Opinion: I Review Mortgages – And I See 3 Areas Of Possible Problems In The Housing Market


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The term “housing bubble” is thrown around regularly these days – and not entirely without reason. Over the past year, we have seen dramatic gains in house prices and witnessed bidding wars over homes for sale. The main measure of housing prices in the United States, the S&P CoreLogic Case-Shiller Index, reported an annual house price increase of 10.4% for 2020. reported that about two-thirds of people who bought a home in 2020 made an offer without actually entering the home and instead relying on video tours.

Despite (or perhaps because of) these trends, there are fears that an overly exuberant housing market may be threatened by credit risks, unrealistic valuations, sharply rising interest rates or other problems.

Indeed, due to the COVID-19 pandemic and associated job losses, around 2.6 million homeowners are currently enrolled in some type of forbearance program, according to recent data from the Mortgage Bankers Association, although the percentage of delinquent homeowners has been declining.

I believe there are significant differences between the current US real estate market and the bubble that contributed to the 2007-2009 financial crisis. That said, there are some caveats that shouldn’t be ignored. To quote a proverb often attributed to Mark Twain, “History does not repeat itself, but it rhymes.”

Here’s why it’s different

Unlike the period before the financial crisis, mortgage products today are much more conservative. Rather than the no-income verification (aka “no-doc”) and low down payment that proliferated then, most of today’s mortgages follow strict underwriting guidelines.

People have more equity in their homes – some for up to 7-10 years – and therefore are unlikely to leave their homes and let the banks “hold the bag”. Total home equity in the U.S. real estate market rose $ 1.5 trillion in the fourth quarter of 2020, up 16.2% from a year earlier, for an average gain per homeowner of $ 26,300 , through CoreLogic.

The banking system is also much less vulnerable to the bursting of the housing bubble today. Due to the tightening of capital requirements in response to the financial crisis, the Tier 1 capital ratio of all US banks averaging over 14% in 2020. And high-risk variants of secured mortgage bonds, in which low-quality mortgages have been packaged into securities, mislabeled with an “A” rating and sold to investors, are a thing of the past.

Here’s something to worry about

Due to our extensive work as the largest provider of quality control for lenders and others, we have a window into the factors that all market players should watch out for. After performing post-close quality reviews of thousands of loans over the past year, we are seeing an increase in errors and general neglect in the application, documentation and approval process.

These errors may be due to the accelerated speed at which originators process loans, as they attempt to take advantage of the refinancing opportunity created by historically low interest rates. The seniority of the staff responsible for underwriting loans may also be a factor. More than half – 60% – of mortgage underwriters have been in their current position for two years or less. The average experience of a loan underwriter has plummeted, in large part due to the latest housing crisis, when many middle and senior level employees fled to other industries.

A second concern is the large number of people looking to buy a home for investment or who already own investment property. If interest rates stay low, even more investors could be drawn to the housing market. There may also be a greater incidence of fraud, as some borrowers claim their properties are owner occupied to qualify for lower rates while planning to lease the units. When banks discover the fraud, borrowers will face significantly higher interest rates.

Alternatively, if the rental income expected by these landlords (whether legitimate or not) does not materialize, their mortgages could be threatened with default.

Finally, while the Federal Reserve and other market experts believe inflation will remain well under control, a significant spike in inflation, pushing mortgage rates toward high single-digit mortgage rates toward single-digit highs, could have a devastating impact on housing. The bond market would be the first to react to inflation because it erodes future bond cash flows. The resulting increase in bond yields would then be reflected in mortgage rates.

Although the frenzied auction wars for housing are a real concern, the housing market is much healthier today than on the eve of the financial crisis. While about 5% (or 2.6 million) of US homeowners are enrolled in some type of forbearance program, 95% of these properties are worth more than loans, and homeowners will be able to sell their homes instead. than handing over the keys to the property. Bank. The financial system is better capitalized and less inclined to offer higher risk products.

Still, it will be important to watch for alternative data – such as quality control failures or an increase in loan applications for investment property – that could raise concerns that air is leaking from the housing market. This would be particularly worrying if there were to be higher than expected inflation at the same time as forbearance ends and properties are pouring into the market.

Jeff Taylor is the co-founder and CEO of Mphasis Digital Risk, the largest third-party service provider in the residential mortgage industry.

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