How to Survive an Inventory Shortage
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.”
EXPAND LOAN OPTIONS
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.”
ELIMINATE VALUATION PERILS
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