Lead Story… Regular readers of this blog know that I have been bearish on the mortgage industry with mortgage rates rising and tax incentives vanishing. The problem is that today’s mortgage lenders are built for growth and staffed accordingly. Rising rates and fewer tax incentives led to a substantial slowdown in the refinance market, cutting off a major source of origination volume and, by extension revenue for lenders.
As the refinance business continues to dry up, mortgage lenders will be forced to focus on purchase mortgages and home equity lines of credit. So far, purchase mortgage volume has held up fairly well as strong demand for housing persists despite affordability concerns. HELOC’s, which many lenders point to as a potential area of growth in a rising rate environment have been a notable bright spot as home owners look to tap into equity generated by price appreciation without having to refinance into a higher rate on their primary mortgage. However, the cost of borrowing under such a loan has gotten substantially more expensive as the aforementioned tax reform bill prohibited interest deductions for home-equity loans and HELOCs unless the funds are used to “buy, build, or substantially improve” a primary residence. Couple this with rising interest rates and it’s easy to see why HELOC borrowers are going to feel squeezed sooner or later. The above factors are having the exact impact on mortgage lenders that one might expect. Via National Mortgage News (emphasis mine):
Declining mortgage origination volume and soaring costs drove production income for independent mortgage banks and mortgage subsidiaries into negative territory during the first quarter, according to the Mortgage Bankers Association.
Nonbank mortgage lenders and mortgage subsidiaries of chartered banks posted a net production loss of $118 per loan in the first quarter of 2018, down from a net gain of $237 per loan in the fourth quarter of 2017 and net gain of $224 per loan one year ago.
This is the second time in the nearly 10-year history of the MBA’s Quarterly Mortgage Bankers Performance Report that lenders lost money originating mortgages. The last time, in the first quarter of 2014, lenders posted a net production loss of $194 per loan.
The decrease in volume is largely due to the declining refinance market which is not going to make a comeback anytime soon unless interest rates dive substantially from here which is highly unlikely. Losing money is clearly not a viable option and mortgage lenders boxed in by a combination of low origination volume and higher origination costs are facing a choice that I laid out about a month ago:
Accept that volume is going to be lower and scale back projections, budgets and staff accordingly.
Ease underwriting standards and lower down-payment requirements in order to qualify more marginal first time buyers and entice cash out refinances (despite higher costs)
Only time will tell which route they choose but I remain highly skeptical that the industry can remain profitable in this environment with its current number of participants.
Armed and Ready: When it comes to interest rates, the Fed appears ready to tighten first and ask questions later. However, inflation is still only modest and deeply entrenched deflationary forces remain at play.
Bottoms Up: Economic confidence is rising among lower-income Americans thanks to a tightening jobs market and increased take-home pay following tax cuts.
Hiding In Plain Sight: The yield curves in major markets haven’t inverted. However, within the past two months, the yield on an ICE Bank of America index of government bonds due in seven to 10 years has fallen below the yield on an index of bonds due in one to three years for the first time since the first half of 2007, which could be a harbinger of things to come.
Fuel on the Fire: US companies spent a record $1.5 trillion on shipping costs in 2017 and that trend is unlikely to change anytime soon, continuing to drive demand for warehouse and logistics space. See Also: While brick and mortar stores continue to struggle, retail is still the engine behind the industrial boom in much of the western US.
Spigot Closing? Higher interest rates will result in less available capital for alternative lending platforms as other investment options become more attractive to the sources of capital funding them.
Different Approach: Tech companies are increasingly focused on segments of the housing market from planning to construction of units. However, the often-massive capital requirements are still an issue for startups. (h/t CJ Collins)
Behind Enemy Lines: San Francisco, aka the poster child for NIMBYism in the United States just elected a pro-housing YIMBY as it’s new mayor.
Strong Support: California voters still love Prop 13 forty years after its passage including a somewhat shocking 50% of renters.
No Stone Un-turned: As the US housing stock shrinks, single family rental companies are cozying up to home builders as they seek out more units.
See, It’s Good For You: A new study found that moderate drinking teaches heart cells how to toughen up, potentially limiting damage from heart attacks because science.
Don’t Call it a Comeback: Sociopathic CEO Elizabeth Holmes of Theranos infamy is planning on starting a new venture despite pending charges from the SEC and DOJ.
Rise of the Machines: A pilot program for fully automated farms where robots tend to crops are being rolled out in China.
Chart of the Day
Go Big or Go Home: A 48-year-old man raised a can of beer and chugged it after a sheriff’s deputy stopped him on suspicion of drunk driving because Florida.
Amateur Hour Two firefighters from Akron, Ohio are on paid leave pending an investigation into allegations that they were shooting porn in a local fire station.
It’s Happening! The US Navy is dropping live bombs in Florida. I, for one have long been a supporter of arming the moderate Floridians or at least establishing a no-fly zone. This is certainly a start. (h/t Stone James)
No Takers? Burger King was forced to apologize for offering Russian women free Whoppers for life if they get impregnated by World Cup players in order to develop future world class soccer players.
Landmark Links – A candid look at the economy, real estate, and other things sometimes related.
Visit us at Landmarkcapitaladvisors.com