No End in Sight as Servicing Drops
In the “pre-crash” days of the mortgage industry two facts were unmovable: that the average nationwide home price would never fall and that servicing rights would never decline.
The belief in ever-increasing home values has obviously been blown apart and now it appears—after several quarters—that the nation’s servicers are looking at a never-ending decline in U.S. mortgage debt which translates into fewer home loans to service.
According to figures compiled by National Mortgage News and the Quarterly Data Report, consumers owed $9.479 trillion on their first and second liens at March 31, compared to $10.138 trillion at the peak of the market, back in late 2009—a decline of 6.5%.
Stated differently, the dollar value of mortgage debt (servicing rights) in the U.S. has fallen in five of the last six quarters, with just one (very minor) increase along the way.
According to housing economists and servicing advisors, the reasons behind the dollar decline are obvious: delinquencies and four million foreclosures over the past three years have taken loans off the servicing “rolls” of mortgage banking firms with servicers of all sizes being affected. Not enough new loans are being written to replace them—despite the lowest mortgage rates in decades.
In the most recent ranking of home servicers, four of the nation’s top five firms experienced a year-over-year decline in their mortgage servicing contracts with one exception: Wells Fargo Home Mortgage, which ranked second overall with $1.8 trillion in MSRs. Its annual growth rate was a meager 1%. (And WFHM is the largest funder of them all with a market share of 20%.)
“When will this situation turn around?” asked Jay Brinkmann, chief economist for the Mortgage Bankers Association. “When we see an increase in the purchase market.”
But Brinkmann is quick to point out that Americans continue to engage in not only cash-in refis where more money is brought to the closing table, but they’re opting to shorten the term of their loans when they refinance. “Roughly 23% of all refis now are 15-year loans,” he said. “Many consumers are keeping their monthly payments the same, but are reducing the number of years they’ll be making payments on.”
But perhaps the biggest driver of lower mortgage debt is the lack of cash-out refis. According to figures compiled by Freddie Mac, in the first quarter consumers drew out just $6 billion in cash from their homes via refis, compared to $84 billion at the peak of housing values back in the second quarter of 2006.
Because home values are still declining in many markets, it’s unlikely cash-out refis will take off any time soon, putting additional pressure on MSR balances.
George Christo, executive vice president of The Prestwick Mortgage Group, Alexandria, Va., notes that consumers are simply deleveraging because they lack confidence in home values. “Some of this is a confidence thing in the near-term market environment,” he said. “Liquidity has confidence. Debt does not.”
He believes the trend of less overall housing debt might reverse when two things happen: “First, when housing values stabilize, which will remove some fear from the real estate market of buyers requiring financing,” he said. “Second, when the competitive balance at the real estate market level, between cash buyers and those requiring a mortgage, changes—and that balance may not change until real estate inventory gets back to a customarily healthier level.”