A focus on enabling FTHB growth – Innovation leading to greater options.
As we rapidly approach the end of the first quarter of 2017, we find ourselves in a dynamic marketplace. While the dominant role of “the Government” as credit investor has not changed, the growth of the purchase market and anticipated reduction of refinance is driving an overall drop in originations. We continue to see depositories step back from FHA lending while non-depositories opportunistically fill the void. In the past several years, millions of homeowners have refinanced their mortgages to take advantage of the historic low rate environment for home loans. This includes the successful crisis era HARP refinance programs offered by the GSE’s.
According to the Home Mortgage Disclosure Act data, HMDA, the Mortgage lending institution pool has decreased from a high of 8,388 lenders in 2008 to 6913 lenders in 2015. According to the Urban Institute February Chart book, The Mortgage Bankers Association (MBA) projections for 2017 are 1.563 Trillion, 30% refinance. This is a decrease from 2016, 1.891 Trillion, 48% refinance. We are now experiencing the new normal as a market with the majority of loans to be purchase money. In 2018, the MBA estimate is 1.588 Trillion with a very low 26% refinance. Today there is meaningful competition for every loan and each company will work harder than ever to compete for the consumer. While the cost to originate has been at historic highs, with many studies citing costs in excess of $7000, we are observing new entrants with technology and workflow challenging the status quo and decreasing the trajectory of the cost to originate. For now however, cost remains a significant barrier to pricing and remains a potential barrier for smaller dollar loans.
Through this reset, we continue to experience tight credit with loans being made to strong credit worthy borrowers with credit scores well above the average credit scores reflected in rational lending book years, 2001-2002. The GSE’s report improving defect rates; and investors are experiencing very low default and foreclosure rates on new books of business. That said, we have lost a pool of borrowers who previously enjoyed homeownership eligibility and remain outside of the marketplace.
The U.S. homeownership rate dropped below 63 percent, its lowest level since 1965, according to a recent paper “lease to purchase” written by the Terner Center for Housing Innovation, UC Berkeley. I will repeat this one more time. We are experiencing the lowest homeownership rate since 1965! That is over 50 years! What should the industry do to respond to this remarkable trend?
My sense is we need to revisit innovation on products, find reliable and unusual partners, and continue to explore new lending models.
- Innovate on new product opportunities
- Expand scalable partnerships
- Explore new lending models
Where is the growth in lending going to take place? Growth will take place in the first-time homebuyer segment which has seen delayed activity due to post crisis issues that include community disinvestment and credit impairment. There is also a need to address the large segment of aging baby boomers who will experience different housing needs in later years. For now, we will focus on the first time homebuyer.
According to the Urban Institute February Housing monthly Chartbook, Urban.org, we know that statistics from 2016 show that the percentage of FHA First Time Homebuyer business served had an 81.8 percent share in November 2016, down from the peak of 83.3 percent in May 2016. The GSE’s numbers were 43.6 percent in November 2016, steady from the prior month data points.
These are admirable programs but the anticipated growth in households over the next two decades will continue to put pressure on options and programs to meet these needs. Here are two ideas for expanded focus around partners and products:
Expand the Pool of Partners and Find the Right Solutions
As Chairman of the non-profit technology portal, HLP (Hope LoanPort), powered by Indisoft llc, I have learned a great deal from our stakeholders about the borrowers who leverage this service. HLP was created by the industry and non-profit housing counselor at the height of the crisis. The intent was to serve borrowers with a simple tool to collect data and documents to facilitate a loan retention opportunity. The most important part of this was to promote transparency, safe transport of information, and one source of truth with borrower information.
While HLP was created for loss mitigation and accurate timely communications, it remains focused on making sure the borrower has an avenue to communicate with key stakeholders and advocates. HLP offers a 360 degree view of the consumer. By capturing data and documents in a compliant process, HLP enables communication with all approved stakeholders on how to bring the consumer closer to a resolution on the front-end of the origination or on the back-end to prevent foreclosure. This non-profit technology portal focuses on the consumer to make sure they are homeownership ready and/or homeownership sustaining. In all cases, we work with the lending community, the non-profit counseling community, credit investors, and borrower, to establish communication in a neutral transparent facility to drive toward improved outcomes for the consumer.
Innovating and partnering to capture a “turn down”. At the front-end of the process, our goal is to work with turn down, candidates or borrowers who are not quite ready for homeownership. When originators are unable to make a loan happen, they have a unique opportunity to work with that borrower, over time, to assist them with that opportunity to become a first time homebuyer. Originators desire to approve loans where it makes sense for the borrower, lender and investor. When they turn down a loan, it is in their interest to work with borrowers who have the desire and capacity to become homeowners over time. HLP and HUD certified non-profit housing counselors are assisting lenders in making that happen. After a six to eighteen month period of counseling and monitoring, we assist the stakeholders facilitate a transaction that puts the borrower back into a path for successful homeownership. This is an example of taking a complicated situation but finding a solution that can be a win for all parties. This takes scale, commitment, transparency, and partnership! This is illustrative of innovation that can create a pipeline of ready-made first time homeowners!
Lease Purchase Mortgages
While the HLP team continues its work building an on-ramp for first-time homebuyers, another path coming in vogue is the lease purchase programs. One of the firms is TRIO and they offer a lease to purchase option for consumers. Darryl Lewis and the TRIO team have over 15 years of experience with lease purchase and have worked diligently with the government agencies, non-profits and industry partners to continue to position this product for the mainstream. The time is right for this product in a world that has narrowed for borrowers who desire that path to homeownership.
TRIO has identified the key pain points and strength of a program like this and aligned the investors, borrowers and operators to bring this to a successful scalable program going forward. With the high cost of rent in many cities and high density metropolitan areas, the lease to purchase program can give potential homeowners the chance to gain firm ground on the path to ownership.
TRIO has a breadth of experience running lease to own programs and was the first to pilot the lease purchase mortgage with Fannie Mae in 2003 to 2007. Today, the TRIO OwnOption mortgage works with FHA origination partners and uses an FHA mortgage to facilitate its transactions. In fact, TRIO funded their first GNMA securitization in the fall of 2016 with anticipated conversions of over 70%.
The J. Ronald Terwilliger Foundation commissioned the Terner Center for Housing Innovation, UC Berkeley, to write a report on Expanding Access to Homeownership through Lease Purchase. This report is a thoughtful thorough view of growing options in the marketplace using the method of lease to purchase for a path to homeownership and features the LEAP mortgage – a more streamlined version of TRIO’s OwnOption mortgage. This report may be found at https://ternercenter.berkeley.edu/lease-purchase. Special thanks to Carole Galante, Carolina Reid, and Rocio Sanchez-Moyano for their role in this publication.
Where We Stand
There are many new ideas circulating in the market for a better first time homebuyer program. And while I have commented on two, there are others, including the AEI focus on gaining equity through 15- year amortizing mortgages.
As we reset our thinking around the composition of the market with new first time homebuyers, increasing minority led households, and tight regulation that narrows the band of offerings, our industry should focus on innovative products to meet the needs of today’s consumer. Innovation in this case is not another fad and is not simply the introduction of a high risk product. Rather, our ability to cultivate products and services for the next generation of first-time homebuyers can turn the tide and enable tomorrow’s white picket fence. And with new tools at the ready such as HLP, we need to advance the story beyond the traditional mortgages that may or may not work for today’s growing demand in the marketplace.