Lower Rates, GSEs, Non-Prime, Data, and How Tech Companies May Forever Change the Business

Spring Ushers In Lower Rates

“Weekly mortgage refinances spike 39% after huge rate drop”, was the headline for CNBC , positive news for many mortgage lenders who have been struggling over the long winter and equally good news for prospective homebuyers entering the peak buying season. All of this was driven by a quick drop in yields driving interest rates lower. In referencing the weekly applications data from the MBA, CNBC highlights:

  • Weekly mortgage application volume surged 18.6 percent from the previous week and 28 percent from a year ago.
  • Refinance applications jumped 39 percent for the week to the highest level since January 2016.
  • Volume was 58 percent higher than a year ago, when interest rates were higher.

Mortgage applications to purchase a home increased 3 percent and were 10 percent higher than a year ago.

The good news/bad news story here is that rates had the largest one week drop last week in over ten years spurring this activity. The bad news is that rates bounced back slightly this week, which will result in a slowing of new volume. All of this is a reminder that consumers need to take advantage of market conditions when they are good, especially in periods of interest rate volatility, as we are seeing lately.

Will New Efficiencies Forever Change the Mortgage Business?

We have been watching and reporting on how technology and demographics may impact the future of how the mortgage business is done. We interviewed Bill Emerson from Quicken Loans, once an upstart centralized direct to consumer platform that rose to be one of the top lenders in the nation, garnering multiple JD Power awards from the customer experience. We attended the recent MBA technology conference, conducting multiple interviews with breakthrough trend -setting technology- based platforms changing the industry. We have highlighted new Uber like home inspection applications and new innovations across the industry. We even interviewed key industry advisors and sales leaders who threatened that the value proposition must be clear for the traditional sales models in Mortgage Banking to be sustainable.

We continue to wonder if the traditional “brick and mortar” loan origination model will survive over the long term as younger prospective borrower’s preferences around personal contact versus more digitized platforms evolves.

Well, this week we read several stories about the evolution of Zillow expanding into direct home sales and mortgage lending. “ Zillow won’t just help you find a house, it will be your mortgage lender, too ,” headlined the story in Digital Trends.

The company’s Mortgage Business has significant growth objectives under the leadership of Erin Lantz, a Harvard Business School MBA professional who first cut her teeth in mortgage lending working at places like Bank of America and Countrywide, and moved into the digital space creating the perfect combination of skills to join Zillow.

Erin’s focus on the experience for the consumer is clear. In the Digital Trends article, she states: “With Zillow Home Loans we are taking an incredible step forward to deliver an integrated payments platform to complete the financing for Zillow Offers that delivers a more seamless, on-demand real estate experience today’s consumers expect.”

When you look at the resumes of the leadership team at Zillow that has been assembled under Rich Barton, their CEO, what is clear is that this is an organization with deep knowledge of the consumer tech space leading us to wonder whether technology firms that happen to have mortgage as a product will be the basis of disruption in the mortgage finance space in the future.

When we initially posted the story about Zillow on social media, a barrage of attacks came from the mortgage lending community threatening the demise of platforms like this. We atMortgage Media are not sure we agree with these traditionalists as we continue to observe disruption in almost every other industry with similar platforms designed to provide efficiency and improved customer experience.

As Loan Depot CEO Anthony Hsieh posted on social media about this Zillow platform:

We believe the innovative developments in this industry will be profound affecting every aspect of the real estate transaction and will continue to report on advancements in this space as we look forward with excited anticipation at new developments. And while we believe in the value of consultation and expert advice from trained mortgage professionals, we look forward to seeing if and how the delivery of this value proposition might evolve in the years ahead.

 

More On The GSEs?

The pressure continues to rise on the next steps for the GSEs. Fox Business Reporter Charles Gasparino published this story Tuesday about discussions he has had with people inside the administration that states, “President Trump has asked his economic advisers to examine a radical overhaul of Fannie Mae and Freddie Mac, including reaching out to Wall Street bankers in order to explore a complete privatization through an outright sale of the mortgage giants.”

As many pundits are wondering what this means, we have many questions. If true, would the administration rule out banks or other Wall Street titans from being prospective buyers? Would a sale of the GSEs include the charter provided guaranty behind future MBS? Would the sale be processed through a receivership path or some form of recapitalization and release?. As Gasparino notes, “White House economic advisers are looking to reduce the role of the federal government in the mortgage business in an effort to prevent the tens of billions of dollars in tax payer money that was spent propping up Fannie and Freddie during the 2008 financial crisis.”

