Mortgages? Big Banks Throw In The Towel (#GotBitcoin?)
Non-banks’ made over half the mortgages taken out by American consumers in 2017. Mortgages? Big Banks Throw In The Towel (#GotBitcoin?)
You can kiss George Bailey’s mortgage market goodbye.
As the small-town banker in Frank Capra’s “It’s a Wonderful Life,” Bailey epitomized an old-fashioned world in which bankers know every borrower personally. In the mortgage market of 2019, borrowers can do just about everything online, never meeting the lender behind the process.
And as comments from executives of America’s biggest banks made clear last week, that person – or institution – making the loan is increasingly less likely to be a banker.
In an earnings report last week, JPMorgan Chase said that mortgage originations were down 18% compared to a year ago in the first quarter. For Wells Fargo, which reported earnings the same day, mortgage lending was down 23% compared to the year earlier. (Wells Fargo is still the largest originator of mortgages in the U.S., with a 10.7% market share in 2018, according to Inside Mortgage Finance.)
Jamie Dimon, JPM’s CEO, said this in his shareholder letter released at the same time as Q1 earnings:
“In the early 2000s, bad mortgage laws helped create the Great Recession of 2008. Today, bad mortgage rules are hindering the healthy growth of the U.S. economy. Because there are so many regulators involved in crafting the new rules, coupled with political intervention that isn’t always helpful, it is hard to achieve the much-needed mortgage reform. This has become a critical issue and one reason why banks have been moving away from significant parts of the mortgage business.”
Because of post-crisis capital rules, “owning mortgages becomes hugely unprofitable,” Dimon lamented later in his note. On a call with analysts, he called mortgage servicing – the bookkeeping for regular customer payments – hard. “You got to look at that and ask a lot of questions about whether banks should even be in it,” Dimon said.
If not banks, then, who should be “in it”? “Non-banks are becoming competitors,” Dimon told analysts.
In contrast, Wells Fargo executives sounded hopeful for a pick-up in mortgage lending, at least in the short term. “We expect to see a higher origination volume in Q2 due to typical seasonality for home buying as well as some additional refinance activity resulting from the recent decrease in mortgage interest rates,” they said in prepared remarks on an earnings call.
“Mortgage lending is core to Wells Fargo,” CFO John Shrewsberry said in response to an analyst question. But moments later, he added, “I think non-bank competitors both on the origination and servicing side are here to stay.”
What exactly is a non-bank? That term generally describes any lender that does not hold deposits, like a bank does. Non-banks lend mortgages that will be guaranteed by Fannie Mae, Freddie Mac, the Federal Housing Administration, or other agencies. In contrast, many banks still hold some mortgages in their own portfolios.
Banks’ retreat from mortgage-making isn’t new, and MarketWatch has covered the issue in the past. But the executive commentary this quarter seemed particularly stark.
Some housing industry participants have raised concerns about the non-bank business model. In 2016, MarketWatch profiled Ted Tozer, who was then head of Ginnie Mae, the massive government entity that includes FHA and other mortgage agencies.
One of the biggest concerns shared by Tozer and other analysts is that while non-banks must hew to the same lending standards, they must depend on banks for short-term financing. “My big concern is starting to have a contagion, similar to 2008, where people quit lending to each other and at that point the whole system had issues because no one knew who to lend to,” Tozer said at the time.
In response, Bill Emerson, CEO of the largest non-bank originator, Quicken Loans, said, “When I think about access to governmental funds, history hasn’t proved that that’s been a great solution for anyone.” (Quicken Loans had 5.1% of the mortgage market in 2018, according to Inside Mortgage finance, making it the number-three lender in the country.)
Non-banks have taken a bigger and bigger share of the mortgage market, as both Shrewsberry and Dimon acknowledged. They had 25% of overall single-family volume in 2008, and 54% in 2017, according to the Mortgage Bankers Association.
The mortgage industry is adamant that non-banks are subject to so much scrutiny that they could never cause a major financial system snafu. In fact, the MBA points out that some guardrails that ostensibly make banks safer, like the FDIC’s deposit insurance, simply mean that taxpayers are on the hook for failures.
