Predicted for H2: Signs of a housing bubble, non-agency lending growth

The biggest 2021 problems for mortgage originators carrying through to the second half of the year are thelack of inventory and the relatedrun-up in home values to record levels.

Both are big concerns for Bruno Pasceri, the president of Incenter, which provides lender services. "I hate to use that word because it's scary, but I think we'reapproaching bubble status on the appreciation of homes," he said.

The annual price gains alarm him because of their effect on house sales.

"We're taking young, move-up buyers and first-time buyers out of the market because the value of the home is too high," said Pasceri. "Sowe're eliminating two classes of normal borrowers, and it kind of really frightens me."

Still, the mortgage industry is expected to continue its migration to a purchase market over the next six months. But loan officers are still focused on refinancings, said Mike Eshelman, head of consumer finance at Jornaya, a marketing technology company.

"That's not an easy shift to make from shooting fish in a barrel to now switch business to purchase when it's so hard to get a home for consumers and win those offers," Eshelman said. "How lenders can set themselves up for success in the second half is by gaining a clear picture of the consumer and where they're at in their shopping journey, so they know how to follow up appropriately."

Follow-up is essential since statistics show that consumers typically only deal withthe first and/or second lender that responds to their contact requests, Eshelman said.

At a time when the business will get highly competitive to deal with overcapacity, originators must "be more in tune with when the appropriate time is to reach out to [consumers] and be that lender that's still there for them when they eventually win an offer," Eshelman said.

While the first-time buyer market will present opportunities over the next few years, the second half of 2021 is not expected to be particularly fruitful.

Overlycompetitive pricing can become an issue during the rest of the year, as originators need to keep all the employees they hired busy.

"But what it's ultimately going to come down to is, who is nimble enough to capture the refi business when it's present, but also capture the purchase market at a high level as the industry shifts," Eshelman said.

But Pasceri noted that the inevitable step after intensified price competition is industry consolidation.

"The midsize independent mortgage lender is going to rethink where they are and the risks they take: 'Should I sell or merge at the high?'" Pasceri said. "So I think we're going to see some of that also confusing the market in the third and fourth quarter."

In these circumstances, he is also worried that the mortgage industry is going back to old patterns of expanding credit to drive business.

"I always think that the mortgage industry has the shortest memory of any industry in the country. We're just going to redo the whole thing [that caused the housing crisis] and replay the story over," Pasceri said.

But counteracting thatdéjà vu of 2007 and 2008 for him, is the fact that mortgage lender credit fundamentals have vastly improved over that period.

Non-agency lenders benefiting from shifting market
Ironically, the non-agency market, which was moribund because of the financial crisis until a few years ago, is expected to continue its rebound.

In the early days of the pandemic, the secondary market for these lendersshut down, but the growth trajectory that was interrupted in March 2020 has since resumed.

The Federal Housing Finance Agency's caps on Fannie Mae and Freddie Mac ability to purchase riskier loans as part of theJanuary revisions to the interagency agreements with the U.S. Treasury certainly helped.

Civic Financial Services, which specializes in non-owner- occupied mortgages, is having a banner year so far, with five straight months of record volume by both dollars and units, said William Tessar, Civic's president. He expects that to continue through 2021.

"Just looking at pipeline and appraisal orders I don't see anything indicating otherwise," Tessar said. "And with that we're gearing up to expand into more states, rolling out some new products, and really doubling down on some of the areas that we've found success in."

But it is more optics around the caps driving Civic's business, he said. Tom Hutchens, executive vice president of third party lender Angel Oak Mortgage Solutions, agreed.

The caps helped educate lenders about the products and pricing available at non-agency wholesalers, said Hutchens.

"Originators were surprised the spread between agency and non-agency was a lot smaller than they thought," he said. "Then they close a few loans and realize these are pretty easy — 'You know, maybe I should go out and market for these investor-type loans' and that's what we're seeing."

"The appetite is extremely strong in the securitization market," Hutchens said. "The reason those spreads between agency and non-agency prices are so thin is because of the demand."

Angel Oak's secondary market outlet, Angel Oak Mortgage, recently went public due to the investor interest in private label mortgage-backed securitizations. The company’s opportunity in the second half may lie in moving into the lower credit end of the lending business, Hutchens said.

"One of the things that we are very confident about is that the pandemic has left a lot of people with credit scars. As the states and the country reopens fully, there's going to be a lot of people that had credit challenges during COVID, are back on their feet, but they're not going to qualify for an agency mortgage," he added.

Civic’s Tessar expects the cost of capital for originators to remain low for the rest of the year, which should make it easier for the flippers to sell their properties.

"The take out financing for the [end] buyers is at the all-time lowest levels right so they're getting these permanent [conventional] financing in the high twos, low threes," Tessar said. "And so [consumers] can afford a lot more home, then you could under normal interest rate conditions."

Additionally, an increase in the supply of distressed properties hitting the market creates more opportunities for flippers and Civic.

"They must go through our channel to get [the property] to a point where they can get a standardized appraisal and [a loan] could be purchased by a Fannie, Freddie-type lender," said Tessar.

And an increase in the number of small businesses forming post-pandemic creates an opportunity for non-agency lenders, especially given all the hoops that conforming originators have to deal with forself-employed borrowers, said John Keratsis, the president and CEO of Deephaven Mortgage.

So besides the opportunity to finance new business owners, "most of these businesses hopefully will end up employing more than one person," said Keratsis. "And that's where folks in platforms like ours come in.”

As for the next six months, "I do think there'll be opportunities to consider different scenarios as the results of the pandemic unfold and the unfortunate disruption in people's lives or jobs," he continued.

The company is assessing the market's temperature while considering new product sets.

"We certainly haven't certainly haven't stamped where that will be but we're always considering this evolution of the market, and the fact that rates have been so low for so long," said Keratsis. "And a lot of consumers have equity in their homes, so by watching the trends, there's opportunity to create more products around them."