A distinguished panel of economics, policy, and mortgage experts discussed national and local mortgage markets at NVAR’s Finance Summit this past May. Nationally-syndicated Washington Post columnist Ken Harney served as moderator.

THE INTERSECTION OF EMPLOYMENT, INFLATION AND INTEREST RATES
With the economist’s point of view, Joseph Minarik, Senior Vice President and Director of Research with the Committee for Economic Development, asked the audience to imagine that they were Janet Yellen, gazing into her fiscal crystal ball as she tries to reconcile her two often conflicting mandates: maximizing employment while minimizing inflation.

Yellen’s job is complicated by the fact that we are in an unprecedented situation. “We’re climbing out of an extraordinarily deep pit and we’ve got no good history to guide us.”  The present recovery isn’t following the rules, Minarik said. 

“We’re climbing out of an extraordinarily deep pit and we’ve got no good history to guide us."

After previous recessions, the level of employment shot back up, Minarik explained. Our present recovery has been different. There was an extraordinary increase in unemployment during the last recession and a large number have not returned to the workforce. 

This has implications for the long-term availability of credit, Minarik said. The Federal Reserve Board sees 2 percent as a healthy rate of inflation. Any lower and economic growth is stymied because people anticipate further price drops and delay expenditures. For the last seven years, Minarik noted, the rate of inflation has been below 2 percent. 

 “If I’m Janet Yellen,” said Minarik, “I see a lot of room to push the economy forward and that means keeping interest rates low. But here’s the big question; if those folks who have given up looking for work rejoin the labor force, we have a tremendous amount of headroom for the economy to grow. However, if they don’t return, the labor market will tighten and wages will rise. Labor costs are two-thirds of all costs in the economy. Rising wages put pressure on prices, which produces inflation.” 

Minarik expects that the Fed will maintain an easy monetary policy for some time and that will hold interest rates down. If the labor market tightens and wages rise, he said, we can expect that the Fed will raise interest rates.

Minarik believes that Fed leadership is using the right tools and showing good judgment. “I don’t have the same level of confidence in the making of policy with respect to the Federal budget.”  

MORTGAGE MICRO-VIEW
Richard Owen, Vice President, Community Bank Division Government Relations with Atlantic Bay Mortgage Group and Steve Farbstein, Chairman of the Virginia Bankers Association Mortgage Executives, explained the lender’s perspective in a micro-view of the mortgage market. 

“On the agenda,” Owen joked, “I saw the words, Dodd-Frank and good news — I was glad I only had 10 minutes.”  The good news is that industry trends are favorable:
• Interest rates continue to rise but are still amazingly low compared to past rates
• Mortgage credit availability continues to increase
• In Virginia, homeownership rates continue to rise while rates are flat nationally
• Delinquency and foreclosure rates continue to decrease; this is critical to the health of the mortgage system
• Consumer optimism continues to improve.

A year ago, there was $1.1 trillion worth of refinance traffic versus $652 billion in purchase originations, Owen said. This year, there are increasing purchase originations and declining refis, which is expected in a rising interest rate environment.

Owen described The Dodd-Frank Regulations as the Y2K of the mortgage industry. Initially, lenders were terrified of the “tens of thousands of pages of rules and new processes that we had to put in place. We worried about unintended consequences and additional costs of ensuring compliance.”  Lenders developed coping strategies and implemented changes gradually, he said. When the rules went into effect on January 10, 2014, the industry was prepared and the transition was smooth. 

The industry’s response to the proposed Qualified Mortgage and Qualified Residential Mortgage was another success, Owen said. These requirements would have had an immense negative impact on cost and availability of credit. 

To avoid risk, he noted, lenders limited themselves to making QRMs and credit became extremely tight, hindering the recovery of the housing market. Industry leaders went to Congress and explained that credit was too tight. Now lawmakers are modifying the rules to make them less restrictive. 

As a result of the Real Estate Settlement Procedures Act (RESPA) -Truth in Lending Act (TILA) Forms Integration, two new forms are coming in August of 2015, Owen explained. These are the Loan Estimate Form which the lender must give to the consumer within three business days after the consumer applies for a loan, and the Closing Disclosure Form which must be delivered three business days before closing. The Closing Disclosure form replaces the HUD-1 Form. 

Farbstein spoke of challenges lenders face. Training, software and closing costs of maintaining a Dodd-Frank-compliant lending environment are high. Instead of focusing on the customer, Farbstein said, lenders must focus on navigating this new regulatory maze. He suggested that Realtors® can help by forming a partnership with their bank or lender. This is particularly important in the case of condominiums that have not been approved by FHA or VA. 

A large number of condos lack FHA approval, creating problems for first-time homebuyers. Seniors who are living in condos also find they can’t get reverse mortgages if their building is not certified by FHA. Farbstein suggested that real estate agents approach local banks that may be willing to portfolio certain units. Realtors® should help lenders to vet risk by presenting them with proposals they can say “yes” to. 

Moderator Harney responded that the movement of the entire mortgage lending system to return to pre-bust conditions has been overly slow and cautious. Homeownership levels are at the lowest since 1995, he said, which has a bad impact on the economy. He noted that risk has declined significantly but lenders haven’t adjusted their requirements. 

Yet based on the portfolios at Fannie, Freddie, FHA, and community banks, loan quality has rarely been better in the past two decades than it is today. “We’re in a vicious circle where everyone is too afraid to ease credit and get the market moving,” Harney said. “Realtors® should be lobbying Fannie and Freddie and Congress over high credit scores and excessive pickiness in underwriting.”

FEDERAL FISCAL POLICY GRIDLOCK
Describing how forthcoming federal fiscal policy and budgetary decisions may affect the mortgage market, Stan Collender, Executive Vice President with Qorvis/MSLGroup said that if you don’t like the current situation, get used to it. Collender predicted that congressional gridlock would continue until the end of the decade. In the meantime, he said, we’ll see narrow majorities and bitter bipartisanship, lack of consensus and a continuing lack of cooperation that will keep policymakers from accomplishing any real changes or responding to challenges in a meaningful way. The federal budgets we’ll see over the next decade, Collender said, will be replays of what we’ve seen over recent budget cycles. Sequestration is in place until 2023, he added. The budget situation in terms of stimulating demand and bringing new workers in is going to be difficult. 

The big shift, Collender noted, will come when Congress considers tax reform, which won’t be enacted until 2019 at the earliest because nobody wants to support tax increases before a presidential election. The good news, he offered, is that under current forecasts the deficit is going to go down. This takes pressure off the Federal Reserve to raise interest rates. 

According to the presenters, mortgage lending has loosened since the depths of the financial crisis. However, as a result of Dodd-Frank, lenders are nowhere near as forgiving as they were during the housing boom.  Add on the federal budget challenges, and real estate practitioners must stay tuned-in or risk losing credibility. New rules and requirements have become or will soon be law.  As trusted advisors, Realtors® need to understand the new rules of the financial road to provide quality assistance to consumers.