It’s worth noting that there was a lot missing in that Hollywood vision of a salt-of-the-earth community banker, like practices that explicitly excluded people of color from getting bank loans. But the debate over whether it’s safer for everyone if lenders have some “skin in the game” when making mortgages is likely to continue.
Homeownership Rate Drops For First Time In More Than Two Years
A rising rate primarily reflects younger households successfully making the transition from renting to owning.
The U.S. homeownership rate fell for the first time in more than two years in the first quarter, putting the brakes on the recovery of an important piece of the economy.
The homeownership rate fell to 64.2% in the first quarter from 64.8% in the fourth quarter, according to U.S. Census Bureau figures released Thursday—a notable drop for a number that barely moves from one quarter to the next. After more than a decade of declines, the homeownership rate had been reliably on the upswing since the beginning of 2017 and was nearing its historic average of around 65%.
First-time buyers “are hitting a bit of an affordability ceiling here,” said Zillow Director of Economic Research Skylar Olsen.
A rising homeownership rate primarily reflects younger households successfully making the transition from renting to owning, which for many families is critical to saving for retirement and other big expenses. Those households have struggled in recent months as mortgage rates have risen and there has been a shortage of lower-priced inventory.
Younger buyers, who had been driving the rise in homeownership for the last couple of years, had some of the steepest falls in the first quarter. The homeownership rate of households headed by someone under 35 years old dropped nearly a full percentage point, to 35.4% from 36.5% in the fourth quarter. The homeownership rate among households headed by someone 35 to 44 dropped to 60.3% from 61.1%.
The homeownership rate is volatile, and it would take several straight quarters of decline to indicate owning a home is once again in decline in the U.S. While the homeownership rate fell over the quarter, it was virtually unchanged from a year earlier.
There was good news for rental landlords in Thursday’s Census report. The number of renter households increased by 458,000 in the first quarter compared with a year earlier, reversing a trend of declines in the number of Americans who rent. The number of owner households also increased by about 1 million during the same period.
The housing market slowed in the second half of 2018, due to rising mortgage rates, high home prices and a shortage of starter-home inventory. Average mortgage rates for a 30-year loan have since fallen from nearly 5% in the fall to just over 4% today. Nonetheless, cheaper interest rates and slowing home-price growth have yet to translate into stronger housing-market data.
Joel Kan, associate vice president of economic and industry forecasting at the Mortgage Bankers Association, said he expected the first-quarter drop in the homeownership rate to be a blip. Millennials are entering their early to mid-30s and eager to buy homes, which should translate to a higher homeownership rate in the coming quarters.
“We had a really, really volatile end of 2018,” Mr. Kan said, pointing to swings in the stock market, fears about slowing economic growth and declines in home sales. “Most of these [younger] borrowers are going to be in tighter financial circumstances. They are going to be more vulnerable to big swings.”
Home-Price Growth Slows To Lowest Level Since 2012
S&P CoreLogic Case-Shiller National Home-Price Index rose 4% in the year ending in February.
Home-price growth slowed to its lowest level in nearly seven years in February, a clear sign that the housing market is moderating heading into spring.
The S&P CoreLogic Case-Shiller National Home Price Index, which measures average home prices in major metropolitan areas across the nation, rose 4% in the year ending in February, down from 4.2% the prior month.
Home-price growth has been slowing for nearly a year, welcome news for first-time buyers who have been struggling to get into the market. Thus far, however, the easing in price growth has yet to translate into the stronger sales that real-estate agents and economists had hoped for.
Real-estate agents say demand for buyers this spring has been strong thanks to more moderate prices and lower mortgage rates. Nonetheless, existing home sales fell nearly 5% in March.
The Case-Shiller 10-city index gained 2.6% over the year ending in February, down sharply from a 3.1% annual change in January. The 20-city index gained 3%, also a significant slowdown from an annual gain of 3.5% in January.
Economists surveyed by The Wall Street Journal expected the 20-city index to gain 2.8%.
