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The Future of the Mortgage Industry

Presented by

Karen Young and Anne M. Canfield

© 2013 Canfield Press, LLC. All rights reserved.


Political Environment

• Housing policy uncertainties. Will we remain a homeowners’

society or evolve into a renters’ society? Who will receive a

housing subsidy and how will it be delivered?

• Federal budget deficit may lead further curtailment of the

mortgage interest deduction.

• What is the future of our nationalized housing system? No one

knows.

– Viability of the FHA

– GSE reform



Monetary Policy

Higher inflation will be the monetary tool of choice for central

bankers tasked with cleaning up sovereign balance sheets.

Headwinds

―The case can be made that we are marching headlong into a

generational bear-market for bonds, writes Guggenheim CIO Scott

Minerd. ―During the next decade, holders of Treasury and agency

securities will likely realize negative real returns. Despite this, these

assets continue to trade at extremely rich valuations. Exactly when

the market will awaken to this anomaly in securities pricing remains

to be determined.‖



Monetary Policy

Distortive effects of policy driven monetary policy.

Long-term interest rates are ticking up.

Headwinds



Tailwinds

by 22 bp to 25 bp. • The Fed has driven long-term interest rates down through the

purchase of mortgage-backed securities. On December 31, the

central bank had $1.41 trillion of MBS on its balance sheet. In

2013, the Fed plans to purchase $40 billion a month of MBS and

reinvest maturing MBS assets—bringing monthly purchases to

between $60 billion to $65 billion month. By yearend 2013, the

Fed will own $1.89 trillion of MBS, representing approximately

20.8% of all mortgage debt outstanding.

Monetary Policy



Tailwinds

by 22 bp to 25 bp. • The Fed has driven long-term interest rates down through the

purchase of mortgage-backed securities. On December 31, the

central bank had $1.41 trillion of MBS on its balance sheet. In

2013, the Fed plans to purchase $40 billion a month of MBS and

reinvest maturing MBS assets—bringing monthly purchases to

between $60 billion to $65 billion month. By yearend 2013, the

Fed will own $1.89 trillion of MBS, representing approximately

20.8% of all mortgage debt outstanding.

• Unconventional monetary policies have reduced long-term rates

by 100 to 125 basis points, according to Goldman Sachs’ models.

In addition, market conditions in the Eurozone have lowered

10-year U.S. yields.

Monetary Policy



Takeaway

No one knows how the central banks’ endgame for

unconventional monetary policy will be played out

or what unintended consequences will occur.

Ultimately, interest rates WILL go up.

Monetary Policy



Regulatory Environment

• Uncertainty of about the constitutionality of the CFPB recessappointment which might invalidate the Bureau’s mortgage rulesand trigger Dodd Frank provisions.

• Impact of the QM and proposed QRM rules mortgage lending, ascurrently proposed.

• New mortgage rules, spanning more than 4,000 pages, are requiringa massive re-engineering of mortgage lending system.

• Regulatory burdens are driving small lenders out of themortgage space.

• Risk of borrowers gaming system under loan modificationrequirements embedded in the loan servicing rule

• FHA fiscal crisis. Will FHA be bailed out by taxpayers? How willthe agency’s financial crisis impact credit availability to first-timehomebuyers?

Headwinds




Tailwinds

• GSEs’ seven-year exemption from QM.

• FHFA’s development of a secondary market platform for the

mortgage market.

• FHFA’s creation of risk-sharing structures for mortgage assets

to attract private capital to the mortgage market.






Takeaway

2013 was going to be the mortgage industry’s watershed year in

which ―rules of the road‖ were put in place by the regulators and

the housing market would clear. By 2014, the ―new normal‖ in

the housing finance industry would evolve.




Takeaway

2013 was going to be the mortgage industry’s watershed year in

which ―rules of the road‖ were put in place by the regulators and

the housing market would clear. By 2014, the ―new normal‖ in

the housing finance industry would evolve.

However, court rulings regarding the constitutionality of Director

Cordray’s recess appointment could invalidate the Bureau’s

mortgage rules and trigger Dodd Frank provisions for mortgage

underwriting. Chaos would return to the mortgage space.




Housing Market

3.8 million homes in the shadow inventory, representing a

30 month overhang.

Headwinds



Housing Market

13.8 million underwater mortgages on December 31, comprising 27.5% of all mortgages

outstanding. These borrowers are underwater an estimated $1 trillion, according to Zillow.

Headwinds



Housing Market

Stringent loan underwriting

requirements continue to

depress home sales

Headwinds



Housing Market

Renter occupied household formations are the

driving force in today’s market.

Headwinds



Housing Market

Tailwinds

Housing supply had declined to pre-boom levels. The annual inventory

change for homes in the U.S. was down 19.4% in 2012.



Housing Market

Tailwinds

Housing sales are forecasted to increase to 5.2 million in 2013

and 5.7 million in 2016, according to Goldman Sachs’ forecasts.



Housing Market

Tailwinds

GS analysts qualified their forecast, writing:

"To the extent that the reduction in foreclosures cannot be

easily converted into other forms of distressed sales such

as short sales, we may see fewer distressed sales, and

therefore, fewer total existing home sales.‖



Housing Market

Tailwinds

• Demand for housing was stimulated by 1.0 million household

formations in 2012. Household formations are projected to top

1.2 million in 2013.

• Housing affordability is near a 20-year high. Today, the cost to

buy a home is cheaper than renting with price-to-rent ratios

returning to early 2000 levels.

• The share of distressed home sales continues to decline from

32% of home sales in December 2011 to 24% of sales in

December 2012.



Housing Market

Takeaway

The housing recovery is predicated upon (i) low interest rates;

(ii) limited supply of homes for sale; and (iii) investor appetite for

cash purchases of homes (which comprised 20% of existing

home sales in 2012). Remove any one element and the

recovery will falter.



Concluding thoughts…

Lawmakers will NOT enact structural reform of the GSEs. Fannie Mae

and Freddie Mac are too embedded in the housing finance system and

the housing market is too fragile for lawmakers to implement GSE reform

of the GSEs for the foreseeable future.

We’re on the path to becoming a renters’ society. So long as Congress

continues to embrace a re-distributive policies, rather than pro-growth

policies, the U.S. will continue its evolution into a renters’ society. Today,

the home ownership rate stands at 65.3% [63.4%, net of severely

delinquent mortgages, according to Amherst Securities.] Will we

ultimately become France with a 50% homeownership rate?

The financial crisis did irrevocable damage to the nation’s contract law.


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