No doubt, 2013 was a year of transition for the mortgage industry. Many will remember it as the year in which the housing market saw significant recovery from the financial crisis: Home prices increased more than 13% from October 2012 to October 2013; foreclosure inventories dropped by more than 28%; and, despite rising interest rates, total home sales increased a healthy 10% (and within that, existing home sales increased a whopping 21%).
Although origination volume decreased overall – mostly in refinances, which plummeted starting in June, on rising rates – the industry for the first time in years witnessed a meaningful shift back to a purchase market. What's more, loan performance continued to improve considerably. As the market stabilized, the doubts and uncertainty of 2012 gave way to optimism that things were finally starting to turn around.
However, that optimism was, at least to a degree, offset by lingering fear and anxiety over the implementation of the Consumer Financial Protection Bureau's (CFPB) new ability-to-repay/qualified mortgage (ATR/QM) rules going into effect Jan. 10 – rules which many lenders fear will lead to an over-tightening of credit and significant reduction in the number of qualified borrowers. Indeed, just as many industry players will come to remember 2013 as the ‘Year Of Regulatory Compliance’ – however, it can be argued that, with other new regulations on the horizon, such as the CFPB's ‘Know Before You Owe’ rules and forms going into effect in 2015, there are still plenty more layers of regulation to worry about.
So what do industry experts think were the most significant factors that reshaped the industry in 2013? And what factors do they think will reshape the industry in the coming year? To find out, MortgageOrb interviewed industry luminaries including Becky Walzak, president and CEO of Looking Glass Group LLC and rjbWalzak Consulting. What follows are Walzak's responses to our questions:
Q: What do you think were the top three factors that reshaped the mortgage industry in 2013 and why?
Walzak: In 2013, we saw the housing market stabilize. The market began to rebound from the crisis due to numerous factors, including the resolution of many of the government-focused actions including providing more clarity in government regulations and directives from the CFPB. Foreclosures began to dwindle, and homeowners felt confident enough in the value of their homes to seek refinancing. In many places, property values began increasing, and pent-up demand started to bubble up as buyers looked for properties and foreign and domestic investors began to put cash back into the market.
Lower interest rates were a big factor in the housing and mortgage markets in 2013. Lower rates certainly drove the refinance market, but they also allowed home buyers to look for properties. I had two relatives who sold their homes within a week of putting them on the market; one for over the asking price. Despite the lack of PMIS (Private Mortgage Investor Securitizations), the jumbo market was also very active due to the low rates. As rates increased we saw the refinance market dry up. Lenders are having a hard time sustaining the level of activity within the purchase market alone.
This past year, fear of the unknown played a big role in how lenders and servicers approached their businesses. They spent the year reacting to market conditions and the proposed new regulations. Fear of what these regulations will eventually turn out to be – and what additional regulatory risks they will be facing – dominated lenders' and servicers' approach to how they did business.
Numerous levels of file reviews were contemplated and/or incorporated into the processes, adding significantly to costs. On top of the additional costs, the QM limitations on fees and qualification factors have left many lenders afraid of their ability to generate significant loan volume that meets the specified parameters. Because of that, lenders are concerned about outlets for non-QM loans, so many are trying to avoid the issues altogether by limiting their originations to QM loans only.Â
Q: What do you think are the top three factors that will reshape the industry in 2014 and why?
Walzak: With the overwhelming concerns about QM and non-QM loans, the secondary market will take center stage in 2014. While there are some PMIS opportunities today, they are primarily ‘to be announced’ securitizations. With Fannie Mae and Freddie Mac having a temporary "patch" in accepting loans – and the Federal Housing Administration's yet-to-be-announced definition of QM loans – the secondary market will play a key role in the availability of financing. Added to this mix is that private investors need to be absolutely certain about the underlying adherence to guidelines and the accuracy of data. Fannie Mae has already announced its focus on purchasing ‘perfect loans,’ which will further drive the need and the opportunity to sell these loans to outlets other than the agencies.Â
With the new requirements in place and the underlying need to ensure that the processes are working as required, risk management will finally become a unified focus of the industry in 2014. Lenders will realize that the idea of six or seven file reviews per loan creates excessive costs that do not produce reliable results. Compliance and quality will roll into one initiative that will result in more and more lenders developing their own appetite for risk. That, in turn, will play out in the secondary market. As a result, fewer lenders will find themselves hamstrung by loan quality limitations set by third parties.Â
The drive for conducting reviews and analysis through the collective data sets will become more critical in 2014 as the regulators continue to focus on being ‘data-driven’ organizations. This means new data fields, more focus on standard data fields (MISMO) and more need to analyze data – from the individual loan data to comprehensive corporate data.Â As a result, lenders will recognize the limitations of current systems, both origination and servicing, and begin to demand changes. New players will introduce new systems that have a much stronger focus on data requirements, and a variety of analytic software will become more readily available.