as a measure of financial security. With a depressed stock market, rising gasoline and energy prices, and the threat of inflation, many consumers take comfort in the fact that their homes are appreciating faster than their mutual funds. After all, homebuyers have provided the most support to U.S. economic growth. According to the Mortgage Bankers Association, residential investment has "increased nine percent in constant dollars during the past four quarters, and housing starts are at levels not seen since the middle years of the 1970s, when rates of household formation were boosted by baby boomers reaching home-buying age." Referred to as the "new gold," Americans have turned to residential real estate to increase their wealth. While it is true that home investments can be just as susceptible to market forces as stocks, the value of homeownership has been steadily increasing with no foreseeable plummet in prices. According to the National Association of Realtors (NAR), based in Washington, D.C., there has not been a nationwide decline in home values since the Great Depression. And the rate of homeownership is also on the rise. The U.S. Census Bureau reports that rental vacancy rates are at the highest level in 40 years. Many of those who do not own homes see the opportunity to improve their financial situation, but they need someone to open the door to ownership. Center Pieces Working Families with Children: A Closer Look at Homeownership Trends, a study conducted by the Washington, D.C.-based Center for Housing Policy (the research affiliate of the National Housing Conference) in May, shines the light on this desire. The study finds that low- and moderate-income working families with children defined as households earning less than 120 percent of the local median income but more than the equivalent minimum wage have the most difficult time becoming homeowners. These families often consist of people who provide vital services to our communities, such as police officers, firefighters and teachers. Of greater concern are the findings from the Center for Housing Policy's report that show "children who live in owner-occupied housing are more likely to do well in school and are less likely to have behavioral problems." The lag in homeownership can be attributed to more single-parent households, the rising cost of homes and the gap between the increase in minimum wage and cost of owning a home beyond the mortgage payment, including utilities, homeowners' insurance and property taxes. This brings me to our present market. Industry experts keep referring to it as a "normal" purchase environment. What they do not do is define what this means. Some economists and housing analysts foresee the housing bubble bursting and act like no more houses will ever be built or sold. While cycles in the mortgage market are nothing new, everything has changed. Today's purchase market is in a constant state of re-calibration and consists of new families, unique demographics and different expectations. Is the sky really falling, as some in the media claim? Absolutely not. NAR estimates that some 12 million new households will have formed in the United States between 2000 and 2010. Talk about opportunity. Here's why I say there is nothing "normal" about the current "normal" purchase environment. First, the size of the mortgage market is still predicted to be substantial, but it will have a different balance. I predict that by the end of 2004, 75-85 percent of transactions will be home purchases instead of refinances. Given rising rates, there will be consolidation throughout the industry. We expect that the ranks of mortgage brokers will be thinned by approximately 30 percent from the 50,000 or more brokers that were doing business during the refinance boom. The number of traditional loan officers will also decline by approximately 25 percent, given the new dynamics of the market. Looking ahead, I envision a future that is even brighter than the last three record-breaking years. In fact, MBA projects $2.4 trillion in originations for 2004, which is still one of the largest markets in history. Joel Rassman, chief financial officer of Huntingdon Valley, Pa.-based Toll Brothers Inc., the biggest U.S. builder of luxury homes, made an excellent point for the skeptics out there. He said, "A better economy will create more jobs and consumer confidence and generally create more income, and those will offset effects of higher mortgage rates." David Berson, chief economist at Fannie Mae, predicts that home sales will stay very strong through the middle of summer. NAR chief economist David Lereah confirmed a belief in a robust housing market by indicating that the typical family could afford to buy a home costing more than 4.5 times its annual income. And, on a national basis, homebuyers have paid just more than 3.1 times their income, so they are far from overextending themselves. That means home buying will most likely continue at a rapid pace. In fact, by 2010, I see a mortgage market that will grow to $14-$16 trillion in size. This prediction is due, in part, to the second characteristic of the "new" purchase market. That is, there are unique demographics that have created entirely new niche opportunities. Younger peoplethose in their 20s and 30sare entering the housing market at an earlier age. This segment of the population used to be renters, but they are realizing the value of investing in their futures now, perhaps even before they start families or marry. Baby boomers are not only trading up, but they are also buying vacation homes or rental properties. Record numbers of immigrants are now calling America home and are becoming first-time homebuyers. A number of geographic markets especially those in Middle America have a large inventory of modestly priced homes as well as considerable land that can be used for new developments. People who want to buy homes are picking up and moving to these areas to live the American dream. Third, there are more loan products available that help offset rising interest rates. In this "normal" purchase market, plain-vanilla loans may not be the right choice. Today, homebuyers want options. As mortgage lenders, it serves us well to develop nontraditional products that meet a diverse array of consumer needs. The popularity of five- and seven-year adjustable loans will continue to grow. Homebuyers are asking for other types of adjustable-rate mortgages (ARMs) to manage affordability. In May, ARMs accounted for 35.2 percent of all mortgage applications, according to MBA. Douglas Duncan, MBA's chief economist, points out that this type of loan product garnered a larger share of the market in proportion to the rise in long-term interest rates. As consumers have become savvier, they are eager to find the lowest monthly mortgage payment possible. There is also an increase in interest-only loans, which carry no principal payment and no equity build-up. The lower amount makes qualifying for these loans easier, especially in the sub-prime area. Another product, negative amortization loans, also uses limited equity build-up to initially limit price shock. There are also more state and local programs as well as low down payment loans available that target entry-level buyers. There are some mortgage banking companies that are even allowing consumers to skip a loan payment in the case of job loss. Sub-prime lending has come into the sunlight. There is no longer a stigma attached to this market. The large players in the industry are primarily responsible for this evolution. They have used this alternative to help put people into houses who may not have qualified before. A recent survey that our company completed with our 5,000 mortgage broker customers indicated that 77 percent of them are involved in sub-prime lending. Despite the increase in sub-prime lending, foreclosure rates have not risen dramatically. This is due, in large part, to the fact that homeowners have substantial equity in their homes. Unfortunately, recently adopted state predatory lending laws have hurt more people within the sub-prime arena than they have helped. Federal exemption to this patchwork of laws is really the only answer for the small- and medium-sized, non-bank-affiliated mortgage banks. Being audited by multiple jurisdictions is just not acceptable it isn't good business practice for anyone. In the mortgage industry, the best is yet to come. If there was any doubt, just read the Washington, D.C.based Homeownership Alliance's May study titled America's Home Forecast: The Next Decade for Housing and Mortgage Finance. This seminal work, written by some of the leading economists in our industry including NAR's Lereah; Fannie Mae's Berson; Frank Nothaft, chief economist at Freddie Mac; Paul Merski, chief economist at the Independent Community Bankers of America (ICBA), Washington, D.C.; and David Seiders, chief economist at the National Association of Home Builders (NAHB), Washington, D.C. is rich with facts and figures supporting steady growth in homeownership. The "new" purchase market provides a wide range of possibilities for increased loan volume, greater market share and enhanced profitability. In order to serve these prospective buyers, we must understand who they are and pinpoint their needs. As mortgage bankers, we hold the key to opportunity for millions of people who share the same ideals and desires we do as homeowners. America is a country that treasures freedom. It just makes good sense to open the door and keep the dream of homeownership alive for decades to come. Reprinted with permission from Mortgage Banking magazine (July 2004, pp. 1516), published by the Mortgage Bankers Association. John M. Robbins Jr. is chairman and chief executive officer of AmNet Mortgage Inc. (formerly American Residential Investment Trust) and American Mortgage Network, headquartered in San Diego. For more information, visit
Jul 12, 2005
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