Once-hot housing markets on the West Coast, such as Seattle and San Francisco, have slowed sharply in recent months. Instead the new drivers of the American housing market are primarily places in the south that are trying to make up significant ground lost during the bust.
Las Vegas had the fastest home-price growth in the country for the ninth straight month, at 9.7%. Phoenix had the second-fastest price growth at 6.7%, followed by Tampa at 5.4%.
Even the hottest markets in the country are still seeing a slowdown in price growth. Only one of the 20 cities in the Case-Shiller index reported a greater increase in the year ending in February compared with the year ending in January.
Risky Seller Financing Flourishes Where Homes Are Cheapest
‘Contracts for deed,’ prone to abuse, are often only choice for buyers shut out of mortgage market.
Poorer Americans buying inexpensive homes have few options in the conventional mortgage system. That has pushed them to a financing option full of pitfalls and prone to abuse.
The option is a “contract for deed,” a sort of hybrid between renting and owning in which the borrower makes payments that resemble a mortgage but doesn’t get title to the house until the end of the loan term.
About half of all sales involving contracts for deed were tied to homes whose sales prices were less than $50,000, according to a new study from a trio of Federal Reserve researchers. That share has risen steadily in recent years and is above precrisis levels. The study examined hundreds of thousands of contracts recorded between 2005 and 2016 in six Midwestern states.
“It’s difficult to get mortgages below $50,000,” said Lisa Nelson of the Federal Reserve Bank of Cleveland, one of the report’s authors.
Contracts for deed require payments, typically to the seller of the property, that resemble a mortgage but don’t confer to the borrower the title and rights of homeownership until the end of the loan term. These arrangements are often informal and lack the consumer protections available with traditional mortgages, so borrowers typically have little recourse if something goes awry.
The low end of the housing market is where plain vanilla mortgages are getting harder to come by, The Wall Street Journal has reported. Banks and other lenders often find it difficult to make a profit lending for small amounts, leaving this corner of the market underserved.
Additionally, people buying lower-cost properties may have more credit challenges that make it difficult to qualify for a mortgage, according to Taz George of the Federal Reserve Bank of Chicago, another report author. Some of the homes are in bad shape, a big obstacle for mortgage lenders, he said.
The Fed researchers found that neighborhoods with the most contracts for deed are lower-income and have higher vacancy rates. Neighborhoods with lots of contracts for deed had higher shares of African-Americans, the study found.
In 2016, the most recent annual data available, houses that sold for less than about $50,000 accounted for just 5% of all mortgages in Wayne County, Mich., where Detroit is located. But they made up 57% of contracts for deed, the researchers found. The number of recorded sales in this price tier tied to contracts for deed was about the same as the number with mortgages, though many contracts are informal and not reported.
The 10% of neighborhoods in the study that had the most contracts for deeds had a median home value of $62,900. That was about half the median home value of the entire group of neighborhoods the researchers reviewed.
Tammy Jo Ackerman-Nelson bought land a few years ago in Nokomis, Ill., for $3,000. She entered into a contract for deed with the seller, she said, because she didn’t have the credit or job history to get a mortgage. She built a small home on the land and she is now living there.
Though she says she paid off the property in full in early 2018, the seller has yet to turn over the deed to the land, leaving her in a precarious position.
“l don’t want to wonder day-to-day whether someone is going to take what I’ve already paid for and screw me over,” Ms. Ackerman-Nelson said.
Need A Mortgage Loan? Good Luck. Lenders Are Tightening Standards
Mortgages are going almost exclusively to borrowers with pristine credit histories.
The mortgage market is humming, but getting approved for a home loan is as difficult as it has been in years.
Mortgage credit availability, a measure of lenders’ willingness to issue mortgages, is near its lowest level since 2014, according to the Mortgage Bankers Association, or MBA.
The tight lending environment illustrates a growing cleavage in the mortgage market: More home loans are being made than almost ever before, but they are going almost exclusively to borrowers with pristine credit histories and sizable down payments.
