WSJ: Is the mortgage market breaking again?

“Years ago, the fi­nan­cial cri­sis re­vealed the folly of churn­ing out “liar loans.” Reg­u­la­tors cracked down, and mort­gages made to­day are gen­er­ally more con­ser­v­a-tive. What reg­u­la­tors didn’t fo­cus on was the strength of the mort­gage com­pa­nies them­selves. Though the loans are stur­dier, the in­frastructure largely didn’t change.”

 

Home prices to drop 2% to 3% in 2020... Seriously?

Zillow Research recently published its forecast, a baseline "2%-3% drop in (home) prices through the end of 2020, followed by a slow recovery throughout 2021. Prices will return to 4Q19 levels by 3Q21." Its pessimistic case calls for a 3%-4% drop.

While this prognostication may seem exceedingly rose-tinted given the likely double-digit percentage economic contraction of this year, there are reasons for optimism and why we may not in fact be in "Housing Bubble 2.0" territory.

Several factors may "flatten the curve" that will keep housing supply from overwhelming the softening demand.

1. Mortgages in forbearance plans made up 7.54% of mortgage servicing portfolios last week according to the Mortgage Bankers Association. These home owners will be gaining a 90-180 day payment holiday, dampening the impact of the double-digit levels of unemployment.
2. Home owners are also in better equity position in aggregate, sitting on $6.2 trillion of untapped home equity, or 1.65x the amount at the end of 2007, right before the last housing crisis. If the home is an ATM, it's a well-stocked one.
3. Moreover, since the Great Recession, housing production has been well under historical levels. Freddie Mac estimates that "2.5 million additional housing units will be needed to make up this shortage."

Even if all these factors help attenuate the drop in housing prices to the levels estimated by Zillow, it will not be smooth sailing ahead for all. There will, in all likelihood, be significant local disparities driven by, for example, industries and uses.

1. Areas reliant on the hospitality industry will be hard hit. Some predict it will take "the U.S. hotel industry approximately five years to achieve pre-COVID-19 occupancy, revenue and profitability."
2. Similarly areas with exposure to the sharing economy, like Airbnb or VRBO holdings, may see distressed selling as overstretched owners capitulate as their "bargain with the devil" turns south.
3. This pandemic will also influence our housing and living behavior. The Atlantic's recent piece on epidemiological-driven retail change has a clear second-order impact - our housing priorities.

Extra credit (for now): How will the fintechs/proptechs of the recent wave find ways of surviving in this new normal? Some initial considerations...

1. Will iBuyers like Opendoor become tech-enabled, social-distancing acceptable front ends for institutions seeking to roll up distressed housing stock?
2. Will fractional equity plays like Point be able to pivot to help consumers access tappable equity rendered untappable due to financial distress?

Opendoor resumes operations

Opendoor resumes operations in Phoenix.

“the #iBuyer has released three fully-digital, contact-free experiences to help their customers purchase homes while coinciding with social distancing guidelines.”

While digital innovations receive the headlines, I can’t wait to hear about innovations on the take-outs since these platforms are perfect to opportunistic acquisitions at-scale

Green shoots in the mortgage business

‪The National Association of Realtors report that mortgage applications were up 12% week-over-week driven by purchase volume since refinances declined 3%. California, Washington, New York all up. While still 20% down from a year ago, positive sign of pent-up buyer demand.

Consumer spending plummets

Consumer spending trends amidst the #covid19 pandemic. Great analysis from Joint Venture Silicon Valley leveraging Earnest Research data. While location-focused, the analysis clearly shows that the region has been a leading indicator for the rest of the nation. Key nugget: if shifts in consumer spending trends persist, upwards of 16% of the region’s total employment, across retail, hospitality and food services, could be at risk.

WSJ: Kevin Scott of Microsoft hopes artificial intelligence will help his hometown

“I don’t think that we should be thinking about people in rural or middle America as folks who need to be defended from the changes that technology is going to force on them.” Microsoft CTO Kevin Scott provides a thoughtful redirection of artificial intelligence from a monolithic combine to consign humans to irrelevance towards distributed augmented intelligence solutions to improve the human condition.

Standing on the Precipice?

"The administration, Federal Housing Finance Agency, and regulators have put policy in place that could wreak long-term havoc on the entire #mortgage market if they don’t finish what they started." (David Stevens on Housingwire)

The unintended consequences of a "trust, but don't verify" mortgage forbearance policy include: (1) a liquidity crisis as mortgage servicers must continue to make good on the principal + interest payments to investors, not to mention property taxes, insurance and sundry other payments; (2) the disappearance of mortgage options for consumers as the originators, wary of moral hazard attendant to the forbearance policy, vacate large swaths of the market; and (3) the post-forbearance period crisis when home owners, stretched during the best of times, must somehow make good on the forborne portions.

It's as if the policy makers are now determined to achieve victory in the last war, one that emanated outward from the housing balance sheet, causing a lasting crisis of solvency.  This coronavirus pandemic is driving a crisis of liquidity as incomes evaporate, but if policy makers don't finish what they started, we may be revisiting the long-tenured morass from the last period.

Texas exceptionalism (and not in a good way)

“You can’t manage what you can’t measure” 

This apocryphal quote, variously attributed to Deming or Drucker, has gotten a bad rap in management circles for its inherent cognitive tunneling.  In the case of the COVID19 pandemic. there’s a massive amount of truth since we’re essentially flying blind.  Especially in Texas (source: Texas Monthly)

Politico: The next financial crisis: A collapse of the mortgage system

“The mortgage market is one of the many multiple complexly interconnected pieces of our financial system, so those assurances (note: bank-provided credit facilities) are really important, but I think the role of the government in being a reliable and available source of credit for the mortgage market and mortgage servicers during a crisis is even more important.” — Margaret Liu, Conference of State Bank Supervisors (CSBS) senior vice president and deputy general counsel.

Those in control seem to be busy fighting the last war, applying those lessons learned in blazing speed with insufficient consideration that mortgage servicing is now dominated by non-banks.  What was a very unpleasant drag to returns for the banks in the prior crisis is now an existential threat for the entire system this go-around.