June2016 - Chase[ing] the Dream

TheMReport — News and strategies for the evolving mortgage marketplace.

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TH E M R EP O RT | 37 O R I G I NAT I O N S E R V I C I N G A NA LY T I C S S E C O N DA R Y M A R K E T ORIGINATION THE LATEST Sheila Teimourian, VP and Deputy General Counsel at Fannie Mae noted, "Many small to mid-sized lenders indicate that larger institutions are able to invest more to upgrade systems and have in-house compliance resources to increase efficiency and competitive advantages." The two biggest challenges lenders reported when implementing TRID were managing/coordinating with third-party technology vendors and communication with key origination and closing players. The report showed that eight in 10 of those who cited coordinating with third-party technology vendors as a challenge during TRID implementation still consider it an issue. Fannie Mae found that most lenders agree TRID has extended the time it takes for a loan to close, with an average of seven additional days, but they do expect this time to shorten over time. Despite the increased time to close, 44 percent of lenders say they raised loan fees. "The survey results confirm in large measure the sense that lenders and their service providers have had difficulties in transitioning to TRID, particularly among smaller lenders. As is evident from trade association and Congressional proposals in recent months, lenders remain concerned over how to comply with TRID and the consequences for non-compliance," Teimourian explained. "Although there have been some suggestions in media reports in recent weeks that lenders' concerns over TRID implementation have receded somewhat, there is a growing sense of unease among the lender community over the interpretations and policies of due diligence firms and secondary market investors regarding TRID compliance." She continued, "Finally, it will remain to be seen whether the competitive advantage that larger lenders reported as a result of TRID implementation will be sustained or whether small and mid-sized lenders will close this gap using their own resources or through innovative third-party vendors." Are Small Mortgage Loans a Thing of the Past? While the share of lower-priced homes rose in recent years, the share of lower- balance mortgages has declined. O ne task that has never been easy in the hous- ing market is securing a mortgage loan for under $50,000, but small loans are now quickly nearing the point of nonexistence, which will create barriers of entry for homeowner - ship. A recent report from the Urban Institute found that from 2004 to 2011, the national share of small mortgage loans remained between 3 and 4 percent, but by 2014, it had declined to just 2.3 percent. "The absence of small loans may seem insignificant in high-cost markets, but in cities like Kalamazoo, Michigan, and Tampa, Florida, a significant portion of the housing stock sells for $50,000 or less. And if potential buyers can't get a mortgage for these houses, they'll miss that important first rung on the homeownership ladder that helps both families and neighborhoods," the Urban Institute said. The Urban Institute examined 10 metropolitan statistical areas (MSAs) where a substantial share of the housing stock is worth less than $50,000. In 2014, lower- valued homes accounted for more than 8 percent of the stock in each of these MSAs (except in Stockton-Lodi, California). These shares have been on the rise since the housing crisis. In Tampa, the share of lower-priced homes increased from 5 percent in 2007 to 11 percent in 2014. "The number of small mortgages doesn't match the number of lower-value homes: the share of owner-occupied, purchase mortgages under $50,000 has steadily declined over the same post crisis period. That share in Tampa has always been less than 3.5 percent but dropped to 2.1 percent in 2014," the report stated. The Urban Institute found the decline in small loans has been accompanied by an increase in the denial rates for applicants for these loans. Calculations based on Housing Mortgage Disclosure Act data showed that the denial rate for loans under $50,000 is higher than the denial rate on larger loans in the post-crisis years. In 2014, for the conventional channel, the denial rate for sub- $50,000 loans was 22 percent, much higher than the 17 percent rate for loans between $50,000 and $100,000. The gap is even larger in the government loan market: 33 percent compared with 20 percent. "Tight credit and the low profitability of small loans are making it extra hard for those who want to purchase," the report said. "Moreover, lenders don't find these loans attractive. Loan origination costs are largely fixed and recovered either through the sale of the loan or, over time, through the financing spread and payment for servicing. Smaller loans generate lower sales prices, spreads, and servicing income, making them less economically attractive to lenders." The report continued, "Small mortgage loans are important to the vitality of hundreds of urban communities throughout the United States. Bringing them back will be hard, and we don't have any immediate or easy solutions. We're eager to work with policymakers and industry leaders to understand the impact of the loss of these loans and develop strategies to encourage their availability."

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