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Mortgage Originations: The Good, The Bad, & The Ugly in 2014

 

The MBA also gave the industry's "glass-half-full types" something to look forward to this past summer. The trade group highlighted the fact that existing home sales grew to 4.9 million units in May (as reported by the NAR). The MBA also noted that new home sales surged to a 504,000-unit pace in May, up from 425,000 in April, according to Census Bureau data. This increase marked what the MBA calls the "highest pace of new home sales since May 2008."

The Q2 turnaround wasn't grand, but it definitely painted a rosier picture when considering overall consumer confidence plummeted just months before in the first quarter of 2014. First-quarter gross domestic product contracted by 2.9 percent on lower consumer spending and a steep trade deficit, the MBA explained in a July update.

While those facts alone may be perceived as a wet blanket for the housing market, improvements in the second quarter at least allowed some room for wishful thinking.

The MBA overall anticipates real GDP growth will reach 1.5 percent for 2014. Furthermore, consumer demand seemed to pick up in the second quarter, the trade group added.

Some of the recent gains stem from stock market improvements and home equity growth. In fact, many of the homeowners who refinanced during the wave of 2013 started to experience some benefits of having more monthly cash flow, the MBA suggested in its July commentary.

Voss notes that refinancing may have declined substantially this year, but it is more in line with historic averages. What concerns him and the rest of the industry is the reluctance of both move-up buyers—those who already have homes and who are looking to upgrade—and first-time buyers. Neither one of these groups is aggressively looking to buy homes and take out mortgages despite fairly low interest rates.

In the younger age bracket, this ongoing reluctance is attributed to the well-known economic struggles plaguing this group of Americans.

"Underemployment is definitely a problem," Voss said. "It is a hidden killer." He added that potential buyers "are not getting the bonus." "They may have a job, but they do not have the same salary."

And if they have a home, they are not going to trade-up if they fear the economy is shaky, he explained. They are going to stay in place, and maybe invest in home improvements. For this reason, the demographic of the average buyer is shifting somewhat.

The New Buyer

"The average customer this year is older," Williams noted. "First-time homebuyers in their late 20s to early 30s are struggling due to a number of factors, including high student debt, tighter credit, and the job market. Many college graduates have struggled with low wages or part-time jobs coming out of school. This discouraged group still represents over 12 percent of the labor force."

This age group faces other major hurdles to homeownership, including stifling student loan debt and an inability to qualify for a home loan in the post-Dodd Frank world.

"With mortgage lenders focused on debt-to-income ratios, college loans are a huge factor," Williams explained. "Overall student debt is at a record high at over $1 trillion, which is causing an increase in renters and fewer 20-something homebuyers. Successful homebuyers in their late 20s and early 30s were those who paid down student loans, had secure full-time jobs with better incomes, and didn't suffer from weak credit scores. But that's another reason for a low turnout in homebuyers. Some people were hit hard on credit scores due to the financial crisis and have not completely healed. Once their scores improve, and loan qualifications loosen somewhat, we'll start to see a stronger housing market."

Voss says there is another disturbing trend afoot. Since parents now have less equity in their homes to help students, fewer parents are able to tap into home equity to pay for college. As this occurs, student debt continues to soar, delaying homeownership even more once the students graduate.

Looking Ahead To The Post-Baby Boom Originations Era

Relying on older homebuyers is not enough to make up for sagging demand in other demographic groups, industry experts suggest. "[W]e did see more Baby Boomers and empty-nesters move into condos and smaller spaces because they just didn't need that much room," explained Williams. "Many of them were all-cash buyers, because they had enough equity in their homes to pay all cash for their new homes." This cash-buyer influence removes the need for mortgage originations, cutting into another potential channel for originations growth.

While Williams believes younger buyers will be able to return when their credit scores return and their balance sheets heal, no one has a definitive time frame as for when that is expected to occur.

Voss believes thinking ahead and forging relationships with future homeowners may be the only way to loop in tomorrow's first-time buyers, who are simply not ready to buy yet. "It's very hard for us to think ahead," he said of the industry. "We need to work with Realtors and the financial industry," he added. The goal of these needed initiatives would be to connect to younger buyers living at home and help them save and plan for a mortgage, Voss explained.

"It is something that needs to happen," he added, while conceding that the industry has been less aggressive in planning ahead on this point.

For now, Voss is worried about trends that have saved the originations industry in the past, which for now, appear to be somewhat hidden or unknown. "You could always count every four years on a refinance wave," Voss said. But that is no longer as certain, he told the MReport.

Furthermore, it is difficult to see an economic boom time ahead that could lift the originations side out of the doldrums, he explained. "You don't see something horrible or good, just a long period of attrition."

About Author: blakestepan

CMB, SVP of compliance at Indecomm Global Services, is a recognized expert in consulting and fulfillment services to residential mortgage lending clients. She has actively served the mortgage banking industry as a governor on several Mortgage Bankers Association boards. Wheatley received her designation of Certified Mortgage Banker (CMB) in 2003 and the designation of Accredited Residential Underwriter (ARU) in 1993 from the Mortgage Bankers Association of America. She has a master’s degree in sociology from Johns Hopkins University and a bachelor’s degree in history from Bethany College.
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