My name is Steve Schipper, and I’m Founder and Managing Director of LendTrade based here in Des Moines.First I’d like to thank Paul and Agri-Access for asking me to talk with you all today.I was here last year for this conference and it’s really a great event that they put together.
I’m going to try and be brief and hopefully everyone can take away at least one piece of information back to their office that they find interesting.What I want to discuss are some trends impacting the residential mortgage market.The opportunities we see as a result of those trendsAnd last we’ll discuss the keys to success for lenders to capitalize on these opportunitiesAfterwords, I’ll take just a few minutes at the end to explain who LendTrade is and how we’re helping with Paul and his team.
Sometimes it’s hard to remember what the world looked like prior to 2007:Seems like a lifetime agoWe had hundreds of companies buying non-agency residential loans on a BULK OR FLOW correspondent basis.Huge variety of loan types.Firsts and Second MortgagesBig Loans Small LoansGood Credit and Bad CreditNINA, No Doc, Stated, Some of these loans made sense, and some of them didn’t
As we all know by the fall of 2008 the secondary market collapsed and most of the links between buyers and sellers were broken.Some of those relationships had lasted for years leaving a huge vacuum in the secondary market.It was like someone just took an eraser to the secondary market for most loan types.The large origination shops that could sell directly to Fannie and Freddie have capitalized on the collapse.
On the origination side we have a large percentage of the market controlled by the top five banks.60% of all originations are controlled by the top five banksWells Fargo had over one-third of the market share in the first quarter of 2012. Wells and Chase Combined were almost half What I want to point out is that everybody else is fighting for the other 40% of the market.[Source: Mortgage Market Index]
On the secondary market side, we have 90% of new mortgages ending up at Fannie, Freddie or FHA.So to combine these two graphs, we have a lot of people competing against one another for the same customers with the same products.We predict that the percentage of loans that are going to these agencies will decrease as the markets heal
We expect that Non-Agency alternatives will take market share from the agencies over time… BUT…Before alternative products can get any traction… the capital providers need to see…
Need prices to stabilize.Seeing some positive signs.
When it comes to home prices, the press loves to talk about the case shiller index so let’s start there.Everybody has probably already seen this graph.One challenge with any of these statistics is that there is a lag. S&P releases the data monthly. On June 26th they released the April data. Therefore a home sale that closed on April 1 would not show up in Case Shiller for 90 days. Additionally, you figure it will take 30 – 60 days from signing a purchase contract until closing so the Case Shiller statistics represent prices from 4 – 5 months ago.18 of the 20 large metro areas covered by Case Shiller saw month over month improvements.Half of the metro areas covered saw year over year improvements.Again, this data released at the end of June represents contracts signed early in 2012.
If we peel back the onion a bit and look at the State figures. Source = Federal Housing Finance Agency they are the regulator of Fannie, Freddie, and Federal Home Loan BanksPopulation of loans are those owned by Fannie and Freddie.These numbers show the change in home prices between March 31, 2010 and March 31, 2011. RED shows states with large decreases in home pricesORANGE shows states with smaller decrease in home pricesGREEN shows states with improving home prices.Note that for the year ending 1Q 2011 it was almost all bad news. Only a few states showed improving home values.CHANGE 2011 to be March 31, 2011
These numbers show the change in home prices between March 31, 2011 and March 31, 2012. Went from mostly orange and a lot of redTo Mostly green with a little orange.Again, this data is several months old. CHANGE TO GRAPH Top part of Michigan needs to be green in this slide, Arizona is currently green should be orange, same with Ohio…Change 2012 to March 31, 2012
it’s all about location, location, location.Need to look at what’s happening at the zip code level.Some of the hardest hit areas are showing significant improvements recently.Phoenix – Case Shiller data showed a 8.6 percent gain in prices from March of 2011 through March of 2012Miami – Case Shiller data showed a 3.24% gain in prices from April 2011 though April of 2012But Atlanta – showed a 17% drop year over year from April 2011 through April 2012.Many of the hardest hit states and cities are seeing some improvement. It shows that the national statistics don’t tell the whole story.
As we all know mortgage rates are at an all time low. Pretty amazing trendline over the past 30 years.Markets continue to drive rates down. Last week Freddie Mac reported that the average 30 year fixed rate for conforming loans was 3.56%How many people with a 3 and a half % 30 year fixed rate are going to refinance once rates stabilize or increase?We think the incentives and ability for consumers to refinance are shrinking all the time.
