How to Sur­vive an In­ven­tory Short­age

National Mortgage News - - Contents - By bon­nie sin­nock and brad finkel­stein

A short­age of hous­ing in­ven­tory is hold­ing back mort­gage orig­i­na­tions, leav­ing lenders search­ing for ways to re­place lost vol­ume

Go­ing into 2017, a pickup in pur­chase lend­ing was ex­pected to help off­set de­clines in re­fi­nance mort­gage vol­ume. But a na­tion­wide short­age of hous­ing in­ven­tory is sti­fling the real es­tate mar­ket’s full po­ten­tial. 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.

How­ever, not all hous­ing in­ven­tory is cre­ated equal, so the prob­lem isn’t the same ev­ery­where or in all price tiers.

Even with pre­mium home in­ven­tory rep­re­sent­ing more than half of listed houses in the first quar­ter, in cer­tain pop­u­lar ar­eas like San Fran­cisco, sup­ply is not keep­ing up with de­mand. There also aren’t enough en­try-level homes to meet the needs of the grow­ing num­bers of first-time buy­ers who typ­i­cally buy these types of houses.

An av­er­age of 1.2 mil­lion house­holds will be formed each year be­tween 2017 and 2020, ac­cord­ing to a Con­gres­sional Bud­get Of­fice fore­cast re­leased ear­lier this year. In to­day’s mar­ket, 38% of home pur­chasers are first-time buy­ers, ac­cord­ing to mort­gage in­surer Gen­worth. But en­try-level homes rep­re­sented less than 26% of for sale prop­er­ties listed on real es­tate web­site Tru­lia dur­ing the first quar­ter.

“There is a marked drought in starter homes be­ing of­fered for sale,” said Equifax Chief Economist Amy Crews Cutts. “New in­ven­tory is fo­cused very much on the larger, higher-end homes.”

An­other con­trib­u­tor to in­ven­tory short­ages is the lim­ited re­sale mar­ket. Cur­rent prop­erty own­ers who bought dur­ing the long run of low post-cri­sis in­ter­est rates are more likely to stay put out of fear they won’t be able to find an af­ford­able re­place­ment if they list their homes. Trade-up homes com­prised just 23% of listed houses in the first quar­ter. In ad­di­tion, the sup­ply of fore­closed prop­er­ties left over from the cri­sis is di­min­ish­ing.

So what can mort­gage lenders do to bol­ster vol­ume?

There are gov­ern­ment pro­grams that can help lenders do more to sup­port con­struc­tion fi­nanc­ing, for one. And lenders are de­vel­op­ing new prod­uct strate­gies aimed at help­ing first-time buy­ers qual­ify for loans as well as en­cour­ag­ing ex­ist­ing home­own­ers to list their prop­erty for sale and buy an­other home.

Fi­nally, com­pli­ant part­ner­ships with re­fer­ral part­ners like real es­tate bro­kers and new data-driven validation checks for col­lat­eral val­u­a­tions can help lenders get loans closed more quickly, mak­ing real es­tate bro­kers, builders and lenders alike more pro­duc­tive.


Sin­gle-fam­ily lenders may not feel like there’s much 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.

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,” 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 con­struc­tion-to-perm loans through a third-party for the first time, he said.

“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.”


Some mort­gage lenders are turn­ing to pro­grams like bridge loans and down pay­ment as­sis­tance to ad­dress vol­ume con­cerns caused by the in­ven­tory short­age.

Home­own­ers are not putting their cur­rent prop­erty on the mar­ket be­cause they fear not be­ing able to find an af­ford­able place to live.

Third Fed­eral Sav­ings & Loan, head­quar­tered in Cleve­land, cre­ated a bridge loan that helps con­sumers pur­chase a new home while mar­ket­ing their cur­rent prop­erty. The bridge loan is struc­tured so the bor­rower just has to make one monthly pay­ment.

“With many mar­kets fac­ing low hous­ing in­ven­tory, bor­row­ers who are in­ter­ested in buy­ing a home need to act fast to have their bid ac­cepted,” said Third Fed­eral Chair­man Marc Ste­fan­ski. “By us­ing our bridge loan, bor­row­ers who al­ready own a home can elim­i­nate a bar­rier to buy­ing their next home and bet­ter com­pete in low in­ven­tory mar­kets.”

It al­lows bor­row­ers to use the eq­uity in their cur­rent prop­erty for the down pay­ment on the next one and prin­ci­pal and in­ter­est pay­ments are not re­quired for up to 12 months while the cur­rent prop­erty is be­ing sold.

