MReport April 2018

TheMReport — News and strategies for the evolving mortgage marketplace.

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10 | TH E M R EP O RT TAKE 5 The Road Ahead for Mortgage & Housing Greg McBride, SVP and Chief Financial Analyst for spoke to MReport about the state of the mortgage and housing industry, the impacts of tax reform, and which emerging technologies have the chance to reshape the industry. With over two decades' worth of experience in personal finance, McBride regularly provides insights on the financial landscape to networks such as CNN, CNBC, and Fox Business Network. He is also Treasurer for the Board of Directors of ClearPoint Credit Counseling Solutions, an Atlanta- based nonprofit credit counseling agency. M // You predicted that HELOC borrowers might see an increase of around 75 basis points during 2018. What sort of factors went into that prediction? MCBRIDE // That reflects the baseline assumption of three rate hikes from the Federal Reserve. The majority of HELOCs are pegged to the prime , so any rate hike by the Federal Reserve is effectively passed directly through to HELOC borrowers, usually in one to two statement cycles. I'm forecasting three rate hikes from the Fed this year, that's going to translate into a 75-basis point increase. Depending on the timing, your rate at the end of the year might be 75 basis points higher, or it could be 100 basis points higher. Forecasts range from zero to five. There does seem to be clustering around the three rate hikes this year. But there are a lot of factors that could change that. The wild card, at this point, is inflation, which could prompt them to be more aggressive, or it could give them the latitude to sit back and be less aggressive. Global develop - ments, the performance of financial markets, the pathway the economy takes--all of those are relevant vari- ables to when and how much the Federal Reserve moves on interest rates. M // What are some of the more significant trends and challenges that you see on the horizon for the mortgage industry in 2018? MCBRIDE // If mortgage rates trend higher during the year, that's going to put more of a damper on refinancing activity and require lenders to have more focus on homebuying activity. Lack of inventory of available homes for sale has been hamstringing the housing market. You can't buy if it's not for sale. More people want to buy homes than are buying them. That's nothing new, by the way, but a continuation of what we saw in 2017, and even in 2016, but if you intersect that with rates going up by any measure, it further takes decreases the refinancing activity. Regarding risks in the housing market in 2018, there are markets where values are very stretched, and prices are just completely divorced from the pocketbook realities of what people can afford to pay. So that's where I think the risk lies. M // Will the concern over affordability push more consumers to rent instead of buy? MCBRIDE // Occupancy rates will still be very high. For landlords, the demand for rentals will still be strong, even if they're not in a position, necessarily, to raise rents. In some markets, there's likely to be price pressure that may limit the ability to increase rents. Whereas in other markets, it can continue to be strong and supportive of raising rents. But regardless of the local market dynamics regarding price, there's a fair chance that occupancy is going to be strong enough that it's a positive year for landlords. M // What are the emerging technologies you think will have a major impact on the industry? MCBRIDE // The future is blockchain and it will have a broad impact on the financial world in the years to come, and again, I don't know that that necessarily reaches a tipping point in 2018, but as blockchain will become more relevant going forward. Blockchain cuts down on the paperwork bureaucracy and over time it cuts down on the paperwork intensiveness of mortgage transactions and just financial transactions in general. Ultimately, it's something that reduces the cost of transactions. As for specific cryptocurrencies like Bitcoin, I'm extremely skeptical of their viability and particularly of the value that speculators have placed on it. M // What other trends will impact borrowers this year? MCBRIDE // You're certainly going to see a dampening of demand for home equity borrowing. People just might increasingly resort to cash-out refinancing, for example, to tap equity. A couple of the limitations that have a particularly hard regional impact are limitations on mortgage interest deductibility, the reduction from $1,000,000 to $750,000. This disincentivizes somebody who's got a mortgage that's more than $750,000 from relocating. So, there's a tendency that that could dilute people moving, within those high-cost markets because they don't want to lose the bigger tax deduction unless they're trading down. I mean, they may do that. But if they have a $900,000 mortgage, and they're moving up to a $2,000,000 house, I think the tax deduct - ibility may disincentivize that to some extent. Also, the limitations on the deductibility of state and local taxes are something that could also have an impact on demand in high-cost markets. Less incentive to move into the market, less incentive to move within the market. And I think it certainly does not provide any support for current price levels. "Blockchain cuts down on the paperwork bureaucracy and over time it cuts down on the paperwork intensiveness of mortgage transactions and just financial transactions in general."

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