New Federal Housing Finance Authority director Mel Watt is the “wild card” who will affect all areas of a rapidly changing mortgage environment which will continue to have a large government footprint at the expense of private capital.
Watt will have a substantial impact not just on mortgage originations, but on servicing and subservicing as well, says one industry pundit.
Based on Watt’s statements, as on the qualified mortgage rule, the government’s huge role in mortgages will continue for some time into the future, says Rick Sharga, executive vice president of Auction.com. The QM rule already carves out a temporary safe harbor for loans sold to Fannie Mae and Freddie Mac.
As a result, the reality is that if private capital is to enter the marketplace, borrowing would become more expensive for consumers, Sharga said during a meeting with the editorial staff of National Mortgage News.
Major banks will not do non-QM lending, with one exception, that being jumbo loans. This situation already is playing out in the marketplace, as rates for jumbo mortgages are lower than conforming loans because banks have been seeking the former for their own investment portfolios. The rate inversion, which has been going on for over one month, is likely to continue for a while, he says.
Besides QM, the capital requirements created by Basel 3 are another reason banks are restricting investment activity.
Loan limits for conforming and Federal Housing Administration products are being reduced, increasing the size of the jumbo market. The private mortgage insurers are likely to be the beneficiaries of this, especially when it comes to the FHA limits being reduced as the government program is a direct competitor.
Because of this, the one area of the mortgage business Sharga expresses a positive sentiment regarding job growth in 2014 is the MIs.
Nonconforming loans will be done through non-banks but priced to account for the greater risk either through the rate alone or through a combination of rates and points.
No mortgage lender exited the business on Jan. 10 because of the implementation of QM, he says. The Consumer Financial Protection Bureau had predicted that 8% of those who qualified for a mortgage before that date would not do so going forward.
However, the impact of QM is being minimized because many mortgage originators began taking steps in the days and weeks prior to bring their shops into compliance, he points out.
On the servicing side, one recent deal could be a model for other transactions. The seller was able to able to retain the subservicing getting the best of both worlds. The mortgage servicing rights were off of its books, but its platform remains busy and it gets the fee income to boot, he says.
Even though it is hard to measure the data, 2014 could see a record volume in MSR sales transactions take place, Sharga predicts. However, 2014 will also be the last year of the boom in nonperforming loan sales as the housing market recovery continues.
Still, home sales should be flat this year compared with 2013 and price appreciation should not be at as quick of a pace at it has been in the last couple of years, Sharga says.
Because sales are growing at a more normal pace, a new bubble is not developing. But the lack of wage growth is a cause for concern.
Affordability becomes an issue as a result of several years of wage stagnation, Sharga says.
When it comes to distressed mortgages and foreclosures, the much-talked about shadow inventory has been overblown all along, he declares. Now that normalcy has returned, the market will absorb much of the remaining shadow inventory in the next two years.
And because of the tighter underwriting of the past few years, virtually nothing has gone or will go into default, he predicts.