To as­sist with af­ford­abil­ity, other lenders are of­fer­ing a 97% loan-to-value prod­uct with a 2% grant, ef­fec­tively al­low­ing con­sumers to buy a home with a down pay­ment of only 1%.

Move­ment Mort­gage of Fort Mill, S.C., takes this a step fur­ther by of­fer­ing a com­pany-funded 3% down pay­ment grant so the bor­rower doesn’t have to come up with any cash.

The Move­ment Mort­gage As­sis­tance Pro­gram is for low-to-mod­er­ate in­come first-time home­buy­ers, and of­fers ap­pli­cants turn­around speed and cer­tainty. The com­pany had been work­ing with Fan­nie Mae on its prod­uct for a year. The loans are sold ser­vic­ing-re­leased.

Move­ment han­dles all of the un­der­writ­ing and pro­cess­ing in-house for this pro­pri­etary prod­uct. There is upfront un­der­writ­ing on each file, which the lender es­ti­mates takes about six hours to re­view and make a credit de­ci­sion, said Ex­ec­u­tive Vice Pres­i­dent of Cap­i­tal Mar­kets Greg Richard­son, who added, “This gives the bor­rower the con­fi­dence of a pre-ap­proval based on an un­der­writer’s re­view” when they shop for a home.

The ap­pli­cant must at­tend home­buyer ed­u­ca­tion, said Richard­son. MAP also of­fers job-loss pro­tec­tion in­sur­ance with the bor­rower need­ing to opt-in although they do not pay for it.

“We felt like if [the bor­rower] can meet cer­tain un­der­writ­ing guide­line specifics, we want to help out and pro­vide these grants. From our per­spec­tive it feels like we’re do­ing the right thing, we’re giv­ing op­por­tu­ni­ties to those that just quite frankly can’t come up with a down pay­ment but want to buy a home,” he said.

“One thing we’ve done is gone out and iden­ti­fied peo­ple that we think are qual­ity builders from be­fore the col­lapse.” — Steve Calk,

CEO The Fed­eral Sav­ings Bank

Par­tic­i­pants must meet me­dian in­come and liq­uid re­serve re­quire­ments. How­ever, for those un­able to qual­ify for MAP, Move­ment has other 97% LTV pro­grams, as well as of­fer­ing Fed­eral Hous­ing Ad­min­is­tra­tion and Vet­er­ans Af­fairs loans.


Real es­tate com­pa­nies of­ten look to give buy­ers an edge in this highly com­pet­i­tive en­vi­ron­ment through their af­fil­i­ated busi­nesses.

The me­dian time for a prop­erty to go from list­ing to con­tract was 37 days dur­ing the month of May, a new low. The old record was 40 days set in April, ac­cord­ing to Redfin.

Speed counts and it makes a dif­fer­ence to a seller eval­u­at­ing com­pet­ing bids if an in-house mort­gage com­pany can get a buyer’s loan ap­proved in 30 days rather than 60 days, said Duffy Hanna, pres­i­dent of Howard Hanna Fi­nan­cial.

Par­ent com­pany Hanna Hold­ings Inc., which owns a real es­tate bro­ker­age, re­cently pur­chased a New York mort­gage banker, 1st Pri­or­ity Mort­gage. The ac­qui­si­tion joins two other com­pa­nies, both named Howard Hanna Mort­gage Ser­vices, one that lends in Penn­syl­va­nia and the other in Ohio and Michi­gan.

“The whole com­pany op­er­ates un­der the ‘one team, one dream’ phi­los­o­phy. It is a more ef­fi­cient, bet­ter way to do busi­ness for the con­sumer to have these ser­vices of­fered in­house un­der one roof,” Hanna said.

Shel­ter Mort­gage, a sub­sidiary of New Penn Fi­nan­cial, has cre­ated a “con­sor­tium joint ven­ture,” Part­ners United Fi­nan­cial. Shel­ter holds 50.1% of the eq­uity and its part­ners, which could be real es­tate com­pa­nies or home­builders, hold the rest as a group.

Right now, there are two real es­tate com­pa­nies in the con­sor­tium, HER Real­tors of Colum­bus, Ohio, and Dil­beck Real Es­tate of Pasadena, Calif., with others in ne­go­ti­a­tions, said Corey Caster, CEO of Shel­ter Mort­gage.

With Part­ners United, which has its own Na­tion­wide Mul­ti­state Li­cens­ing Sys­tem num­ber, there is an op­por­tu­nity to join an al­ready ex­ist­ing busi­ness and buy into own­er­ship, rather than try­ing to start one from scratch, he said.

