2019 is almost done and it has proven, once again, how hard it is to predict volumes and market conditions – especially in the financial markets, which are now heavily influenced by politics and the global economy. Let’s take a quick look at my top five stories from 2019.
- Rates: Perhaps the biggest story that affected this industry was the significant decline in mortgage rates which led to several revisions in volume forecasts and reversed (or perhaps delayed) what many were assuming to be a year of contraction, mergers, and tight margins. Just look at the 10-Year Treasury this past year. This picture certainly tells the story. It dropped about 150 bps over the previous 52-week high. This created a boon for refinancing as well as purchase activity, and surprised some economists, but others like Barry Habib had predicted this all along. The result here is that at year-end, the mortgage industry is flush with profits, millions of homeowners have lower mortgage payments, and more people are feeling optimistic financially heading into the holidays.
2. The Rise of the Mortgage Broker: 2019 saw the most pronounced surge in mortgage broker activity since before the Great Recession. Led by very aggressive wholesale lending by a few of the nations’ larger players like UWM, Quicken, Freedom, Caliber, and others, the growth in wholesale activity has been significant. Archana Pradhan, a risk management analyst for CoreLogic, wrote in their company online blog that “brokers’ share of the conventional conforming mortgage market hit 16 percent earlier this year.” While this is only half its share from before the housing crisis (when it accounted for about one-third of originations), it has doubled since 2011. The rise of the broker has proven, once again, that the scalability of this model and low overhead makes entry and exit far more fluid and elastic than in some of the other more costly retail business models. Whether the broker channel will ever get back the market share it once enjoyed in the early 2000’s is not certain, but they are clearly a force in the current mortgage market.
3. Non-Prime Lending: In a world where the regulations require proof of “ability to repay”, Non- Prime lending has emerged as a very different product set than the Alt-A and subprime lending before the Great Recession. Non-Prime lenders have seen significant growth, doubling year over year, by filling a void where the GSEs and the GNMA programs cannot. In jumbo lending, where the loan amounts exceed the maximums of the government supported programs, non- prime lenders have jumped into the fray competing with the whole loan jumbo market. While larger banks were almost exclusively filling that void, companies like Redwood Trust and others have been able to grow the securitization side of this marketplace which has provided an outlet for non balance sheet lenders to begin offering these loans to compete with the banks that were retaining them. But non-prime goes further than this. Some self-employed borrowers who may have an income stream more difficult to document, investors who own multiple rental properties, borrowers with lower credit scores but with compensating factors may have an easier time with the products offered by non-prime lenders. Companies like Angel Oak and many others including some REITs and non-banks have helped bring new options to borrowers who may not fit in the square peg, square hole requirements for underwriting traditional QM – Safe Harbor loans. And many have taken note of the growth. The Wall Street Journal published an in depth story on the subject earlier this fall and Inside Mortgage Finance noted the volume growth in this chart below. In 2020 we should see even more growth in this product sector as new ‘de-novo’ companies get launched to bring more product and competition into this space.
4. GSE Reform Becomes Real: With the confirmation of Mark Calabria to head the FHFA earlier this year, things have really begun to heat up in the GSE world. Unlike previous regimes that were focused on legislation to reform these two companies, Director Calabria and the team at Treasury under Secretary Mnuchin have escalated the timeline for ending the conservatorship.
A series of steps to implement some reforms in a regulatory manner such as a new capital rule, eliminating some pilots and pricing advantages to select lenders have been FHFA’s way to regulate some reform in the absence of legislation.
The Trump administration’s plan released in early fall of this year called for both legislative and regulatory reforms, but they have committed to move forward without Congress, if necessary, and that appears to be what they are doing.
As to the steps ahead, Director Calabria has a behemoth task at hand. As the WSJ said in a September editorial board opinion, “The Trump Administration last week sketched out an ambitious plan to rein in mortgage monsters Fannie Mae and Freddie Mac and release them from government captivity. Godspeed to Federal Housing Finance Agency (FHFA) director Mark Calabria, who’s unlikely to get help from Congress in this Sisyphian task.”
There are a great number of disruption risks to the markets, which will become better understood in the year ahead. Investors are faced with the massively complex task of how to view a released Fannie and Freddie’s UMBS, compared to the conservatorship status; what the capital requirements will be and how that might impact cost; and so many other steps that the administration will need to take.
Add to this what FHFA will put in place to control the footprint of these companies, combined with the end of the QM Patch, and we may see some significant impacts to all in single family and multi-family lending.
The pace of change that we have seen since the white paper was released by the administration and public comments made by the Director should tell all stakeholders that this is real, and it is time to become more engaged as steps are taken. Change for change sake, especially if too quick, can bring enormous market risk. Buckle up for what comes in 2020.
5. Millennials: 2019 has shown signs that Millennials may finally be starting to show some force in the home buying market. What was identified as this generations “delayed” decision making to buy a home, and some questioning whether there were changes in preference between renting and owning compared to baby boomers, purchase activity reflected some improvement this year. “Millennials have represented the largest share of the home buying market for the past five years in a row with the 2018 share at 36%,” says Anna DeSimone, author of Housing Finance 2020 and a housing advocate. In fact, as the chart shows from the National Association Of Realtors 2019 “Home Buyer and Sellers Generational Trends Report”, millennials now make up the largest share of homes purchased.
As the Washington Post made clear in a story earlier this year, there are some big differences about the trends for this generation. Millennials are more ethnically diverse, have less savings, and are delaying major life decisions such as marriage. As the Washington Post wrote, “All the major life milestones — marriage, children, homeownership — have arrived measurably later for millennials than for the three previous generations for which we have comparable data”. And, as the same article states regarding purchasing, “It took until 33 to 35 for most older millennials to become homeowners. The oldest groups of boomers hit that milestone at 28 or 29.”
But this should all be good news for our industry. Because these delays are now showing in home buying, as this generation moves into its early-30s. And that should be great news for purchase activity in the years ahead.
It’s A Wrap: While 2019 was a year of surprises and forecast revisions, looking ahead at 2020 brings its own set of uncertainty for all of us. Politics, trade wars, global economic conditions and more will affect everything from sentiment to interest rates and the stock market. Here’s to a great year in the rear-view mirror and an exciting one ahead!
David H. Stevens, CMB, is former SVP of Single Family at Freddie Mac, former EVP at Wells Fargo Home Mortgage, former President and COO of the Long and Foster Realty Companies, former Assistant Secretary of Housing and FHA Commissioner, former CEO of the Mortgage Bankers Association.