The state of the States’ mortgage market

The overall mood of the conference attendees was a yearning for the good old days (i.e. pre-GFC) to return. The return of this time of bounty for the industry does face a few headwinds, however.

The first of these has to do with the state of the housing market and attitudes to home ownership generally.

There are a few factors at work here. First up, many Millennials don’t view home ownership as either something desirable or practically achievable. In the digital world, often lacking job security, mobility is necessary and a home with a mortgage is seen as a ball and chain.

Also, many in the first home buyer demographic have very recent memories of the havoc that that GFC wreaked on their parents – whether they were over-geared home purchasers or investors looking to ‘flip’ properties for easy gains. There’s a degree of scepticism that residences are a store of value or represent enforced saving.

Then there’s the real elephant in the room – affordability. The US has much more regional variation in house prices than Australia, so generalisations are difficult, but in the desirable urban centres there are major affordability issues. Not only are there regional bubbles developing – in the San Francisco Bay Area, house prices are up 50 per cent from their trough, with household income multiples for median housing approaching a stratospheric nine times.

In San Diego – the conference venue – the salary required to comfortably afford a median-priced home is $105,000, whereas the median salary is actually $65,000.

The lack of genuine first home buyers – many burdened by student debt and facing major affordability issues – may make a return to the heady days difficult.

There are many parts to the mortgage value chain in the US – realtors, brokers, mortgage bankers, lenders and very often the government-sponsored enterprises (GSEs) like Freddie Mac and Fannie Mae.

These moving parts in the chain are jostling for position and experimenting at present. Right now, the most imperilled appears to be the mortgage broker.

Why? The broker segment grew to service excess demand when there was a multitude of products developed to meet that demand. Nimbleness, product knowledge and access to lenders providing innovative products supported the growth of mortgage broking.

With declining first home owner demand and the mortgage of choice being the 30-year fixed-rate product, the other players in the chain seem to have decided that they don’t need brokers at this time.

It’s far too early to predict the permanent demise of brokers in the US. However, as the early signs of a return of competition products can be detected, just don’t whisper the words “sub-prime”.

In the US, positive credit reporting that finds its way to a ‘FICO’ score dominates the credit process. Good credit demands a FICO score of around 680. With subdued demand and many people with impaired credit, and with family formation in recent immigrants and minorities outpacing homeownership rates, there’s the impetus for private lenders to re-enter the market to meet the need.

The truly toxic products like ‘option ARMS’ and 30-year fixed rates are unlikely to reappear – the competition seems more to be on credit rather than product design. Products with FICO scores in the lower 600s and the odd one in the 500s were noted – which was where they were when it was still okay to call it sub-prime.

One commentator noted “Greed has never left the system – it just took a nap for a while”. Harsh perhaps, but the impetus to feed the machine of the housing finance industry and bring back the good old days is very strong.

On the funding side, the GSEs are funding around 60 per cent of all mortgages. Distribution is broadly 50 per cent by ‘high street’ banks and 30 per cent by mortgage bankers, with the up-and-comers being community banks and credit unions as the remaining 20 per cent. Their increase in market share is due to a crisis of trust in mainstream banks and a desire amongst some consumers for a return to personal banking in an era of digitisation and credit by number.

Another major factor in the US is the greying of the industry. The average age of a loan officer is now 54 and attracting new entrants is a major problem. Part of the issue is that loan officers in particular are now are exposed to significant risk as individuals if something in the origination process goes awry. They can face fines and other sanctions if defects in origination are found, or a customer complains and many potential new entrants just don’t see involvement in the mortgage business as a desirable career option.

Which ushers in the final topic: regulation? The response to some of the excesses of the pre-GFC period to better protect consumers was the formulation of the Consumer Financial Protection Bureau (CFPB). From their website, their role is to help “consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives”.

Now, it’s a rare industry that welcomes increased supervision and regulation, but the activities of the CFPB seem to have agitated the US industry to a remarkable degree – not a kind word was heard.

What seems to have given rise to the most ire is new set of disclosures that came into force in October called TRID. These rules were meant to simplify disclosure, but they haven’t been interpreted that way by the industry. One major bank lender is reported to have stopped lending for five days while it figured out the new regulations, and another commentator said that the cost of closing a loan has risen from $2,600 to $5,400 as a consequence of TRID.

There are a fair few dots to be joined from the current American experience. Affordability issues, regional bubbles, the dearth of genuine first home buyers, the impact of increased regulation and the inadequacy of disclosure alone to better protect consumers, and the dynamic tension between lenders and brokers.

It’s worth keeping an eye on US developments as a guide to the future of the industry in this country.