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COVER STORY The Good and the Bad of Home Price Appreciation A nother impediment for today's potential homeown- ers is the widening gap between wages and home price appre- ciation. According to a recent report released by RealtyTrac, a provider of housing data and analysis, home price increases are outstripping wage increases 13 to one. This gap also contributed to lower originations, according to Sanders. "[R]eal median household income is lower today than it was in 2007," he said, "making it difficult for millions of households to buy a home (particularly if they lost their home to foreclosure and saw their credit score plunge)." Steve Bailey, COO of PennyMac, says home values are "a mixed bag." He notes that home prices in certain markets have gone well beyond pre- crisis levels, while other regions that never experienced a major increase and crash during the boom-bust cycle are not seeing the same rapid price inflation. Ed Pinto, co-director of the International Center on Housing Risk at the American Enterprise Institute, has been tracking home price increases and the real estate value recovery since the crash and has some suspicions about income stagnation and rising values eventu - ally causing friction in the market. "What we see is that house prices today are about 14 percent higher than they were back in the trough (after the crisis) in real dol - lars," Pinto said. "When we go back to the 1970s, anytime we get home prices that hit 15 percent to 20 percent above the trough, there is eventually a reversion to the mean." Does this mean that the recov - ery's higher prices in key markets will reverse soon? Pinto did not predict that exactly, but he is watching price inflation closely. He expects home prices–even with interest rates going up–to con - tinue to expand moderately next year. "My projections for next year is that house prices will continue to grow faster than inflation and incomes," he said. Meanwhile, Sanders sees a pos - sible reversal with prices falling. "With Chinese investors pull- ing out of the U.S., we may see a slowing of home price growth, particularly in the more costly West coast cities," he explained. Though this could make housing more "affordable," Sanders says investors often target higher-priced homes, the net result could be increased rental households, rather than increased homeownership. The gap between home values and medium incomes has had rip - ple effects throughout the mortgage industry, one of which has been the increased the demand for accuracy in assessing home valuations. Vladimir Bien-Aime, CEO and president of Global DMS—a valua- tion technology provider, has been mapping changes in his industry since the financial crisis. "Prior to the crash, lenders were more concerned with credit than collateral," Bien-Aime said. "Post- crash, the industry started paying attention to collateral, because the possibility of default was so much more significant." When discussing the impact this shift had, Bien-Aime noted that "The end-result for valuations was the emergence of a series of regula - tion such as HVCC and sections of Dodd Frank. Lenders now need to mitigate risk by using technology to monitor quality of their appraisers and improve the accuracy of the collateral that underpins the loan. These trends of risk mitigation and due diligence are evident in initiatives like the UCDP and the upcoming FHA EAD." The Impact of Dodd- Frank D iscussing the evolution of the mortgage finance system since 2008 is impossible to do without evaluating the Dodd-Frank Reform Act, which created the Consumer Financial Protection Bureau (CFPB), the qualified mortgage rule, and the qualified residential mortgage standard for securitizations. These developments served as a catalyst for most of the changes experienced in recent years. "The single largest change has been the regulatory requirement placed on lenders and the sub - sequent increase in the cost to originate a loan," LenderLive's Pannes said. "People in the indus- try had no choice but to embrace the change." Sharma also pointed to regula- tions and new compliance metrics as a driving force in the recovery phase--and in how the market operates eight years after the crisis. "[T]here is much greater regula - tory oversight of the industry," Sharma stated. "The severity of the financial crisis is fresh in everyone's mind, and it's in our collective interest that new struc - tures are put in place to prevent a recurrence of that. The creation of the CFPB was probably the largest change that impacts our industry. The CFPB has rolled out several new initiatives and regulations, and I see the industry working hard to implement those changes. I believe the industry and regulators have a joint interest in creating a more stable as well as efficient mortgage marketplace." This increased focus on regula - tions led to new ways of doing business and improved quality controls, but the aftermath has "The severity of the financial crisis is fresh in everyone's mind, and it's in our collective interest that new structures are put in place to prevent a recurrence of that. The creation of the CFPB was probably the largest change that impacts our industry." —Gagan Sharma, president and CEO of BSI Financial 16 | TH E M R EP O RT