Gasparino adds, “Sources say that the president is open to at least exploring something more comprehensive for the GSEs: a complete privatization of Fannie and Freddie with no government control and their eventual sale to a third party.”

This story is one of many that have been written since the President directed the Treasury and HUD to develop plans for the GSEs and the GNMA programs. This has sparked speculation and rumors as to what comes next. As Joe Light from Bloomberg tweeted early Wednesday:

At Mortgage Media we will continue to monitor the developments but remain cautious on pathways forward given the many stakeholders involved, the complexity of the issues involved, and the political debate ahead.

In the meantime, however, the Senate leadership announced Wednesday morning that “Leader McConnell has filed cloture on Executive Calendar #87 Mark Calabria to be Director of the Federal Housing Finance Agency for a term of five years.” Confirming the fact that Mark’s confirmation is a priority to this President. With Mark likely to be in his new job in the days ahead, this subject of the GSEs is likely to dominate headlines in industry trade periodicals for some time to come.

 

Non-Prime Continues To Grow

We continue to watch the growth in the non-prime market. It was reported by Inside Mortgage Finance that Chase is structuring a pool of non QM loans, all with DTIs below 43% and mostly from third party sources. While smaller and safer from a credit risk side, it shows the growing interest in non-agency execution which may be driven by an increased investor appetite for these loans and perhaps better all in pricing available in the open market for high quality non- agency loans.

But Non-Prime is also growing in other areas in the Non-QM space. It was headlined by Global Banking and Finance Review that “ Angel Oak Capital Advisors Breaks Record Once Again by issuing $621 Million Non-QM Securitization.”

In their 10th non- QM securitization the senior tranche was rated AAA by Fitch and DBRS. What’s notable is that this securitization is Angel Oaks first securitization that complies with European Union risk-retention regulations broadening the ability for European investors to participate in the sector, a move that will only broaden investor interest and demand in the non- agency space. With a weighted average FICO of 712 and an average loan size of $343k, it is clearly targeting what would otherwise be the conventional space.

 

Data Can Be Dangerous

We are watching the discrimination sanction filed by HUD against Facebook as reported in the Washington Post. What stands out is that housing should always be viewed differently than traditional consumer products as homeownership and rental housing comes with a strict legal framework to prevent steering, discrimination, or redlining. As reported: “HUD claimed that Facebook mines users’ extensive personal data and uses characteristics protected by law — race, color, national origin, religion, familial status, sex and disability — to determine who can view housing ads, even when it’s not the advertiser’s intent.”

HUD also notified Twitter and Google that they were studying these practices on their platforms as well.

Why this matters? The use of sophisticated algorithms to match consumers with products that may best align with their interests based on things like geography, age, sex, search history, and more may be fine for matching shoe and clothing companies with those registered to a social media platform, but it is an entirely different thing when it comes to housing.

This has challenges for those advertising or promoting property on a social media platform as well. Suppose for example a Realtor promotes a condo in Arlington, Virginia and adds several hashtags or links to the promotion with phrases that would target a segment of viewers based on age, sex, income, sexual preference, marital status, and more.? The wake- up call of this action should be studied through the real estate and mortgage lending sectors with appropriate policies established to protect against even unintentional discrimination in housing. HUD penalties can be severe and apply per each incident.

As we recognize new and exciting technology developments to aid consumers looking to rent, buy, or borrow, we see this as cautionary that appropriate legal oversight is needed as a lease to protect both consumers and institutions engaged in this process of buying or renting a home.

 

Finally, Advocacy

We end with recognition that this week marks the MBA National Advocacy Conference. The event drew some key speakers including HUD Secretary Ben Carson.

National Mortgage Professional reported that the Secretary focused on affordable housing stating, “Solving affordable housing challenges requires a team effort,” Carson said. “It’s been said that, ‘the bigger the dream, the more important the team’–and few ambitions are more compelling, or necessary, than that of the American Dream.”

The week’s events included a reception at the Library of Congress, meetings with members of both the house and the senate. And other speeches to the attendees from members of congress including Senator Doug Jones (D-Alabama) who sits on the Senate Banking Committee.

We note the importance of advocacy in light of the enormous role that public policy has on the state of our industry. Mortgage Media will continue to dedicate time to focus on the issues critical to all who work in the field of housing, real estate, and finance.