In reviewing the recent blogs I’ve published on topics surrounding Best Practices and the pressures imposed on title agents by lenders and federal regulators, I realize most were anything but uplifting. For this reason, I wanted to share a blog highlighting a recent industry-related publication that contains some good news and indications that there may be more business in your future!
As we reflect on the real estate collapse of 2008, it’s clear that there is ample room to point fingers at a variety of players who significantly may have contributed to a host of bad practices which ultimately led to the industry meltdown. Some will blame borrowers for buying more house than they reasonably should have expected they could afford, but this desire was not new. In the period leading up to 2000, borrowers always attempted to secure loans for amounts beyond their ability to repay, but their attempts were kept in check by lenders who exercised conservative lending guidelines and simply refused to lend. But over time, lenders’ emphasis on conservative lending guidelines steadily diminished as radical changes occurred in the expansion of the secondary market for loans. With the development of new finance products like collateralized debt obligations, and a robust market to acquire subprime loans, lenders found there was an unending appetite to buy newly originated loans regardless of risk. As a result, lenders were able to minimize their focus on credit risk and refocus on short-term loan profitability arising from origination fees.
For the years leading up to 2008, the lending industry’s business model quickly shifted to maximizing the number of loans that could be generated with the belief that lenders could always resell them in the ever expanding secondary market. To meet these demands for more and more transactions, the use of independent mortgage brokers expanded.
Unfortunately, the business model of independent mortgage brokers also began to evolve. Instead of focusing on pairing a borrower with a loan that the borrower could afford, many brokers now focused on merely assisting borrowers in their quest to find any loan product that would loan the amount the borrowers desired, regardless of their actual ability to repay it. For a while, everyone seemed happy because each was getting what he or she desired, until the secondary market collapsed. At that point, borrowers, lenders, and mortgage brokers began to suffer as it all melted down. Regardless of whom you may attribute as the leading cause of the collapse, it is agreed that everyone shared financially in the meltdown. Included in those suffering were title and settlement agents who saw their closing volumes tumble to unprecedented lows and were forced to lay off staff and close offices.
Since 2008, federal statutes have been passed and new regulations imposed; the lending and appraisal communities have reacted by becoming much more conservative, at times to an extreme. While lending continued, it was at a fraction of the rate that had occurred prior to 2008. Those securing loans usually had high credit scores and were capable of paying substantial down payments. This left a significant portion of the population unable to qualify for loans and, as a result, severely limited the number of potential closings that the title industry could service.
Over time, those title agencies that survived the downturn have made staffing adjustments and found ways to operate more efficiently. Most today are operating at a level that allows them to be profitable with the current volume, but everyone would like to see the prospect of more business in the future. That is why I was excited to see a recent report released by the Urban Institute. In August 2016, Laurie Goodman, co-director of the Housing Finance Policy Center, published an article with a puzzling title: “Squeaky-clean loans lead to near-zero borrower defaults—and that is not a good thing.” In the article, Goodman provides some interesting insight into the Urban Institute’s “Housing Finance at a Glance: A Monthly Chartbook, August 2016.”
This article confirms what we in the title industry have long suspected. Lenders have been extremely conservative in their lending practices since the 2008 collapse. While that statement should not be a surprise, the exact extent of the lenders’ conservatism has been remarkable, especially in comparison to the periods leading up to the crash.
One of the key measurements of the quality of loans originated is the percentage of loans that go into default in the years following their origination. Using this benchmark as a comparison to prior years, the following chart reveals that the last 4 to 5 years have been extraordinarily conservative compared to the past 15 years. Look closely at the chart below; the green line for the default percentage for all loans originated between 2011 and 2015 is easy to miss.
Upon review of the data depicted in this chart, one can easily see why the great lending industry breakdown occurred. In 2006 and 2007, between 9 and 11% of every loan originated had gone into default after a five-year period. Compare that to the recent experience, where only a mere fraction of a percent had defaulted.
While the chart above is insightful, the really exciting part of Goodman’s article is her conclusion that this experience indicates it is time for lenders to loosen up the underwriting guidelines. While the lending community never intends to get back to the wild and crazy, “no holds barred,” underwriting practices that were prevalent pre-2008, there is real support for making downward adjustments on the credit and down payment guidelines that have been in place for the past five years.
Goodman states: “The performance of mortgages originated over the past few years has been extraordinarily good by historical standards. Not only is the credit box exceptionally tight, but even controlling for credit characteristics, mortgages are also performing much better. This suggests that there is plenty of room to safely expand the credit box.”
This means more potential borrowers and more potential closing opportunities for title agents in the future. Certainly, there are other factors in play that could affect future lending volume, such as the fed’s interest rate adjustments and stock market fluctuations, but the chart makes it clear that historical mortgage performance is not one that will hold back the volume. I strongly encourage you to read the Urban Institute article and the referenced Chartbook upon which it is based; there are countless charts and other data analyses that contain hope for an improving future.
The future is bright for those who are equipped to service the new closing volume that could arise from making loans to a broader segment of the industry. But you will only be able to take advantage of that opportunity if you remain on your lender’s approved closer list. Becoming compliant with ALTA’s Best Practices is a way to ensure that you meet your lender’s qualifications. Using an independent third party to assess your compliance is the best way to convince lenders that your office is ready to safely service their business. Let PYA know if we can help.