By Dan Green, Mortgage Cadence
Three factors will heavily influence the mortgage market during 2013. Two of them are immensely positive for credit unions and for our industry overall. The third is a reflection of the mortgage market generally, and, when seen in a certain light, is positive as well.
Factor One – Refinance
Yes, refinancing will continue in 2013. The Mortgage Banker’s Association’s (MBA) January forecast is bullish through the first half of the year, less so in the second half. Why? Two reasons.
First, rates remain abnormally low. Homeowners who refinanced last year are refinancing again, perhaps for the last time. Ever. Let’s face it, with a mortgage rate in the mid- to high 3% range, why would any homeowner, unless forced, give it up? Which leads to a sobering fact: many of us may have seen the last refinance wave of our careers. Coping with this eventuality is covered in the second factor.
While the MBA may only be bullish through the first six months of the year, there is one reason to believe robust refinance will be a year-long phenomenon: the Home Affordable Refinance Program (HARP). HARP helped 1 million or so homeowners in 2012, up from the 900,000 it helped from 2009 through 2011. These aren’t bad numbers. Though, before we congratulate ourselves, recognize that they belie the opportunity: somewhere in the broad range of 2 to 7 million is the number of homeowners who potentially remain HARP eligible. That is a lot of loans. Considering this year’s entire market is expected to produce about 7.5 million mortgages, HARP could represent 25% to more than 90% of the total.
Why more HARP? It is tactically good business from a pure volume perspective. Helping underwater homeowners in the last twelve months of the Program could almost equal an entire year of production. It saves them money, too, anywhere from $100 per month to more than a $1,000. Like all mortgage loans in this rate environment, they are profitable, too. HARP is a win for members, your credit union and your community. Get engaged, this is an important strategy for 2013.
Factor Two – The Purchase Market
All lenders, credit unions included, have been enjoying the refinance environment since it started in late 2009. This period of refinance has gone on far longer than any other in history which is fine because it was so necessary. Many more homeowners are now in mortgage loans they can afford. As a result the housing market is moving on.
What it is moving on to might be one of the longest purchase-money markets since post WWII. There are two reasons for this. First, just about everyone who could have or should have refinanced has, forever diminishing those types of loans from the market. Second, consumers have been putting off the housing decision since 2007. Here’s a great example: formation households over the past five years have been at record lows. The housing market, the employment situation and the economy have caused people to put their lives on hold, until 2011. More than 1 million new households are once again forming every year. Their need for housing will help drive the recovery, and your lending business. This segment, broadly defined as first-time home buyers, demands your strategic planning attention. They serve the triple purpose of growing mortgage lending volume, decreasing the average age of credit union membership while increasing demand for all other products and services you offer. At no time in recent history have first-time homebuyers been so important to credit unions. At no time in history have you been so important to them: today’s borrowers look to lenders they trust. That’s the definition of a credit union.
It may take the first six months of this year to truly ignite the purchase market. If rates slowly rise as they are expected to, borrowers will engage to take advantage. Housing prices are on the rise, too, which will also excite demand. Be ready, 2013 is the start of a long-running purchase-market. Your credit union needs to be part of it.
Factor Three – Factor Three – Regulation, a sign of the times
At least three mortgage regulations profoundly affect housing finance now and long into the future. None of the three take effect this year, in fact, we have about one year to get prepared to deal with:
1) New Disclosures. The disclosure changes also known as Know Before You Owe will not take effect until 2014 at the earliest. They represent, however, a seismic shift in how mortgage rates, fees and terms are communicated to borrowers. No more Truth-in-Lending Statement (TIL), no more Good Faith Estimate (GFE), no more HUD-1 Fee Itemization. In their place are new Loan Estimate and Closing Disclosure Forms designed by the Consumer Finance Protection Bureau as mandated by Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). While credit unions won’t be disclosing using the new forms during 2013 time will be spent preparing for their introduction during 2014.
2) Servicing Rules. New servicing rules were announced last week. These are sweeping changes, designed to make sure homeowners and their loans are managed carefully, especially those who become delinquent and move toward default. Two things to note. First, these changes take effect in January 2014. Second, they only apply to servicers with portfolios in excess of 5,000 loans, which means that less than 200 credit unions are affected.
3) Qualified Mortgage Rules. The definition of what constitutes a Qualified Mortgage was released last week. Determining whether a mortgage is a qualified mortgage for purposes of the regulation boils down to an essential test: the borrower’s ability to repay based on thirteen or fourteen criteria. It’s somewhat more complicated than that, yet the point is the Rules stand to change the way we lend, how we lend and the products we use to finance homes. Complying will take time this year so we’re ready for next year.
Despite the extra effort and cost to prepare for and lender under these regulations credit unions can see them as positive. Why? Take the Qualified Mortgage Rules, for instance, while they will change lending practices, our industry practices are philosophically close to their intent: we must know borrowers can afford to repay their loans before we close their loan. This is the very essence of lending, something credit unions never forgot, even during the heady days of last decade’s housing rush. There’s another reason, too, that new regulations could be less stressful for credit unions than for other lenders: as an industry we tend to have better, more advanced technologies that makes compliance easier. If your technology isn’t being helpful, might be a good year to look for a replacement.
Will other factors influence lending this year? Undoubtedly. They always do. Pay attention to these three, however, and you’ll be in a strong strategic and competitive position.