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In this third and final installment of our look into the industry’s near future, we consider the product trends and operational concerns that will dominate the mortgage profession.
What will next year’s potential borrowers pursue? If this year’s trend is any indication, jumbo mortgages will continue to be very popular in 2015.
“There is heavy competition between banks and mortgage bankers over jumbo loans,” said Ruth Lee, executive vice president of sales, marketing and business development at Denver-based Titan Lenders Corp. “If we look at a $750,000 to $1 million loan amount, there is a significant amount of pent up demand. And the risk appetite is really conservative—no one wants to be on the bleeding of edge of how to finance jumbos.”
“This has been the best jumbo market since 2004,” said Paul Anastos, president of Walpole, Mass.-based Mortgage Master. “There is a huge appetite, especially among large banks. Those assets always performed—now there’s a big audience for that.”
Another current trend that is pointing to greater viability is green housing. According to the recently released study “Green Multifamily & Single Family Homes: Growth in a Recovering Market,” published by McGraw Hill Construction, builder and remodeler members of the National Association of Home Builders (NAHB) are reporting a strong increase in the volume of green building for single-family homes. The study finds that builders and remodelers in both the single family and multifamily sectors recognize the value of going green: 73 percent of single family builders and 68 percent of multifamily builders say consumers will pay more for green homes.
“Greater consumer interest in green homes has contributed to the ongoing growth, leading us to anticipate that by 2016, the green single family housing market alone will represent approximately 26 percent to 33 percent of the market, translating to an $80 billion to $101 billion opportunity based on current forecasts,” said Harvey Bernstein, vice president of industry insights and alliances for McGraw Hill Construction. “The findings also suggest that lenders and appraisers may be starting to recognize the value of green homes, making it a factor that could help encourage the market to grow if there is more widespread awareness across the U.S.”
One area that is beginning to show signs of percolating involves home equity-related products. The aforementioned TILA/RESPA rule going into effect next August does not apply to home equity lines of credit (HELOC), and the growing level of positive equity among U.S. homeowners appears to point to a new push into equity-related products.
“We are going to see homeowners want to tap into their equity with HELOCs,” said Rick Seehausen, CEO of LenderLive Network Inc. in Glendale, Colo. “We will see a lot of folks looking to renovate their home and obtain home improvement loans rather than moving up in their housing decisions.”
Rosie Biundo, senior director of product marketing at Atlanta-based Equifax Verification Services, agreed. “As we look at where the market is growing, we are going to see the HELOC market continue to grow,” she said. “Home values are on the rise. While borrowers and homeowners that were upside down a few years ago, we are now seeing the trend reversing and these people will now have more lendable equity. But because of low mortgage rates, people are staying put. Instead of buying new homes, they will use the equity in home to make enhancements on their existing homes.”
Biundo added that in the interim period between the retreat of dominant refinancing activity and the eventual reanimation of the purchase market, lender will look to home equity lending “to fill that gap and fill their pipeline.”
Another trend that may grow in vibrancy in 2015 is the still-nascent concept of equity sharing, which is being developed by the San Francisco-headquartered start-up Primarq. Under its business model, homebuyers can either tap equity in their homes or supplement downpayment funds through an equity share finance partnership with accredited investors.
“For both affordability and sustainable home ownership, there is a better way to enable ownership and the opportunity to create wealth,” said Richard Zahm, president of Primarq, whose company is in the process of creating an Internet-based platform for this new approach to real estate finance.
Another home equity tool that is also excluded from the TILA/RESPA rule is reverse mortgage lending. Rob Katz, executive vice president of sales at ReverseVision Inc. in San Diego, reported that his company is beginning to see a spike in inquiries from originators that are looking to expand into this sector.
“What we’re seeing in the second half of 2014 is more and more forward loan originators and brokers getting into the reverse business,” he said. “The traditional refinance market is gone—originators are looking for ways to supplement their income and make money. In the last 12 months, 725 new brokers started using our software, and 50 to 60 new brokers sign up every month. As values of homes going up, introducing more equity—the reverse is how you draw that equity out without having to make a payment gain. Tapping into that equity with the reverse is the most logical way. And there is a huge pool of people qualifying for these loans that are sitting in homes with more equity.”
But at least one industry leader warns that a rush to equity-related products may create a new problem.
“The way the economy is going, consumers will increasingly rely on debt to support standards of living expected of them,” said Stanley Street, president of Street Resource Group in Atlanta. “We will see people leveraging their houses again to support daily operating expenses. Ultimately, there will be another cycle of an increase in debt—but without a corresponding increase in basic earnings.”
