"This is a fantastic opportunity for lenders to be recalibrating with technology partners to ensure they have right capabilities configured... and the lender is taking full advantage of their partners’ technology innovation."
How can lenders prepare for an uncertain future mortgage market?
And will the future mortgage market favor first-time home buyers or large real estate investors?
DENVER; Jan. 14, 2021 - Lenders, prepare for an uncertain future mortgage market in 2021 and beyond. In my last post, I wrote about the major drivers that have contributed to the incredibly hot real estate market we enjoyed for much of 2020. However, everyone should expect that to change due to the cyclical nature of our industry. When it does, only the prepared will thrive. Today, I'll share the three areas lenders should consider including in their strategy to prepare.
First, I want to talk about the future that I see beginning to come into focus.
A bump in REO inventory
I don’t think you need a crystal ball to know that with nearly 7% of mortgage borrowers in forbearance as of September 13. A lot of consumers are in distress. At the height of the foreclosure crisis between 2007 and 2010, 10% of borrowers were in default.
I don’t expect everyone in forbearance to default, in fact many who were in forbearance are making payments again. However, some of these borrowers won’t be able to claw their way back.
When that inventory hits the market, I expect to see institutional investors step in to purchase much of it. But it will also open the doors to traditional home buyers. If interest rates stay low, these buyers will stay in the market.
If there is enough of this inventory, it could keep housing prices from softening when interest rates rise, which they are bound to do. However, there is an ugly scenario in which we don’t have much inventory on the market, interest rates return to 5% and the market slows to a crawl.
Demographics hold the key
Our best bet at figuring out which scenario will actually play out is all about analyzing the demographics.
When we look at the health crisis, it’s clear that the blue-collar workforce has been impacted by the pandemic more than the white-collar workforce. These people work more closely together and can’t really work from home. Unless they are sheltering in place, the blue-collar workforce is susceptible to the virus.
Typically, this segment of the population lives in smaller homes, which are the preferred target for first-time homebuyers. If they sell, new home buyers will step in and buy them up, which is exactly what we saw happen last year.
The other demographic that has been negatively impacted by the pandemic is the senior population. Many of these homeowners had already downsized and were again living in smaller homes. This means more inventory for the upcoming Millennial first-time home buyer.
It is reasonable to expect that smaller homes will fly off the shelves this year. On the other hand, what about the larger homes?
The opportunity for institutional investors
During the foreclosure crisis, Wall Street hedge funds stepped in to buy up distressed real estate, which they proceeded to rent until the market improved enough that they could release it back into the market at a profit. It was a sound strategy that I expect we will see again.
There is plenty of reason to believe that, from an investor perspective, many people who are renting today could be in a position to buy. Affordability is high in many markets and interest rates are low. This makes buying distressed real estate with the intention of flipping it to new homebuyers an attractive strategy.
However, even if they have to rent it in the short- to mid-term, buying real estate owned (REO) properties that comes as a result of the pandemic would still likely be quite profitable. When the spread returns, these investors can release it back to the market.
Depending upon the type of inventory we see in the post-pandemic market, it will either be a first-time home buyer boom or an investor buying boom. If interest rates remain low, it will favor first-time buyers. If they rise, look to larger real estate investors.
Will there be a spike in REO after the pandemic? While some still wonder, it seems clear to me that companies that failed during the pandemic won’t be in a position to offer jobs even when vaccines are scaled around the globe. While some borrowers may qualify for a loan modification, it will only delay the inevitable.
Three areas lenders can focus on to prepare for an ugly scenario
In my last post, I mentioned a scenario in which the market sees a drop in inventory and an increase in interest rates, putting immense drag on the industry and slowing it to a crawl. What can lenders do to be prepared for this? Lenders should be doing the same thing they would be doing in any market.
1. Streamlining Operations
First, lenders preparing for an uncertain future mortgage market in 2021 should consider including streamlining operations to reach the following three objectives: to decrease cost, to reduce time to originate and to increase borrower satisfaction.
2. Developing Talent
Additionally, there should be a focus on growing talent. Lenders should be developing their staff to be the very best at what they do in order to offer borrowers an unparalleled experience.
3. Recalibrate with Tech Partners
Last but not least, this is a fantastic opportunity for lenders to be recalibrating with technology partners to ensure they have right capabilities configured for their unique approach to the business and the lender is taking full advantage of their partners’ technology innovation.
To learn how a customized solution can transform your operations, contact us today to schedule a live demo of the Mortgage Cadence Platform (MCP).
By Joe Camerieri, EVP, Client Account Management at Mortgage Cadence
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