At the beginning of 2004, the future of the mortgage industry appeared to be in a state of flux. The portents of doom were everywhere: Fannie Mae predicted a drop-off in the mortgage business of approximately 40 percent, warnings of a major shakeout due to the end of the refi boom, an uncertain economic recovery, impending government regulation, and finally, the prospect that rising interest rates would burst "the housing bubble," with disastrous consequences for mortgage brokers and the American economy. This year was poised to be a banner year for the Chicken Littles of the world. Well, 2004 is now more than halfway finished and the sky hasn't fallen, just yet. The Federal Reserve Board raised short-term interest rates by one-quarter on June 30, and people are still buying homes. Job growth in the U.S. economy is expected to be strong for the remainder of 2004, the U.S. Department of Housing and Urban Development's proposed RESPA rule has been withdrawn amid intense opposition, and a major shakeout of the mortgage broker industry has yet to occur.
In fact, existing single-family home sales rose in May to the highest monthly pace on record, increasing 2.6 percent to a seasonally adjusted annual rate of 6.8 million units in May from a level of 6.63 million units in April, according to the National Association of Realtors (NAR). Sales activity for May was 15.8 percent above the 5.87 million units pace of May 2003; the previous record was 6.68 million units in September 2003. The U.S. Census Bureau reported that single-family housing starts increased from a seasonally adjusted annual rate of 1.62 million in April to 1.64 million in May.
"Fundamentals are still very favorable for a vibrant market. In part, the record results from a natural 'fence-jumping' by buyers getting into the market after mortgage interest rates began to rise at a sharper clip in April," said David Lereah, NAR's chief economist. "This may be the last peak in home sales for a while and existing-home sales are likely to be slower during the second half of the year. Even so, they will remain at strong levels and 2004 is on track to be a record."
The Mortgage Bankers Association's Weekly Mortgage Applications Survey for the week that ended on July 2 indicated that the Market Composite Index of mortgage loan applications jumped from 575 to 687 on a seasonally adjusted basis. On an unadjusted basis, applications rose 19.2 percent on the week, but were down 34.1 percent from the same time in 2003. The Purchase Index rose from 435.4 to 500.9 on a seasonally adjusted basis, while the Refinance Index climbed from 1386.9 to 1769.7. Refinances represented 35.8 percent of total applications, up from 33.4 percent the week that ended on June 25, while adjustable rate mortgages accounted for 34.1 percent. According to Freddie Mac, the national average commitment rate for a 30-year, conventional mortgage was 6.27 percent in May, up from 5.83 percent in April; it was 5.48 percent in May 2003.
The Public Home Builders Council of America (PHBCA) issued the following statement regarding the impact of the Fed's interest rate increase on the country's largest housing markets:
"The PHBCA believes that housing demand will remain strong throughout 2004, despite the Federal Reserve's move today [June 30], to raise the benchmark federal funds rate to 1.25 percent. The demand for housing is being driven by demographics, land constraints and job growth, among other factors, and not due solely to interest rates, which remain at historically low levels. These other factors include the competitive advantages of the large builders, market share expansion, a long-term shift in supply and demand fundamentals, and an increase in the diversity of housing and financial products available to buyers."
As the U.S. economy picks up steam, residential mortgage delinquencies and foreclosures began to decrease in the first quarter of 2004. In June, the inventory of foreclosed residential properties declined for the first time in 2004. There were 22,132 new foreclosed residential properties listed in the U.S. in June, and such properties totaled 72,962 overall. In May, the overall figure was 82,991.
"With the ongoing strength of the economy during the first quarter of 2004, delinquency rates continued their fall from post-recession peaks in the second quarter of 2003," said Douglas Duncan, MBA's chief economist and senior vice president. "An expectation of strong job growth for the rest of the year and continued strength in the housing market bodes well for lower delinquency and foreclosure rates in the upcoming quarters."
NAR chief economist David Lereah predicts that the unemployment rate should fall to 5.2 percent by the beginning of 2005. And, nearly three-fourths (71.6 percent) of real estate professionals believe that commercial real estate activity will either strengthen (35.8 percent) or remain the same (35.8 percent) within the next 12 months, according to the results of the first-annual Bryan Cave Real Estate Executives' Forecast Survey. Only 26.9 percent believed that real estate activity would weaken, indicating a sign of strong confidence and optimism about the market.
While the pessimism over an uncertain economy that pervaded the industry at the beginning of 2004 appears to have been replaced by guarded optimism from industry professionals, there was good news on the political front as well. As 2004 began, HUD's Proposed RESPA Reform Rule was a wet blanket set to dampen the spirit of the mortgage industry. It was proposed as way of simplifying and lowering the costs of the mortgage process for American consumers. The rule was sent to the Office of Management and Budget (OMB) in Dec. 2003 for review before implementation. The mortgage industry marshaled its forces to defeat the Proposed Rule, as HUD received more than 40,000 letters during the 90-day comment period. Congressional hearings were held on the matter, as the National Association of Mortgage Brokers and other industry groups, including American Land Title Association, MBA, NAR and the National Association of Homebuilders all voiced their concerns about the rule. Consumer groups, such as the Consumer Federation of America, Consumers Union, International Union UAW, National Association of Consumer Advocates, National Community Reinvestment Coalition and the National Consumer Law Center, joined the chorus of voices opposing the rule. In a study titled, "The Effect of Mortgage Broker Compensation Disclosures on Consumers and Competition: A Controlled Experiment," the Federal Trade Commission indicated that the proposed rule was likely to harm, rather than help, consumers and could reduce competition in the mortgage market by placing an undue emphasis on broker compensation rather than the actual cost of mortgage transactions. The FTC estimated that the proposal could have cost consumers between $400-$800 million per year. More than 200 members of Congress signed a letter authored by Reps. Judy Biggert and Ruben Hinojosa that appealed to the OMB to return the rule to HUD for re-proposal. Sen. Wayne Allard threatened to hold up the confirmation of HUD Secretary Alphonso Jackson. In the face of this mounting opposition, HUD decided to withdraw the Proposed Rule, and is now consulting with NAMB and other mortgage industry associations to formulate a new RESPA reform proposal.
RESPA reform is dead, at least for 2004; the housing market didn't collapse after the Fed raised rates; the economy is recovering; and there is still a demand for homes among consumers. The sky hasn't fallen, but the year isn't over yet. While RESPA reform may be gone, there are several states adopting laws aimed at predatory lending that could create a patchwork quilt of legislation that has an adverse impact upon the mortgage industry. Minorities are still underrepresented in the ranks of American homeowners. U.S. Department of Labor work rules could substantially increase costs for mortgage broker/owners. However, in light of the industry's performance during the first half of 2004, these issues don't conjure up the apocalyptic prophesies that seemed to infect so much of the mortgage industry at the beginning of the year. These difficulties seem to be mere hurdles that a now more responsive federal government and the mortgage industry can work on surmounting together.
And as for the future of the industry, "The housing industry is well positioned for another decade of growth," according to Harvard University's Joint Center for Housing Studies. The Census Bureau's newly revised population estimates raised the Joint Center's projected total household growth to 13.3 million between 2005 and 2015, up 1.1-two million from previous estimates.