Most industry watchers believe that the housing market finally turned the corner in 2012, stabilizing and beginning a sustainable recovery after a protracted, seemingly endless down cycle. The mortgage industry also prospered, with over $1.7 trillion in originations, thanks to a refinancing boom. All of this is welcome in an industry that’s been desperately in need of positive news. The question is whether that positive energy will carry over into 2013.
A Look at Housing
As 2012 came to a close, virtually every meaningful metric used to measure the housing market was trending in the right direction. Pending sales were at the highest level since 2007 (except for two brief, artificial – and unfortunately temporary – spikes driven by the Obama Administration’s homebuyer tax credit stimulus programs). Sales of existing homes were up; sales of new homes were up even more. Inventory levels were incredibly low; in some parts of California, there was less than one month’s inventory available for homebuyers. Median home prices were increasing, but even at these new higher prices, affordability levels were still near the best levels they’ve ever been. Housing starts – notably those of single-family homes – were higher than they’ve been since the beginning of the downturn. Foreclosure actions were down by 20% from the previous year, and even further from the all-time high set in 2010. And delinquencies – especially newly delinquent loans – were down significantly, indicating that the pipeline for new foreclosures was finally slowing to a relative trickle.
So, all signs pointed towards a housing market that had finally stopped its downward spiral, and was now poised to begin a steady, if slow and uneven, path towards growth.
But it’s also important to keep all of these positive numbers in perspective. Even with the number of home sales increasing, the year ended with around 4.8 million units changing hands – better than the 4.3 million in 2011 and the sub-4.0 million at the bottom of the market, but still a far cry from the 7.1 million sold during the peak year of the boom. Prices were improving, but had rebounded only to 2003 levels, meaning that essentially nine years of equity had vanished and not yet been recovered. Foreclosure actions amounted to about 1.5 million filings, well off the prior year’s 2.0 million, but still about three times what we’d see in a normal year, given the number of active mortgages. So the numbers, while encouraging compared to how very weak they’ve been in recent years, were still more indicative of a market in recovery than a market that had fully recovered. While housing truly is in recovery, it remains weak enough that one major economic blow could send it right back into another down cycle.
The market also faces two strong headwinds. The first is the stubbornly high level of unemployment, and an even higher level of “under-employment,” where workers take on part-time work and odd jobs in an effort to just barely make ends meet. Until unemployment levels dip below 6.5%, it’s unlikely that we’ll see major movement in home sales. The second is the lack of available credit, particularly for borrowers whose credit was impaired during the Great Recession, or those who don’t meet today’s more stringent lending requirements.
The most likely scenario for 2013 is that home sales inch up slightly, probably to just about 5.0 million units, and that home prices move up another 4-5%. While not breathtakingly exciting, this represents the first time that year-over-year growth in both sales volume and prices has been the consensus forecast since 2006.
Implications for the Mortgage Industry
Today’s mortgage industry bears little resemblance to what the industry looked like during the boom years. In fact, in 2012 it didn’t even look very much like it did in 2011. While the Federal Reserve continued to take action ensuring that interest rates remained at or near historically low levels, origination activity didn’t experience the kind of explosive growth many had anticipated.
A big part of the reason for this is that much of the activity in 2012 was refinancing – in fact, according to the Mortgage Bankers Association, over 80% of all originations were loan refinances. A huge percentage of this business was driven, either directly or indirectly, by the government’s HARP and HARP 2.0 programs, which provided easy refinancing at market rates for borrowers who were upside down on loans owned by Fannie Mae and Freddie Mac. Unfortunately, this wave of refinancing isn’t expected to last past the first quarter of 2013, and purchase loans aren’t expected to pick up the slack, since home sales aren’t expected to increase significantly. Forecasters expect some $400 billion less in origination activity in 2013 than took place in 2012.
The companies offering those loans will look very different than lenders did a few years ago too. The large retail banks, with the notable exception of Wells Fargo, appear to be in full retreat from the mortgage business. And even Wells Fargo has largely exited the wholesale or correspondent space, along with Bank of America, Citi and others. This has created opportunities for non-bank lenders (such as Carrington, the company I work for), who are filling the void created by the retreat of the large banks from this market. In turn, this realignment will probably create new opportunities for mortgage brokers, who will be well-positioned to help borrowers navigate the new lending topography, matching these customers with lenders who have the right products and services to successfully execute their transactions in a timely basis.
These products, by the way, will still largely consist of conventional loans: in the continuing absence of a robust secondary market, well over 90% of all loans issued involve either the FHA, Fannie Mae or Freddie Mac. This does little to help borrowers looking for jumbo loans or deserving borrowers who need loan products outside the parameters of what the agencies will allow. While private capital will ultimately come back to the market and support these types of non-agency loans, it’s unlikely that investors will hurry back into the market until there’s more clarity about what the regulatory environment will be, and an ability to thoroughly understand what level of risk is going to be involved – put-back risk, compliance risk, litigation risk, headline risk, etc. – in the purchase of whole loans or securities.
A Few Final Thoughts
The elephant in the room, of course, is the Federal Government. As this is being written, there is no agreement on a plan to avoid the so-called Fiscal Cliff scenario. Going over the cliff could potentially have a devastating impact on the housing market, and by extension, on the mortgage industry. Even if the cliff is avoided, the tactics agreed upon to come up with the needed mix of revenues and cuts may well impact the industry. Will the mortgage interest tax deduction be eliminated, or capped at a level too low to support high-cost markets like California, New York, Florida, Illinois and Connecticut? Will the Debt Forgiveness Act be allowed to expire, making short sales – and even loan modifications – problematic for cash-strapped borrowers, and leading to an unexpected wave of foreclosures?
How far will the CFPB decide to push QM rules to make loans “safer” at a time when the industry has already virtually eliminated risky loans? Will down payment requirements, debt-to-income ratios and other criteria be so tight that even fewer borrowers will have an opportunity to own a home? Will there be safe harbor provisions for lenders who follow the QM rules? Or will the CFPB open the floodgates for potential litigation by borrowers later, making loans more expensive and more difficult for all borrowers to get?
And are we any closer to understanding what the final disposition of the GSEs might be – what their role will be in the near-term, and what they will become once the anticipated “wind-down” is complete?
Probably more questions than answers, unfortunately. But the housing market has shown its resilience by beginning its recovery sooner – and doing it more quickly – than many industry analysts had predicted. Continued growth can only help stimulate lending, leading to a healthy mortgage industry. Perhaps, with all due respect to Triskaidekaphobics, 2013 will be a year in which luck continues to smile on both the housing and the mortgage markets.
[caption id="attachment_13070" align="alignleft" width="150"] Rick Sharga[/caption]
Rick Sharga, Executive Vice President, Carrington Mortgage Holdings, LLC. One of the country’s most frequently quoted sources on foreclosure, mortgage and real estate trends, Rick has appeared on NBC Nightly News, CNN, CBS, ABC World News, CNBC, FOX and NPR. Prior to joining Carrington, Rick spent eight years at RealtyTrac, where he was a Senior Vice President, responsible for marketing, business development and data operations. Rick is a member of the National Association of Real Estate Editors and the USFN, and a member of the Board of Directors of REOMAC. He is also President of the Technology Council of Southern California and on the Advisory Board of Default Servicing News.