As a resultAkey shift is going to occur in the coming months and years away from refinance business and toward purchase business.While purchase currently only make up around one quarter of the overall mortgage market.The MBA predicts that will rise to around 71% by the end of NEXT year
The National Association of Realtors generates a Housing Affordability Index.Describe how they come up with it.Since the recession began, the low mortgage rates and the drop in home prices have helped drive housing affordability to an all time high.But we haven’t seen consumers capitalize on this yet.
Everybody has heard of the baby boomer generation…62 million echo boomers (Were called Generation Y), ThoseBorn between 1979 and 1990Many of them are children of baby boomers.Will shape the next 2 decades.Already make up 31% of recent home purchases. [Source: US News & World Report]
5 million of them turn 21 every year.
Despite the fact that homes are as affordable as ever….And despite the demographics of young homebuyers Household growth has yet to stage a strong recovery.These figures are in millions per year, so in the late 90s we saw almost 1.2 million households created per year.From 2000 – 2005 that figure rose to 1.4 million households created per year. The past five years we’ve seen that drop to roughly 600,000 households per year. We’re currently running about ½ of rate of households formed vs history and projections for the current decade.Five years at 600,000 below trendline per year is around 2.5 million households
According to the US Census Bureau, the percentage of men aged 25-34 living with their parents has risen from 14% in 2005 to over 19% in 2011. Not as severe a rise for women in that age group.I don’t know about you but I lived at home for a summer after leaving for college and it was the longest summer of my life and probably my Mom felt the same way.I believe there is pent up demand for housing.
The national jobs numbers have been weak. This is holding back consumers and is also keeping capital providers on the sidelines.It’s circular. Need jobs to create confidence for consumers and secondary market investors.
Many potential homebuyers & capital sources have remained on the sidelines. Confidence is key driver to get people to take action.JobsHome values Government (regulations, taxes).
Prior to 2007 you needed all the products that were available just to keep up with the competition.Now it’s going to give you a leg up if you have unique products.
Secondary market relationships are going to be more specialized (niches) and more geographically specific vs. national.
Prior to the crisis we had pretty much uniform guidelines regardless of where the property was.When the housing crisis began the first thing we saw was that investors tightened up guidelines for “hot states” Florida and Arizona for example.We predict going forward the opposite will happenThe national numbers for home prices and job creation are important for sure, but Capital will flow to cities and states where jobs are being created and real estate values are stable.The secondary market will be more segmented by geographies until it’s clear that all of the excess inventory has been cleared.
Revisiting something we looked at earlier…Unclear how much the non-agency market will grow over but….Suppose we even get back to 50% of the market being non-agency that’s a 400% increase from where we are now. Therefore….
Huge opportunity over the coming decade for the portion that is non-agency to grow.
Firms that can develop investor relationships for non-agencyproducts with do extremely well.Things like Jumbo loansHome Equity Loans,And Country Home Mortgages / Hobby Farms etc.
Looks more B2C, need B2B
There is a silver lining in everything that’s happened in the past several years. We all survived, and we get to re build the market. Huge opportunities because a lot of the competition is no longer there.Firms like Agri-Access are re-positioning to capitalize on the vacuum that exists in the secondary market.
I’d encourage lenders to seek out capital partners that operate beneath the radar screen.Best capital partners are less likely to be the household names (Citi, Chase, Wells, etc). They are focused on retail production.If you are going to offer your customers something unique you need to find investors not everyone has access to.
“If you see a bandwagon, it’s too late.” - James GoldsmithOnce the market turns to purchases business, everybody is going to be going after that business…
We believe there are several keys to success for mortgage lending organizations.
Lenders are tired of working with the 800 pound gorillas.What lenders need is the ability to pick up the phone and talk with someone who can help them. You want to find investors like Agri-Access where you can pick up the phone and call Paul or Michele, or Tam and talk through things.
As we discussed, I think smaller lenders can be more effective than the large ones for niche products.
Consumers will demand low long-term fixed rates.They will shy away from ARMs & Balloons.
Again, thanks for your time. Thanks again to Paul and Agri-Access for inviting me to come and talk.
If you see me later at the golf course, and want to ask any questions feel free to stop up. I have a stack of business cards here too.
Trends & Opportunities in the Residential Mortgage Markets
OBJECTIVE 1 THE TRENDSOBJECTIVE 2 THE OPPORTUNITIESOBJECTIVE 3 THE KEYS TO SUCCESS