Mortgage Bankers: 'Wait 'Til Next Year'

The Reality of Real Estate Finance

For real estate professionals, May through July is the equivalent of October through December for retailers and “Christmas in July” is now gone for the mortgage banker. Retailers felt the pain during the last holiday season and the mortgage market is feeling the pain today. However, as the Brooklyn Dodgers once said at the end of a heartbreaking season, “wait 'til next year.”

There’s no secret as to why mortgage activity dropped significantly this year:

•         Fewer first-time homebuyers
•         Higher student debt
•        All cash buyers
•        Tighter credit due to new regulations 

There’s no reason to go further. This isn’t rocket science.

The National Association of Realtors reported June existing home sales up by 2.6% but down compared to last year. First-time homebuyers averaged 28%, as renting became the “new normal” over buying a home.

First-time homebuyers are typically drivers for the housing and mortgage markets., but low wages, more than $1 trillion in student debt, higher FHA insurance premiums and an increase in downpayments continue to keep first-time homebuyers out of the housing market. Also, the refinance market dried up after mortgage rates increased last year, which also kept mortgage bankers grappling for customers.

Unlike mortgage borrowers, all-cash buyers have no worries about downpayments or debt-to-income ratios or even going through a laborious “paper chase” of finding banking statements, income tax returns, W-2’s, and car titles so that all the i’s are dotted and the t’s are crossed. And, at the last minute before closing, an all-cash buyer doesn’t need to find one more statement to make sure $250 was a valid deposit into a bank account. Maybe I exaggerate, and maybe I don’t.

While Realtors still have business from all-cash buyers, the mortgage industry remains hungry.

Today’s Qualified Mortgage (QM) rule puts the debt-to-income ratio at 43%, including the debt on a home. Mortgage lenders are very paranoid about buying back loans. They go lower on the debt-to-income ratio to insure they won’t have to repurchase loans. A recent FICO survey said nearly 60% of bankers are most concerned about a “high debt-to-income ratio” when approving a loan.

And, above all else, housing prices continue to rise—albeit slower than last year.

Now, here’s the good news for mortgage bankers. The market should come back next year. As the old saying goes, “No pain, no gain.” And there will be pain. Home prices will have to drop for housing to become more affordable for the first-time homebuying crowd, including the Millenials. In fact, in that same FICO survey, many lenders fear another housing bubble and a pop is not only likely but necessary.

Institutional and small investors have pushed up housing prices, but a drop in valuations is a good thing because affordable homes and low mortgage rates will get first time homebuyers into the marketplace.

Credit will need to loosen—and likely will--including 3% downpayments on Fannie Mae and Freddie Mac loans and lowering the FHA insurance premiums. Also, more lenience on the debt-to-income ratio from the Consumer Financial Protection Agency will help first-time homebuyers with student debt afford an additional housing payment to replace that rent payment. With apartment rents increasing, housing will become the best investment, especially with a tax deduction.

With looser credit, more affordable home prices and some more job security, with potential for increased wages, we can see a true housing boom next year—a real one—that will not only benefit real estate agents but mortgage bankers as well.

For those mortgage bankers who survive the heartbreak of the current mortgage cycle, hold on tight. Wait for prices to fall during the winter months. Watch the retail sector feel some more holiday season pain as consumers save their money. And then know future first-time homebuyers are on their way to buy a home in spring 2015.

In other words, wait until next year.