Is the Refinance Boom a Sugar High?

Joe Mellman is the SVP and the mortgage business leader at TransUnion, overseeing the development and execution of the company's mortgage strategy and product suite. This includes a focus on helping mortgage and HELOC lenders improve their new customer acquisition, retention, cross-sell, loan product creation and refresh, origination, servicing, and capital markets functions. 

Prior to his current position, Mellman held a variety of mortgage financial services and capital markets product management and strategy roles at TransUnion. Before joining TransUnion, he held positions in consulting at McKinsey & Company and PricewaterhouseCoopers. 

Mellman spoke exclusively with MReport on details on Transunion’s Q4 2019 Industry Insiders Report, including the debt-per-borrower ratio, inventory concerns, and how the refinance boom is like sugar. 

 

Is the increasing debt-per-borrower ratio a concern for the industry?

I think it's something to keep an eye on, but I don't think it's particularly a concern at this exact moment. To give a little background, if you look at the context of that, over the last three years we've been seeing average mortgage debt per borrower rise anywhere from two to 3% on a year-over-year basis pretty consistently. That’s not a huge surprise - a lot of that is a reflection of HPI going up. And more recently, cash-out refi has also contributed to that, which is also going to raise average new account balances.

When we think longer term, it does suggest a potential structural problem if new account balances are rising higher than wages are going up. The market can absorb this disconnect for bursts of time, but in the long run, there has to be an equilibrium between wages and monthly payments that consumers can afford - and resulting home prices. Right now the trend is diverging a bit.  I don't think it's a pressing concern like this quarter, but it is something we should keep an eye on.

The other reason I'm not as concerned about it right now is we also see home equity at record highs. There's a massive amount of home equity out there – over 15 trillion dollars. That indicates that consumers are not over their skis as we saw in 2009.  So as long as consumers don’t over-leverage and are still able to afford monthly payment in line with their wages, we should be okay. Having said all that, we are still seeing a widening of the spread between monthly payments and wage increases, so we still need to keep an eye on things.

  

Do you expect to see purchases from Gen Z buyers rise in 2020? Or will rising home prices deter them from entering the market?

It’s not an “or” question. It's an “and” question and the answer is yes.  For the latter part, absolutely rising home prices are going to deter Gen Z first-time homebuyers more so than any other generation. The hardest step in entering into the home market is putting together that down payment and home prices are a huge driver of the difficulty in doing that. Having said that, we've done surveys and the demand is there—they want to purchase homes. Additionally, there's a natural demographic shift every year that goes by. Bit by bit Gen Z is getting a little older, getting more into that prime home-buying age and also becoming more economically established. There is a wave of maturity that passes each year for Gen Z that helps them get into that purchase market, notwithstanding the headwinds they're going to face.

 

Is the rise of mortgage delinquencies an immediate concern?

When we look at a year-over-year basis, mortgage delinquencies are still down - delinquencies are still less this quarter than they were compared to the same quarter a year ago. When you look quarter-over-quarter though, they did go up over the last two quarters. That is a break in the pattern we’ve been seeing. Going back to 2009, virtually every quarter had a quarter over quarter decrease with a few exceptions. 

Is this a problem to look out for? It's too early to say it's a problem given that we did have year-over-year declines in delinquencies, but if you look at a curve, we've had this steady downslope of delinquencies decreasing pretty consistently. It started to flatten out these last two quarters and so the question will be, is this a blip and we're going to continue to see declining delinquency rates, driving us to even lower historic lows? Or are delinquencies flattening out to where they are now and we're going to see that consistently for a while? Or is it an inflection point where we're going to see delinquencies start to rise? The reality is it's too early to tell one way or the other, but it is worth looking at. I'm not concerned about it yet, but I do think we should keep an eye on it.

The hardest step in entering into the home market is putting together that down payment and home prices are a huge driver of the difficulty in doing that. Having said that, we've done surveys and the demand is there—they want to purchase homes.

 

How long can refinancing kind of carry or bolster the mortgage origination fields and is that good for the industry?

It's a clear question with a complicated answer. It's very hard to tell how long—there is a shelf life on a refi boom. There are only so many consumers that are in the money and going to be able to take advantage of low-interest rates. If interest rates don't keep on dropping, which they may not, interest rates will probably be flat throughout the next year. There is a finite number of consumers that can take advantage of that. Though it’s very hard to know, I suspect that we're probably going to see the refi volume start to taper off about halfway through the year —maybe the beginning of Q3 2020. That's the first part of your question.

Is this good for the industry? That's complex. This is maybe an imperfect analogy, but you can think of the boom as sugar.  It's a nice boost and makes us feel good. It’s been really good for consumers—they're making lower payments. That's great. And lenders love it. There's a ton of volume that's going through their shops right now and they're not having to fight for what is coming to them. They've even increased the capacity to handle this added volume. That's the sugar hit. But just like sugar, eight hours later you start to feel the effects and maybe you're not feeling so good. The same thing could happen with this refi boom.

Some of the downsides we might see, from the consumer side, is that once you're in those low-interest rate loans, borrowers can feel locked into their existing home because they have that low-interest rate.  So five years from now when they're looking to move up to the nicer neighborhood or the larger house, if interest rates have ticked up, it's going to be very hard to pull the trigger to make that move up. Not only are they going to have to spend more for the home, most likely, but now they're going to have a higher interest rate. They're facing a double hit. For the consumer that's in the home, they can feel locked in. That also can cause trouble for incoming prospective first time home buyers. Because now if you have fewer consumers leaving their starter homes to get into move-up homes, there's going to be less supply for first time home buyers to come in and take those cheaper homes.

So longer term we may see some stifling effects from the refi boom three or four years down the road. That's from a consumer perspective. From a lender perspective, they are loving life now with high volumes and they've increased capacity to handle it.  But once the refi boom dries up they're going to have this extra capacity and it's going to be more of a question around how can they drive additional volume through their shops and utilize that capacity. They are going to have to find those purchase buyers but also looking at who hasn't refiled yet. There's a whole education process around consumers that aren't aware of things and didn’t follow the refi opportunity. 

 

What are your thoughts on kind of the inventory struggles currently facing the housing market and particular to that first-time buyer?

The reality is that in many of the major metropolitan areas where the jobs are and where generally younger people want to live, there is a supply constraint. It can be due to geographic constraints like Manhattan is only so big. It can also be due to municipal constraints. Limits on high-density housing and urban development add to these supply constraints. 

The third point is that builders also tend to make more money on the more expensive homes rather than the less expensive homes, so there’s that incentive piece as well.  I think that the path forward to open up supply is probably going to be some combination of municipal changes to allow more higher-density housing to be developed. That's very hard to do. Most people that already have a home and who are the voters, don't like that. It increases congestion and potentially lowers their home values. So it's a very sticky problem.

 

For the consumer that's in the home, they can feel locked in. That also can cause trouble for incoming prospective first time home buyers.

 

What can be done, if anything to boost the number of purchases?

There's a lot that can be done. Independent of whether the supply picture changes or not, we've done surveys that have shown that consumers want to buy homes, but they think it's harder to do than it actually is. They consistently think that they need a higher credit score than they actually do. They think they need a larger down payment than they actually do.  And they think that they need a higher income than they actually do.

There is an opportunity for lenders to find the consumers that are interested in getting into a home and then investing to educate those consumers around what's actually required to qualify for mortgages. At TransUnion we've been focusing on helping lenders identify which specific consumers are really interested in the mortgage and then helping the lenders get specific information to help a specific consumer and educate them on their specific situation. As we start to see more of that and more consumer education, more consumers are going to realize that it might be easier to get into a home than they had thought.