“There are ab­so­lutely folks that want to go through and start their own joint ven­ture and not be a part of a con­sor­tium be­cause they want one part­ner. It just comes down to chem­istry, con­nect­ing,” Caster said.

But hav­ing an in-house lender doesn’t mean the real es­tate agents will re­fer their clients over. The typ­i­cal cap­ture rate is be­tween 15% and 20%, Real Trends Pres­i­dent Steve Mur­ray said. “Agents are in­de­pen­dent con­trac­tors for the most part. You can’t force them to use your in-house mort­gage ser­vices. And no amount of plead­ing will suf­fice.”

For Howard Hanna’s real es­tate agents to rec­om­mend its mort­gage af­fil­i­ate, “ul­ti­mately we have to have the best ser­vices and the best prod­ucts and com­pet­i­tive pric­ing. If we don’t do those things, we don’t de­serve their busi­ness,” Hanna said. Agents are “fiercely in­de­pen­dent and if we’re not of­fer­ing that ser­vice to them, then they won’t de­liver.”


With thin in­ven­tory and soar­ing prices, get­ting ac­cu­rate and timely val­u­a­tions that sup­port sales is a grow­ing chal­lenge best met with quick ac­cess to ac­cept­able data — and there’s the rub.

Even with con­sid­er­able tech­no­log­i­cal ad­vance­ment, the mar­ket can still move faster than avail­able data can, and lenders don’t re­ally want to risk fund­ing or sell­ing a loan with an un­sup­ported valu­a­tion.

“When a mar­ket is in­creas­ing at a speed more rapidly than pre­dicted, you still have to wait for that data to be ev­i­dent,” said Kevin Wall, pres­i­dent of First Amer­i­can Mort­gage So­lu­tions.

With hot hous­ing mar­kets like the Pa­cific North­west’s boost­ing U.S. home prices be­yond pre-cri­sis highs, it’s a grow­ing prob­lem. The av­er­age na­tional home price was a lit­tle more than $250,000 in 2007 and it looks likely to drift slowly to­ward $300,000 now, ac­cord­ing to Black Knight Fi­nan­cial Ser­vices’ home price in­dex.

Tech­nol­ogy is be­ing in­tro­duced that will help re­duce the lag be­tween the ini­ti­a­tion of a sale and its record­ing, but it could still be a con­cern for a while, Wall said. Ag­gre­gated, real-time data on com­pleted sales avail­able is com­ing in less than two years, he pre­dicted.

In the mean­time, the first thing a lender can do if a valu­a­tion looks like it’s out­pac­ing the mar­ket is to ask for a re-ex­am­i­na­tion to see if the ap­praiser was aware of con­di­tions un­sup­ported by the pub­lic record.

A lender may find that an ap­praiser based the valu­a­tion on not-yet-recorded pend­ing sales. While this may not be enough to sup­port a com­pli­ant valu­a­tion on its own, it could help un­der­writ­ers who con­sider a broad range of fac­tors when mak­ing a de­ci­sion.

Com­pli­ance and cost sen­si­tiv­i­ties prompt most lenders to work through ap­praisal man­age­ment com­pa­nies, un­less they are large or oth­er­wise have the re­sources to man­age ap­praisal or­der­ing in-house. That makes it dif­fi­cult for them to di­rectly ad­dress the chal­lenge of need­ing to cul­ti­vate lo­cal tal­ent in a shrink­ing ap­praiser work­force.

But they can make sure the AMC they choose to work with does.

“We re­ally urge our AMC part­ners to reach out to the ap­prais­ers,” said Ben­jamin Good­win, col­lat­eral ad­min­is­tra­tor for Churchill Mort­gage.

And as much as pub­lic records can call into ques­tion an ap­praiser’s opin­ion, an ap­praiser also can call into ques­tion a pub­lic record.

“Pub­lic records are no­to­ri­ously in­ac­cu­rate when it comes to square footage,” Good­win said.

Lenders should be pre­pared for a low ap­praisal as well as a high one in a hot mar­ket, said Clint Ham­mond, branch man­ager at Mort­gage Net­work.

Lenders should have “a con­tin­gency plan,” he said. “This can be any­thing from a bor­rower bear­ing the dif­fer­ence out-of-pocket to re­lin­quish­ing some por­tion of the seller-paid clos­ing costs.”

“Pub­lic records are no­to­ri­ously in­ac­cu­rate when it comes to square footage.” — Ben­jamin Good­win, Col­lat­eral Ad­min­is­tra­tor Churchill Mort­gage

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