By Rod J. AlbaThe mortgage industry is expecting a bouncy ride in the next several months. While the sources of anxiety in mortgage lending operations are varied, they will all require careful attention (and in some cases calibration by bankers) to ensure profitability in the coming months.
Rates. Top on the list of concerns expressed by panelists and participants at the recent American Mortgage Conference was rising interest rates. The immediate worry is diminished production volume and increased competition via nonbank affiliations and arrangements (joint ventures, marketing services arrangements, etc.). Inflated interest rates have turned 2022 into a “transition year,” moving the industry from a refinance market to a purchase market. According to keynote speaker Mike Fratantoni, the Mortgage Bankers Association’s chief economist, there is no assurance on how far the Federal Reserve will increase interest rates. He observed that inflation is likely to persist. “Although job markets are strong, inflation rates are high, placing ambiguity on where interest rates will ultimately settle,” Fratantoni said.
Affordability. This top concern contributes to the second: home price increases and loss of affordability. According to the most recent Case-Shiller index release, which tracks home prices in 20 major metro areas, home prices were up 20.2 percent year-over-year, while the Federal Housing Finance Agency’s house price index showed that the price of homes bought with GSE loans rose 19.4 percent YOY. This means that expenses are rising across the board for anyone wanting to purchase a home—and lower-income populations will suffer the most. “Higher home values coupled with increased interest rates create a real challenge for affordable housing,” said Teresa Gregory, president of Traditions Mortgage at York, Pennslyvania-based Traditions Bank and chair of ABA’s Mortgage Markets Committee. “One lender in our committee indicated that customers in their market can afford about 65 percent of the house they could afford just last year,” she observed.
Loan Sustainability. Following on the economic trends above, bankers also identified the long-term sustainability of home loan servicing as a looming concern. The worry, according to Gregory, is that increasing prices put stress on families and weaken their ability to manage mortgage credit. “Servicing operations will have to be attentive to this development,” she warned.
Appraisals. The fourth worry identified by lenders is increasing appraisal shortages affecting multiple housing markets. Banks report that appraisal options are dwindling in many jurisdictions, leading to difficulties in home closing transactions. “Home purchases may be significantly delayed and may even fall through if you can’t find a licensed and approved home appraisers,” said Tyler Gilday, SVP at Mascoma Bank and vice chair of ABA’s Mortgage Markets Committee. Appraisers report that they face very increased demands and are charging more in an attempt to reduce the number of orders. “In light of this shortage, the price for appraisals is increasing very sharply,” said Gilday. According to market experts, appraisers are retiring in a hurry and are not being replaced at rates that will sustain increased demands.
Servicing. The fifth concern cited during the conference was continuing difficulties related to mortgage servicing enforcement and compliance. Even though it appears that the worst of the COVID-19 pandemic is behind us, servicers should still expect significant loss mitigation activity, and therefore, sound and compliant loss mitigation processes should remain at the forefront of servicers’ minds. “Simply put, the regulations related to loss mitigation are voluminous, complex and ever-changing, and servicers must be prepared to handle them with augmented attention from regulators,” said Jason Bushby, a partner at Bradley. Treliant’s Carl Pry added that “regulators will also be placing a focus on the charging of mortgage servicing fees, fair servicing, Limited English Proficiency concerns, foreclosures, and credit reporting.” In short, there will be a red-hot focus by regulators on mortgage servicing activities, and this poses elevated risks to servicing banks.
Policy Environment. Finally, a significant source of unease stems from the increasingly anti-bank tone coming from the CFPB. ABA’ President and CEO Rob Nichols opened the conference by detailing some of the most troubling comments and actions from the bureau. First, Nichols pointed to a request for comments on what the CFPB calls “junk fees” in which it draws on a series of deeply flawed premises regarding the market for consumer financial services and the use of well-disclosed and highly regulated fees. Second, Nichols pointed to recent examination manual changes that vastly expand the reach of CFPB enforcement powers beyond that assigned by Congress. Finally, Nichols criticized the quiet release of revised rules of practice for administrative adjudication that allow Director Rohit Chopra to make decisions in enforcement actions that effectively allow the director to play both prosecutor and judge in all cases. Together, these actions point to “carefully choreographed” media campaign designed to unfairly scare consumers and serve as a pretext for a politicized enforcement agenda, Nichols said.
Looking ahead to the second half of 2022, bankers and mortgage lenders will face a variety of headwinds. These challenges will affect all markets, but will have local distinctions that will be important for market participants to understand as they navigate the uncertain road ahead.
Rod J. Alba is SVP for real estate finance at ABA.