Rick Sharga: Multiple Trends Reshaped Mortgage Market In 2016

Whether it was dealing with complex new regulations, such as the TILA-RESPA Integrated Disclosures rule, or preparing for upcoming rules, including new reporting requirements under the Home Mortgage Disclosure Act, mortgage lenders were exceptionally busy dealing with compliance-related issues in 2016.

Making things even more challenging for them was that mortgage rates started to increase immediately following the November presidential election, setting things up for a rather dismal fourth quarter, origination-wise. The rise in rates had an almost immediate impact on refinances, plus it started to dampen home sales, as many consumers who were considering buying a house started to pull back for fear that rates would rise even more in 2017. Then, in December, the Federal Reserve decided to raise short-term rates, which further impacted refinances and purchases. The Fed has indicated that it may decide to raise rates two or three more times this year, but, once again, it depends on the performance of certain macroeconomic indicators, including job and income growth.

During a series of recent email interviews, MortgageOrb asked numerous housing and mortgage experts to reflect back on what they feel were the most important events or factors impacting the mortgage industry in 2016 – and which factors will continue to reshape the market in 2017. Next in this ongoing series of Q&As, we have Rick Sharga, housing luminary and executive vice president at online marketplace Ten-X. What follows are excerpts from our interview.

Q: Reflecting on 2016, what would you say were the most important changes the mortgage industry saw and why?

Sharga: There were a few major trends impacting the mortgage industry in 2016. One was the rapid growth of non-bank lenders in terms of origination volume. It became apparent that retail banks were focusing most of their mortgage lending on conventional loans that fit squarely within the qualified mortgage box or on jumbo loans to high net worth individuals who were candidates for other banking services. A number of smaller community banks exited the business, citing exorbitant costs of regulatory compliance. Non-bank lenders have filled this void and appear to be poised to continue to grow market share.

Increased levels of regulatory compliance was clearly another trend in 2016; this added to the cost and complexity of making loans but also resulted in some of the lowest delinquency rates in recent history. We also saw a huge movement of nonperforming loan portfolios from banks and government entities to institutional investors; this had major impacts on the balance sheet of the sellers and on the servicing industry, which saw these portfolios move from traditional servicers to special servicers selected by the investors.

Q: Looking forward to 2017, what are your predictions for home sales and origination volume? What impact do you think rising mortgage rates will have on volume and operations?

Sharga: I expect existing-home sales to increase marginally over 2016 numbers – we’ll probably see between 5.6 million to 5.7 million units sold. New home sales may grow more rapidly and will probably end 2017 in the 650,000-700,000 range.

Origination volume will be a mixed bag: Purchase activity is likely to go up a bit, but refinance activity is probably going to fall off a cliff as interest rates rise. Overall, we’re probably looking at between $1.5 trillion to $1.6 trillion in origination volume, with between $1.0 trillion and $1.2 trillion of that being purchase loans. Rates on a 30-year, fixed-rate loan will probably end the year between 4.5% and 5.0%, which is still very low by historical standards but high enough to become a major headwind for the refinance market.

Home price appreciation will probably slow down to accommodate the higher interest rates. We’ll likely finish 2016 with around a 6.0% year-over-year increase in home prices; I expect that the increase in 2017 will be more in the range of 4.5% to 5.0%.

Q: What other factors do you see reshaping the mortgage market in 2017?

Sharga: I’m not sure how much we’ll actually see happen in 2017, but the two huge issues that are likely to be front and center are the ultimate disposition of Fannie Mae and Freddie Mac and whether the Dodd-Frank law survives the incoming Trump administration.

The president-elect has made regulatory relief one of the pillars of his economic policy, and he and some of his nominees have identified Dodd-Frank as a burden not only to the mortgage industry, but also to all businesses in the U.S. Whether the new administration will be able to repeal the bill is open to debate, but it’s very likely that it will at least attempt to scale back some of the more onerous aspects of the legislation.

The administration has also made strong comments about ending the government conservatorship of Fannie and Freddie, and Treasury secretary nominee Steven Mnuchin has expressed a desire to privatize both entities. But after eight years of conservatorship, it seems like there will be a lot to unwind before anything happens – and a lot of unanswered questions. But whatever the administration decides to do, it needs to do it very carefully and very thoughtfully, as the government-sponsored enterprises (GSEs) are involved in such a large number of mortgage loans; simply unplugging the GSEs and expecting private capital to take over would be a disaster.


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