PERSON OF THE WEEK: Tom Gillen is senior vice president of secondary marketing for Churchill Mortgage, which offers residential mortgages across 44 states.
MortgageOrb recently caught up with Gillen and asked him a range of questions to get a better idea of where the mortgage market is headed in 2018.
Q: As a 20-veteran of the secondary market, what do you think is the biggest challenge lenders face in marketing their loans and identifying opportunities?
Gillen: The biggest challenge for lenders operating in the secondary market is in having the patience and discipline to do the research and keep track of all the moving parts that can impact an investor’s demand and hedging ratios. It’s never been just a matter of bundling loans together and selling them; rather it’s about a lender’s ability to compile all of the relevant market data available and leveraging that intelligence to determine the optimal timing and method for selling.
Just as lenders are utilizing new technologies to streamline internal processes and improve borrower relations, they must also look at how modern technology can impact their hedging and selling strategy. Real-time data and analytics, for example, offer mortgage professionals a more exact picture of the market. Those that choose to work with third-party vendors may have to account for a one- or two-day delay in the data and then work to identify where to place certain sensitivities based on that data. This is problematic as it only provides the lender with a snapshot of the market that may no longer be accurate.
This may be viable in a stable market environment, but when volatility is introduced, lenders need to have a real-time view to make the best possible decisions for their business. This level of intelligence is often how lenders can get those few extra basis points that, over time, can produce a dramatic change in their incremental revenue – sometimes upwards of a $1 million or more, depending on your size. While the market may be stable at the moment, volatility is on the horizon, and lenders must prepare for this change.
Q: What do you think is keeping mortgage rates down, even considering the steady increase to the Federal Funds Rate?
Gillen: This year, we’ve already seen two increases to the Federal Funds Rate, with a potential third coming before the end of the year. One would expect such a hawkish outlook and approach from the Federal Reserve to cause a steady increase in mortgage rates, but instead, they’ve remained relatively flat. At the same time, it remains nearly impossible for rates to go any lower or for banks to see a meaningful spread.
Rates absolutely could go up, if and when inflation starts to kick in, but based on what we’re seeing globally, it looks like investors are keeping their money where it is safest – the U.S. bond market. This puts downward pressure on yields and interest rates alike as global instability is keeping everyone on the edge of their seats when it comes to investing. So rather than putting their money into potentially volatile markets, it’s safely stored away in assets such as bonds, which, in turn, hinders interest rate increases, particularly in regards to fixed-rate mortgages.
Q: In terms of inventory, do you think we can expect to see a pick-up in building activity, or will inventory continue to be a prominent issue leading into 2018?
Gillen: Historically, we’ve seen a builder’s budget for land costs at around 20% to 30% of the end-sale price of a home. So, for a $200,000 home, the builder would on average invest something around $40,000 to $45,000 in land costs alone. What we’re seeing today though, is that higher land costs are forcing builders to either cut their margins (which they obviously want to avoid) or build houses that sell at higher prices.
The unfortunate downside to this is that it raises the price ceiling on starter homes for families. Considering that 50% of first-time buyers are operating within a fixed price they cannot exceed, this higher price ceiling is forcing a large number of buyers out of certain markets.
Looking at the amount of recently signed building permits, however, the numbers do indicate a more positive outlook for the remainder of 2017. Housing permits have picked up nationally, which should lead to an increase in supply by next spring. The current numbers do not go much further than the end of the year, though, and are not specific to any general region.
We have to consider that home buyers are moving to certain areas for a reason – whether for the climate, jobs or otherwise, and new inventory may or may not exist in these areas. With that said, it’s likely that both inventory and pricing will continue to be concerns heading into 2018, but the outlook is certainly more positive than it has been as of late.
Q: Would you say that consumers have less buying power than they had in the past, or have we simply reached a new price ceiling?
Gillen: I think it is more a matter of wages not keeping up with the price increases than consumers having less buying power. Additionally, increasing home prices are also causing an increase in rent pricing, which hinders a family’s ability to save enough money for a down payment on a home.
Of course, you’ve also got to look at millennials in the market today, and what we’re seeing there is that they simply can’t afford to rent or buy, which is why we see so many stories around millennials moving back in with their parents. Many are likely employed, but not necessarily in the careers they want or at the income level they need to make a home purchase viable. It’s likely that we’ve reached a peak in rent pricing at this point, or at least are very close, and unless housing inventory increases and/or prices decrease, we should reach a price ceiling in the mortgage market, as well.
Q: Where do you see in the industry today in relation to credit requirements? Has credit quality improved or diminished?
Gillen: Credit quality has certainly improved, especially in relation to pre-recession levels. Based on the numbers we’re seeing, the average FICO score today is around 740, up 20 points from one year ago.
The thing to keep in mind here, though, is that these numbers are just indexes. Do they really indicate whether or not the loans themselves are qualitatively better? Possibly not. The fact of the matter is that the mortgage industry is simply originating better loans than it was before. And, while it’s true that credit standards are loosening somewhat, thanks to the current regulatory environment, it’s relatively impossible for us to reach a similar credit situation as the one we saw back in 2007.
Q: Alternative credit report methods are also gaining traction in the market. How do you see this impacting the market and credit availability for borrowers?
Gillen: A borrower with no credit score, traditionally, would have been considered a poor, high-risk investment for a lender. What we’re seeing today, however, is a new demographic of borrowers who, whether because they had limited access to credit or simply choose to avoid it, may actually be credit-worthy, but do not yet have the FICO score to back that up.
And it’s not just millennials. There is a growing segment of our population working to become debt-free. Some, for example, have chosen to forego credit cards in response to experience during the recession. We’re already seeing individuals such as these apply for (and be approved for) first mortgages that Fannie Mae and Freddie Mac then purchase, so as the process becomes standardized, we can expect more borrowers to utilize this path to achieve homeownership.