July 2016 - Lessons Learned

TheMReport — News and strategies for the evolving mortgage marketplace.

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42 | 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 A NA LY T I C S S E C O N DA R Y M A R K E T ORIGINATION THE LATEST A Look at Online Lending White paper estimates online loan origination could reach $90 billion by 2020. T he digital age has altered the way consumers and financial institution lend- ers are doing business, and the emergence of online mar- ketplace lending, particularity in the mortgage space, has provided a medium for transactions to occur between the two from anywhere. Recently, the U.S. Department of Treasury issued a white paper titled, "Opportunities and Challenges in Online Marketplace Lending," that dove into the sec - tor of online mortgage lending. It examined 100 responses from online marketplace lenders, trade associations, consumer and small business advocates, academics, in - vestors, and financial institutions. "Advances in technology and data availability are changing the way consumers and small busi - nesses secure financing. Leveraging these developments, online market- place lenders offer faster credit to consumers and small businesses," the report said. "Over the past 10 years online marketplace lend - ing companies have evolved from platforms connecting individual borrowers with individual lenders, to sophisticated networks featur - ing institutional investors, financial institution partnerships, direct lend- ing, and securitization transactions." The online lending marketplace is just a small part of the overall mar- ket but is growing at a rapid pace. The Treasury noted that market an- alysts identify a $1.0 trillion address- able market for online marketplace lenders (excluding mortgages) and estimate loan origination volumes could reach $90.0 billion by 2020. Although these online marketplace lenders are only beginning to offer mortgage and auto loans, it is still a small share of the total market. "Beyond general unsecured consumer, student, and small business loans, online market - place lenders are moving into the mortgage and auto loan markets. Although still nascent businesses for online marketplace lenders, existing online marketplace lenders view auto loans and mortgages as having the potential to help them broaden and retain their customer bases," the report said. "Additionally, some new entrants are building niche businesses that focus exclusively on mort - gages or auto loans. RFI responses acknowledged the potential role of technology and data in the residential housing market. The mortgage lending and auto loan markets are still in early stages of development for online market - place lenders, and Treasury will continue to monitor origination volumes and loan performance as the sector matures." The Treasury made the fol - lowing suggestions to the federal government and private sector par- ticipants to encourage safe growth and access to credit through the continued developments of online marketplace lending: • Support more robust small busi- ness borrower protections and effective oversight; • Ensure sound borrower experi- ence and back-end operations; • Promote a transparent market- place for borrowers and investors; • Expand access to credit through partnerships that ensure safe and affordable credit; • Support the expansion of safe and affordable credit through ac- cess to government-held data; and • Facilitate interagency coordina- tion through the creation of a standing working group for online marketplace lending. The Face-off FHA and private mortgage insurance issuers show down, as premium reductions make GSEs more affordable than ever. I n the time period follow- ing the housing market collapse, private mortgage insurance was not easy to obtain, which left the door open for the Federal Housing Administration (FHA) to step in to accommodate low-down payment borrowers and pick up the majority of the mortgage insurance market share. But the tables have since turned. FHA loans have become more expensive as the housing recovery surges forward. A 2016 Mortgage Insurance Study by WalletHub found that private mortgage insur - ance has resurfaced as a once-again viable option for those that can afford a mortgage but not the 20 percent down payment. According to the report, from 2007 to 2009, FHA were the primary choice for low-down payment borrowers and volume grew by more than 355 percent during this time. Meanwhile, pri - vate issuers incurred huge losses, with some going bankrupt. WalletHub found that despite the reemergence of private mort - gage insurance, FHA policies still dominate the market. FHA loans are roughly 51 percent more popular than conventional loans with private insurance policies. During the time period from 2014 to 2016, FHA insurance costs have fallen by 29 percent, while primary mortgage insurance costs have declined by 47 percent for people with credit scores above 760 and increased by 28 percent for people with a fair credit score of 660 or below, WalletHub reported. The recent reduction in private mortgage insurance fees has made getting a mortgage loan a lot easier and may begin to pull high quality borrowers from the FHA. Urban Institute researchers Bing Bai and Laurie Goodman found in a recent report that borrowers that can afford a monthly mortgage but do not have the 20 percent down pay - ment, have two options: 1. Secure an FHA loan or 2. Get a conven- tional mortgage guaranteed by the GSEs. While both programs allow borrowers to put as little as 3.5 percent down, one may be better than the other. "For the past 15 months, the answer has been the FHA loan," the authors wrote. "But for those with nearly perfect credit, a change to PMI fees in April 2016 made the GSE guarantee more affordable. This new pricing could pull some of the highest- quality borrowers out of FHA and into GSE loans."

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