Are nontraditional lenders mortgaging the future?
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Not every bank wants to avert its eyes from mortgage lending, however. Steve Hansen, vice president and senior residential sales manager for Associated Bank, doesn’t dispute the data from the Harvard study. However, based on his bank’s experience, nontraditional lending would appear to be more of a coastal trend (east and west) rather than an established pattern in the Midwest, where he says financial institutions are more likely to provide loan servicing after a mortgage-lending deal is closed.
“From our perspective at Associated Bank, and also from the standpoint of mortgage bankers in the state, we have not seen that significant an increase to the non-traditional lenders,” Hansen states. “To some extent, it is out there from some of the other sources like CPAs, insurance companies, and other corporations that are looking to get into home-mortgage originations.
“We actually have seen our business increase by 35% in the local market just through retail origination in Wisconsin and especially in the Madison–Dane County area. We see that [nontraditional] trend as a competitor, but we don’t see it as having a major impact on our business here.”
The Wisconsin Realtors Association’s June report on residential housing activity confirms a more robust housing market in 2015. Statewide, existing home sales in June rose 17.6% over June of 2014, which pushed the median price up by 6.3% to $169,000. In Dane County, sales were up 13% over June of 2014, with the median price increasing 4.2% to $233,500.
Perhaps the most encouraging trend is greater interest in home ownership among millennials. Their interest in home buying has been suppressed, in part, because of lifestyle reasons and, in part, because the 2008–09 financial crisis and housing collapse gave them second thoughts, especially if a family member or neighbor owned a home that was “under water.” In that situation, the home purchase loan has a higher balance than the home’s market value, which not only prevents the homeowner from being able to sell unless they are willing to cover a loss out-of-pocket, it also renders refinancing unrealistic.
“In the last couple of years, we’re starting to see millennials get into the market,” Hansen states. “Millennials will make up 50% of the buying market here in the next two to five years. We’re thinking ahead as far as how we market to them because they are a very viable group for the future of home purchasing.”
Cause for alarm?
However strong nontraditional mortgage lending happens to be, it raises questions about risk avoidance and preventing a repeat of the 2008–09 housing collapse. The Harvard study found that Federal Housing Administration (FHA)-insured loans are a key contributor to the recent surge in nonbank mortgage loans because the median FICO (credit) score of an FHA-insured, nonbank borrower is 667, compared to 682 for banks. At several nonbank loan originators, the median FICO score is below 660, and some believe this could bring higher rates of default and system-wide risk.
However, the U.S. mortgage market is largely shaped by federal policy, and regulators have begun to apply to nonbanks the same regulatory structure, via the 2010 Dodd-Frank Act and subsequent rule making, that also applies to banks.
Eisenga says people need not be alarmed about the heightened mortgage lending activity of nonbanks because they are much better supervised than they were before the financial crisis. Among the changes he would make in the new rules would be greater licensing flexibility to help people who once operated in the industry but can’t get their licenses renewed because they went broke, often through no fault of their own but as the result of the housing collapse. “Sometimes, bad things happen to good people,” Eisenga notes, “so more flexibility in licensing would be helpful.”
Hansen acknowledges that regulatory compliance is an ongoing process for banks, but he adds that Dodd-Frank brings improvements for consumers. He notes that under Dodd-Frank, matters like closing costs must be clearer to consumers, and changes that occur during the lending process must be promptly disclosed and well-documented. “One intent of Dodd-Frank is there will be no surprises for the consumer,” he says, “so they can make the best possible decision when they finance the purchase of a home.”
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