MReport September 2019

TheMReport — News and strategies for the evolving mortgage marketplace.

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50 | TH E M R EP O RT O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T THE LATEST ORIGINATION The Ripple Effect of Student Loan Debt How is student debt hampering potential homebuyers from purchasing property? A new report out of Dallas and WFAA, states that high levels of student loan debt is hampering the housing market in Dallas-Fort Worth, prevent- ing potential homebuyers from purchasing a home. "From a practical perspective, somebody coming out of school with heavy student loan debt may simply not qualify for a conven- tional loan," said Rick Sharga, Founder, President, and CEO of CJ Patrick Co., a California-based real estate and financial services consulting firm. Sharga added that millennials came into the market after the Great Recession, many of which had record levels of student-loan debt, and into a market with no jobs. "The notion of them being able to pay back that student loan debt in any reasonable period of time was pretty much a fantasy," he said. Ilyce Glink, who writes a syn- dicated column titled, "Real Estate Matters," for WFAA said many millennials have stopped paying student loans altogether. "First they were delinquent, and then they just stopped," Glink said. "Then you've got a huge chunk—and I mean tens of millions of people—who now have lower credit scores, which of course are the defining factor for all things mortgages." Glick states that 44 million bor- rowers owe around $1.6 trillion in student loan debt. "[Today] if you have a 680 credit score, which used to be the bulk of the lending market, you have to crawl over a field of broken glass to qualify for a loan," he said. Sharga said that while home prices fell at the end of the Great Recession, declining about 35% from their peak, prices have rebounded much quicker than many anticipated. According to CoreLogic's latest Home Price Index (HPI), national home prices rose 3.6% year-over- year in May 2019. In fact, CoreLogic is forecasting prices to increase 5.6% from May 2019 to May 2020. However, the May 2019 gains were lower than the 6.4% increase in May 2018. Homes in the lower-price tier saw the largest annual increases at 5.4%. The middle low-to-middle tier rose 4.5%, middle-to-moderate price tier increased 4%, and the high-price tier jumped 3%. Changing Priorities The growing use of technology in the mortgage space is what most lenders call their biggest competitor, according to a Fannie Mae analysis. L enders continue to cite "consumer-facing technol- ogy" as the most impor- tant business priority to maintain competitiveness, according to Andrew Peters, VP of Fannie Mae's Single-Family Strategy and Insights. "The mortgage industry has faced a number of challenges in recent years. Technological advance- ments, demographic changes, increased competition, and lack of entry-level housing stock have ap- plied pressure to growth and prof- itability. Over the past two years, lenders have continuously pointed to 'competition from other lenders' as the most significant drag on their profit margin outlook," Peters said. The amount of lenders who had technology as a top priority in Q2 2017 was 18%, which grew to 23% in Q2 2018 and to 25% in Q2 2019. "Lenders' business priorities also appear to be in line with their assessment of market threats. A majority expect 'online business- to-consumer lenders' to be their biggest competitor over the next five years, followed by tradi- tional financial institutions with branches, online real estate service providers, and mortgage brokers," Peters observed. "Many pointed to B2C lenders' advantages in technol- ogy, scalability, and advertising and technology budgets." Peters said that lenders ap- peared to be trending toward making investments to improve customer experience, while reducing the cost to manufacture mortgage loans, all in an effort to better deal with market changes. New entrants, though, are chal- lenging existing market dynamics. Some of these competitors are digital banking startups focused on building a digital experience. Traditional lenders report that online lenders present the largest threat to their business going forward. "As a result, lenders believe that their biggest opportunity lies in re-engineering their processes to be competitive in similar ways," he said. "The extent to which this type of simple digital banking mod- el can be operationalized within a complex mortgage ecosystem remains to be seen, but investments to that end continue to be made." "Over the past two years, lenders have continuously pointed to 'competition from other lenders' as the most significant drag on their profit margin outlook." —Andrew Peters, VP of Fannie Mae's Single-Family Strategy and Insights

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