Economy hums but some headwinds could be ahead for mortgage servicers
At its National Mortgage Servicing Conference & Expo held last month, the Mortgage Bankers Association (MBA) forecasted a strong and stable economy this year with plentiful jobs and growing wages that should bolster purchase originations, consumer spending and home sales. However, mortgage lenders and servicers will face a few notable headwinds, they noted.
The MBA expects growing housing demand to boost purchase originations to an estimated $1.183 trillion this year, up about 7 percent over 2017, while refinances are expected to decline about 29 percent to $426 billion. The net result will be a decline in overall originations to $1.61 trillion from $1.71 trillion in 2017.
The MBA forecasts the mortgage interest rate will reach 4.8 percent, and couldn’t forecast what effect those rising rates will have on the housing market. Also of concern: the seasonally-adjusted national delinquency rate rose to 5.17 percent in the fourth quarter, up 37 basis points over the year-ago figure.
“The hurricanes may be partly to blame, but we can’t blame everything on the hurricanes,” says Marina Walsh, MBA’s Vice President of Industry Analysis.
Walsh and Joel Kan, MBA’s Associate Vice President Research and Economics, gave an overview of the economy and mortgage servicing statistics during a keynote address at the Plano, TX event.
Delinquencies on the Rise
Besides the hurricanes that hit Houston in August and Florida and Puerto Rico in September, declining credit scores on newer FHA loans and rising debt-to-income levels are also playing a roll in rising delinquencies, says Walsh.
The non-seasonally-adjusted delinquency rate was 7.33 percent in Texas and 8.89 percent in Florida in the fourth quarter. While forbearance is in place for many hurricane-affected borrowers, MBA’s survey asks servicers to report loans as delinquent if the payment was not made based on the original mortgage terms.
Upside risks for mortgage servicers include wage growth that, if it takes off, will boost consumer spending and positively impact on the housing market. Wages grew at the fastest pace in eight years in January, up 2.9 percent compared to a year ago.
Unemployment stood at 4.1 percent, a 17-year low. Potential downside risks include a more restrictive immigration policy that could negatively impact homebuilders already struggling to find labor, Kan says.
“We have a baseline forecast,” notes Kan, “but still, we say ‘anything can happen’ such as an unexpected financial markets disruption, the debt ceiling, or uncertainty about immigration policy.”
The two MBA economists provided a wide variety of statistics during their keynote address. Below are a few of the highlights:
- Loan production continues to increase at independent mortgage banks while it declines at depository institutions. In 2016, IMBs held 52 percent of the production volume and depositories held 48 percent. That compares to depositories holding 73 percent of the production in 2011 compared to 27 percent at IMBs.
- Independent mortgage banks continue to grow their share of servicing. IMBs held 33 percent of servicing in 2016, up from 11 percent in 2011.
- Servicer profitability was up during the first half of 2017, pre-hurricane, with higher loan balances part of the reason. Servicers are paid as a percentage of loan balances outstanding, so higher loan balances translate into higher per-loan revenues.
- Direct servicing costs have remained fairly constant over the past five years despite declining delinquencies. “If you are looking into the future and delinquencies tick up a little bit, how will this change the picture?” posed Walsh during her talk. “If this (expense trend) is the new norm in a low-default environment, what does that mean in terms of expenses going forward?”
- While the 5.17 percent delinquency rate in Q4 raises concerns, it pales in comparison to the high of 10.06 percent in Q1 2010. In Q1 2006, the rate was 4.41 percent.
- 10.38 percent of FHA loan loans were delinquent in Q4 2017. The figure is seasonally adjusted and excludes loans in foreclosure. In comparison, 4.19 percent of conventional loans were delinquent during that time period.
- Larger purchase loans are winning the day with loans from $424,100 to $625,000 leading loan growth, followed by loans from $625,000 to $729,000.
- New limits on the mortgage interest deduction, passed in the 2017 federal tax reform legislation, will have the biggest impacts on New York, California, Washington, D.C., and Hawaii, locations that have the highest proportion of high loan balances (greater than $750,000, the cut off for MID) and also potentially higher numbers of borrowers who itemize their deductions.
- Employment growth for younger workers, those age 20-55, recently surpassed levels seen in the year 2000. Employment growth for this age group declined sharply in January 2009 and slowed to its lowest point through 2010 and 2011 before beginning to rise.
- Inflation is flirting with 2 percent with the cost of gasoline seeing significant price increases to start 2018.
- The two-year Treasury, 10-year Treasury, Fed Funds rate and the 30-year fixed mortgage rate are all headed higher over the next three-year period.
- Declining for-sale inventories will continue to constrain existing-home sales while labor supply shortages will hold back the new-home starts.
- Home price growth will slow but continue to outpace wage growth. From 2013-2017, wages grew 2.1 percent while home prices grew 5.3 percent.
Kerry Curry is a freelance writer for several Texas and national publications and is the former executive and magazine editor of HousingWire.