An impediment to clear access to credit
by Ron D’Vari, CEO, & James Frischling, President, NewOak
The upward trend for home prices nationwide exceeded many experts’ expectations in 2013, with home prices rising by 10.9 percent. This has been welcome news for banks as well as those who may want to refinance based on improved equity positions. There are still many positive factors that may propel home prices up further, including an improving job market, pent-up housing demand and still historically low interest rates. Home prices also are still low and affordable in many markets. The lingering question is how long will this gravy train run?
A few natural factors that can reverse this trend are corresponding increases in interest rates and home prices in the face of tighter mortgage underwriting standards. In addition, there is a less-publicized phenomena impeding growth in the mortgage market: Rising student debt burdens.
Student debt, which naturally dampens young people’s ability to get home financing, is rising faster than mortgage and credit card obligations. According to the New York Fed, fourth quarter student loans rose by more than 5%, whereas mortgage and credit card debt rose by about 2%. Further, many graduating students are forced to take lower-level jobs because of still-weak employment outlook. Bulging student loans make it difficult for young people to save at all, much less set aside down payments for their first homes. The combined effect of student debt burden, lower entry-level salaries and tougher underwriting standards has significantly lowered the ability of prospective first-time home buyers to qualify for a mortgage.
An analysis of home loan applications in the last four months, performed by the Mortgage Bankers Association, indicates a 20% drop versus the same period a year earlier. If unresolved, this student debt issue may impact the housing market and the overall economy. For now, the improving economy and job market are simply masking what may become a very serious problem.
Last Tango in the Mortgage Litigation Fight: Servicing
The first part of the mortgage litigation fight was launched at the securities level and quickly migrated down to the loan level for part two. The third part of the mortgage fight, it’s now abundantly clear, is tied to servicing. The Financial Times reported that some of the biggest investors in the world are contemplating legal action against the mortgage servicers. It’s their contention that servicing practices and loan modifications affected the performance of the securities they purchased. While it’s safe to say that the majority of mortgage-related litigations are in the rearview mirror, the servicing chapter of the mortgage financial litigation fight is heating up.
The issue isn’t just a fight between investors and servicers. The Consumer Financial Protection Bureau (CFBP), along with other regulators, has been focused on the issue of servicing for some time. The “pipes”, as they call it, refer to how money flows between lenders and borrowers and represent the crucial third leg on the mortgage stool. If the pipes aren’t working properly, problems will follow. The CFPB has come down hard on problem servicers and agreed to settlements which underscore the importance of this often overlooked component of the mortgage market.
Most recently, servicing made headlines when the New York Department of Financial Services blocked a deal between Wells Fargo and Ocwen Financial Corp over concerns that the mortgage servicer didn’t have the capacity to manage the increased volume.
The financial crisis has brought a great deal of volatility to the mortgage market, including the transfer of more than $1 trillion in servicing rights over the past two years. That volume level is calling into question the capacity capabilities of the servicers and is drawing investors to the litigation table as well.
