We sat down with industry veteran Joseph Melendez to learn how changing buyer demographics, technology, and the new administration are shaking things up. Melendez is the CEO of ValueInsured, a down payment protection provider based in Dallas. He has more than three decades in the insurance and financial services industry.
What kind of impact will rising mortgage rates have on originators?
We're in a completely different market this year than what we had last year, particularly from the standpoint of the mix of business. We now have a dramatic decline in refinance activity given that rates have been rising, and most homeowners who wanted to refinance have already done so. That is basically forcing the industry to renew their focus on new home purchases.
We've also seen industry consolidations. For instance, we saw recently the Prospect Mortgage operating platform get acquired by HomeBridge. I think you're going to see more consolidation activity like this from the standpoint of driving efficiency because now you have all these loan officers who were previously involved with refinances having to shift gears and get involved in new purchases. We will have substantially fewer transactions being chased by more lenders and more loan officers going forward.
And it's not just loan officers; it's also all of the new, innovative technology platforms that are coming about and trying to innovate their way into taking market share from the traditional platforms.
What technology is having an impact on the industry right now?
We're seeing much more activity in the digital space. Last year we had Rocket Mortgage through Quicken and we had Guaranteed Rate promoting their digital mortgage platform. That whole platform continues to expand rapidly, both from the standpoint of what Fannie Mae and Freddie Mac are doing in introducing innovative end-to-end mortgage processes that make it easier for the consumer to get a mortgage, as well as the fintech revolution that’s originating out on the West Coast and even here in New York. In New York, companies like Better Mortgage are coming up with new ways to originate mortgages that are more in line with the millennial mindset of doing things on their phone. When I say on their phone, I don't mean verbally. I mean completing a loan transaction on their mobile without any human interaction.
I think we're seeing more innovation, with some of them driven by regulations. There's been a drive to have the mortgage process become more end-to-end integrated, thereby eliminating potential defects in the mortgage origination process. All these things are leading to more intense competition for what is essentially a commodity product—a mortgage. To become a leader of this next generation of mortgage transactions requires new solutions that offer homebuyer empowerment and easier access to credit, affordability, access to parent lending programs, down payment protection programs, and no mortgage insurance programs.
These innovations will help more millennials get into their first home or their first trade-up home. Millennials have lived their whole life with technology and flexibility, so it only makes sense that this is how they want to buy homes.
Are there any current products or solutions that are really bringing millennials to market lately?
I think we've seen it from the GSEs, Fannie Mae and Freddie Mac, by offering more affordability and low-down payment mortgage programs. Fannie and Freddie have also expanded to accept broader gifting. For instance, we're seeing multi-generational mortgage products that allow multi-generational families to be in the same home and have that income count toward the loan. We've also seen down payment protection, which is a product that helps people have the confidence to put money down on a house knowing that their money is protected if their market turns against them.
These innovations are providing differentiation targeted at modern homebuyers so that the conversation for today's loan originator isn't about points and rates. Instead, the conversation is about what am I doing to get you into the home you need, how do I protect you while you're in that home and how do I ensure that in the future you have a way that you can move regardless of market conditions? Whoever can make their loan product less of a commodity will win more market share.
What exactly is a down payment protection program?
Down payment protection covers a homebuyer's down payment against risk of loss for seven years from the date of purchase, even if the owner needs to sell when the market happens to be down. What we're finding in all of the market research that we've done is that the American Dream is still owning a home, but how they want to own has changed. Today’s homebuyers are not going to be in the same house for 30 years. Instead, they will likely be in five or six homes over that same period. Millennials’ average job tenure is 2.8 years. 86 percent plan to move in less than seven years. This exposes them to more risks to market fluctuations if they happen to need to sell when their local housing market is down. Currently, the industry doesn’t let them own a home while still enjoy mobility and flexibility.
There are many different programs available to a homebuyer, but in the end, it’s all about meeting the needs of a new generation who will own their home very differently than the previous generations.
That’s what I think it’s going to take for today’s mortgage originators to compete, because otherwise, there’s always going to be somebody who is willing to sell something at a lower rate, with fewer points, and it becomes a race to the bottom. That’s just not sustainable.
Are there any other trends that you think will play a role in 2017’s market?
Big consolidations will be one trend as I mentioned, when you have too many people chasing too few loans. From a historical standpoint, rates are still incredibly low. We could have a very similar situation to the ‘80s where we had economic growth, wage growth, home price growth and rising interest rates. However, it all worked because there was balance – with all trends going upwards enabling home prices to be supported with wages.
We could be in the early stages of an ‘80s rerun, but we certainly see some potential risks with delinquency rates trending up and wage growth not quite heating up just yet. Overall, I think we’re going to have a fairly robust 2017. Homes are still the greatest wealth-builder in the long run.
One trend I find very interesting is parent gifting. We have a large population of Baby Boomers entering downsizing and retirement age. According to our research, in the 65+ group, two in three plan to down size their home in the near future. In this sellers’ market, that’s a lot of home equity and influx of cash for Baby Boomers and empty nesters. Our research tells us seven in ten millennials expect their parents to help them buy a home, more importantly four in 10 parents say they plan to help. With the run-up of the stock market in recent years and the home equity, millennials have a very powerful financial backer in their parents. We have this pent-up demand in first-time home buying, millennials delaying marriage and having children. I think we will see a rush to catch up while interest rates are still low in the next few years, and with parents who are in the position to help. Again, I would expect higher demand for these gifting-type programs in conjunction with down payment protection. The parents do not want their money lost if their child needs to move for a new job and the market happens to have a temporary downturn. They want to make sure the down payment is there to help their child upgrade to their next bigger home to accommodate more grandchildren, for instance, or for any other future needs. When this gift is protected, both the child and the parents have more flexibility.
Do today’s homebuyers care about branding or choosing a big-name lender?
Homebuyers don’t have brand loyalty, otherwise you would see them borrowing from their personal banks. But we all know the big banks are losing shares to non-bank players, many of whom are complete unknowns to homebuyers before they apply for a home loan. It’s a commoditized market, and what they’re looking for are those unique differentiators–rates, points, plus more. Plus more risk reduction, plus more personalization, plus more flexibility and control. Whoever figures out what plus mores are personally meaningful to the homebuyer will win.
How do you think the new administration is going to impact the industry in the next few years?
I think the administration right now has been very clear that they want to roll back regulations. We don’t know yet what is the future for Fannie Mae and Freddie Mac. Do they become something similar with what the Johnson-Crapo bill was talking about: a new entity, a new government model? We have the potential implications for CFPB and regulation there. These are still unknowns, but I think overall the lender community is very optimistic. They expect some of the regulatory pressure they experienced over the last several years to be minimized. Some of the regulations have made it more costly for them to originate a loan. If some of these regulations can be relieved and thus lower costs, lenders can be more competitive and the consumer will benefit in the long run.
Overall, I think it’s going to be a good year. It won’t be a banner year like 2016 because we are on track to see $400 billion reduction in originations because of the change in refis, but with all of the innovation that’s coming out this year and the consolidation, I think that overall it will be a positive year. Home buying will continue to be a terrific investment for Americans as long as they take advantage of new innovations to give themselves more flexibility, mobility and control of their own home and finance.