Editor's Note: This is part one of a four-part series on the mortgage industry's response to the housing inventory shortage. Read
Going into 2017, a pickup in purchase lending was expected to help offset declines in refinance mortgage volume. But a nationwide
Homebuilders burned by the housing crisis still aren't producing enough single-family housing to meet demand, as they face challenges like land and labor shortages and rising property taxes.
Annual single-family housing starts totaled more than 1 million in every year from 1983 to 2007 except 1990 and 1991, when builders were affected by the savings and loan crisis. After bottoming out at 430,600 in 2011 — the lowest level on record, dating back to 1959 — single-family starts have recovered somewhat, but still remain below 800,000, according to the Census Bureau.
Mortgage lenders have been hit with a one-two punch as a result: There are fewer transactions, and it's harder to qualify borrowers. That has kept loan volume down.
Single-family lenders may not feel like there's much that they can do about the inventory shortages that limit their purchase-loan prospects, but there is.
One of the most direct actions they can take is to participate in the underserved market for construction financing. Borrowers increasingly want to finance their own custom-built homes, and smaller builders often need financing.
"One thing that we've done is we've gone out and identified people that we think are quality builders from before the collapse," said Steve Calk, chairman and CEO of The Federal Savings Bank in Chicago. "Many of them pared down to very, very, small operations and we've now made sure they know we will help them with a construction loan, and that we will provide them with financing to grow their business."
Construction lending opportunities exist because while some traditional players like banks are still active, there has been much less participation in the market since the downturn. On top of that, there's increased interest in new homes from new buyers.
"In my opinion, it's never going to go back to the way it was, and now we also have pent-up demand, plus we have rising household formation," said Shannon Faries, director of risk management and strategic planning at construction loan technology and consulting firm Land Gorilla in San Luis Obispo, Calif.
While builders are primarily the ones financing new construction, borrowers' interest in custom-built homes is slowly growing.
"The vast majority of what we do is construction lending for families that are building a home," Calk said.
Custom-built housing starts were up 2% during a rolling four-quarter period ending March 30, and currently make up 21% of single-family starts, according to a National Association of Home Builders' analysis of census data.
"If you're out looking for a home for your family, housing inventories are tight, and you can't find what you want; you may choose to build."
— Shannon Faries, director, Land Gorilla
"If you're out looking for a home for your family, housing inventories are tight, and you can't find what you want; you may choose to build," said Faries.
A more monoline home lender, such as an independent mortgage bank, may not want to take on the commercial lending risk involved in providing builder financing.
However, single-close construction-to-permanent loans for borrowers have growing attractions for mortgage bankers. That's in part because there's increasing support for these available through government loan programs, said Faries.
Fannie Mae, for example, will buy single-close loans; and the U.S. Department of Agriculture's Rural Housing Department recently revised its handbook to allow lenders to offer
"The secondary mortgage market is playing a greater role," said Faries.
Lenders still need to manage the construction risk when they make the loans, though.
"The solution to that is not getting too greedy and following best practices," said Faries. "We expect you to vet the builder, we expect you to look at the builder's tax returns and credit history. We expect you to analyze the builder."
Coming up in Part 2: To help consumers get over the homeownership hump lenders are expanding loan options by offering programs and features like low down payments, bridge loans for home sellers and student loan refinancing.