Borrowers with credit qualifications that fall just outside the stellar category are finding fewer lenders willing to approve their applications. A segment of borrowers who would have qualified for a home loan early last year are now out of luck, deemed too much of a credit risk.
“Because mortgage credit is more difficult to obtain, it is a more competitive environment overall,” said Dr. Lawrence Yun, chief economist at the National Association of Realtors.
About 70% of mortgages issued in 2020 went to borrowers with credit scores of at least 760, up from 61% in 2019, according to the Federal Reserve Bank of New York.
The median credit score of borrowers approved for mortgages reached 786 in the fourth quarter of 2020, up from 770 during the same period in 2019.
Americans who want to break into the housing market this spring face plenty of other challenges. Home prices tend to fall in a slowing economy, but they have jumped during the coronavirus pandemic, keeping many families out of homeownership.
Home prices are increasing at the fastest pace in 15 years, propelled by a record-low supply of homes for sale and a flood of well-off workers looking for second homes or space for home offices. The median existing-home price topped $300,000 last summer and has stayed there ever since.
And mortgage rates, while still historically low, have risen meaningfully from last year’s record-setting lows, pushing monthly payments higher for would-be buyers.
The availability of mortgage loans plummeted as much as 35% year over year in 2020, when lenders wanted to protect themselves from making loans to borrowers who might lose jobs during the pandemic. The MBA’s mortgage credit index has drifted higher since last fall but remained about 31% lower in February than the same time last year.
“In one week last spring, jobless claims were in the millions,” said Tendayi Kapfidze, chief economist at LendingTree. “A borrower who was fine one week could be a much riskier borrower the next week.”
Lenders’ concerns about the financial stability of borrowers prompted them to increase verification of employment and income.
Some borrowers were asked to sign statements affirming that they had no intention of requesting forbearance after being approved for a mortgage. Some lenders are asking that documents used in mortgage applications, such as bank statements and pay stubs, be no older than 30 days, where they once allowed them to be 60 days older or more.
Stricter credit requirements appeared most clearly at either end of the mortgage market. The average credit score for borrowers approved for Federal Housing Administration loans rose to 672 in the fiscal year 2020, up from 666 in 2019. FHA loans typically have lower incomes and smaller down payments.
At the same time, lenders upped requirements for jumbo mortgages, which tend to go to well-off buyers. Jumbo mortgages are too big to be sold to government-backed mortgage giants Fannie Mae and Freddie Mac, so banks often keep them on their own books and bear the risk of default.
Jeanne Griffin’s local credit union in Minnesota denied her mortgage application earlier this year. She said she was told her 713 credit score and the fact that her student loans were in pandemic-related forbearance disqualified her.
“They said if I had applied a year ago, I would have been approved,” said Ms. Griffin, who has close to $20,000 saved for a down payment.
The credit union encouraged her to begin making student-loan payments and pay off about $4,000 in credit-card debt before reapplying.
The meteoric growth of home prices has made some lenders reluctant to take on first-time home buyers or others they view as slightly risky. Lenders who were comfortable offering mortgages of $300,000 or $320,000 to borrowers with good-but-not-great credit histories might not be willing to lend the $350,000 or more now required to buy the same property.
Loan officers and underwriters weigh a handful of variables when determining whether to approve a mortgage application: employment history, income source, credit score and debt level, among others.
Strict lending requirements play an important role in keeping the housing market healthy. Making sure that borrowers can afford mortgage payments is key to limiting defaults. Ultraliberal lending policies, including loan approvals for people with spotty income histories or mountains of debt, helped spark the 2008-09 financial crisis.
Lending standards are unlikely to expand meaningfully until housing demand ebbs, economists said. The dearth of homes for sale means lenders can select only the best from an abundance of applications.
Still, credit requirements should loosen slightly this year as interest rates rise, drying up refinancings, said Mike Fratantoni, the MBA’s chief economist.
“Since lenders aren’t being flooded with calls to refinance, more of their resources can be used to reach out to first-time buyers for purchases,” Mr. Fratantoni said.
Refinance loans are expected to comprise 46% of the mortgage market in 2021, down from 59% in 2020, according to the MBA.
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