Street added that the industry is cognizant that the economic picture is nowhere near the level of desired stability.
“Most mortgage bankers are trying to position themselves to gain the business they can get while understanding the economy is still somewhat fragile,” Street said.
And this raises another concern for 2015: What happens when there are more companies competing for a still-smallish number of clients?
“Competition is always a good thing to keep things fair and balanced,” Mark Greco, president of Austin-based 360 Mortgage Group LLC. “But when you have more players competing for less business, there is going to be a point of diminishing returns.”
Mike McHugh, president and CEO of Melville, N.Y.-based Continental Home Loans Inc. (CHL), predicted a smaller industry come next year.
“There is going to be consolidations and mergers,” McHugh said. “The capital requirement side of the business is being increased daily. Small banks are feeling the pressure of how to stay in business and make a profit. The net results will be mergers of quality organizations and similar organizations to find ways to go together.”
“Companies that have been lean and meager in keeping costs down are at the make-or-break point,” said Brandon G. Haefele, president and CEO of Catalyst Mortgage in Sacramento, Calif. “The cost of compliance continues to increase at such a rapid pace that over-regulation will either drive people out of business, or force them to join bigger firms because they cannot sustain these additional costs. And that will create more damage to economy and market because there will be less competition.”
Todd Potter, senior vice president and national sales manager at Houston-based Envoy Mortgage, echoed those sentiments. “There is a lot of compression going on,” he said. “Every nickel and dime matters a lot, and the costs to originate a loan are now higher than ever before.”
So how can companies remain ahead of the curve? Jonathan Corr, president and chief operating officer at Ellie Mae in Pleasanton, Calif., stressed the need for a more aggressive approach to securing business.
“People have to be prepared to be purchase-centric if they’re going to play in this marketplace, with refi as a little bonus on the side,” Corr said. “They will need to have more feet on the street. It will be important to reach out through establishing relationships with real estate professionals. There are a broad array of local independent mortgage bankers and community banks that do better in a purchase market because they have that kind of a presence.”
Christopher George president and CEO of San Ramon, Calif.-based CMG Financial and chairman of the California Mortgage Bankers Association (CMBA), stressed improved customer service, with an emphasis on ensuring that loan officers fully comprehend what best suits the borrower.
“We need to teach loan officer how to understand products thoroughly and who is not right for those products,” George said. “We can also do a far better job in confirming the borrower really understands what they’ve got—the disclosure that they sign is not enough. We should call borrowers and go over the requirements—we’re wallpapered with disclosure paper. All of this needs to happen in a dialogue and not as form to be signed with 30 other forms—that is zombie signing.”
Gibran Nicholas, chairman and CEO of The CMPS Institute in Alpharetta, Ga., also advocated a more holistic approach to dealing with borrowers.
“I think that it is important for any salesperson to understand where their product fits in the context of what their client is going through,” Nicholas explained. “If a loan originator can understand what the customer is going through, what the challenges they are facing with college funding or retirement planning–the sort of things that a financial planner looks at–then they can bridge the gap between the housing decisions and what the client is facing in their life financially, and they will be more effective in what they do.”
Nicholas added that this big picture would also apply to the investors who still constitute a considerable presence in the residential property market.
“In the case of a real estate investor, originators should understand how to calculate rate of return or how to analyze a property from a financial standpoint,” Nicholas said. “Then, you are able to put the mortgage product in the context of what the investor is trying to do.”
If anything, 2015 does not promise to be a boring year. According to Chris Sorensen, director of mergers and acquisitions at Corona, Calif.-based Paramount Residential Mortgage Group Inc. (PRMG), the coming year may offer the industry more questions than answers.
“People need shelter, so real estate will always be a decent investment and our government does recognize—I hope—that housing is essential to a stabilized American economy,” said Sorensen. “The challenge is that with the Feds pumping money into the markets, the investment banks and hedge funds put much of this money to work in rental housing and this artificially pumped up values beyond the average American’s confidence. Forget facts—perception amongst the people is the reality and the polls reveal consumer confidence is waning. This is the variable that causes grey hair for traders. In short, I have no idea what’s next.”
Phil Hall is managing editor of National Mortgage Professional Magazine, and is lead anchor and commentator for Mortgage News Network. Phil is also host of Mortgage News Network's "The Housing Show." He may be reached by e-mail at email@example.com or visit www.mortgagenewsnetwork.com.