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The Future of the Mortgage Industry
Presented by
Karen Young and Anne M. Canfield
© 2013 Canfield Press, LLC. All rights reserved.

Political Environment
• Housing policy uncertainties. Will we remain a homeowners’
society or evolve into a renters’ society? Who will receive a
housing subsidy and how will it be delivered?
• Federal budget deficit may lead further curtailment of the
mortgage interest deduction.
• What is the future of our nationalized housing system? No one
knows.
– Viability of the FHA
– GSE reform

Monetary Policy
Higher inflation will be the monetary tool of choice for central
bankers tasked with cleaning up sovereign balance sheets.
Headwinds
―The case can be made that we are marching headlong into a
generational bear-market for bonds, writes Guggenheim CIO Scott
Minerd. ―During the next decade, holders of Treasury and agency
securities will likely realize negative real returns. Despite this, these
assets continue to trade at extremely rich valuations. Exactly when
the market will awaken to this anomaly in securities pricing remains
to be determined.‖

Monetary Policy
Distortive effects of policy driven monetary policy.
Long-term interest rates are ticking up.
Headwinds

Tailwinds
by 22 bp to 25 bp.
• The Fed has driven long-term interest rates down through the
purchase of mortgage-backed securities. On December 31, the
central bank had $1.41 trillion of MBS on its balance sheet. In
2013, the Fed plans to purchase $40 billion a month of MBS and
reinvest maturing MBS assets—bringing monthly purchases to
between $60 billion to $65 billion month. By yearend 2013, the
Fed will own $1.89 trillion of MBS, representing approximately
20.8% of all mortgage debt outstanding.
Monetary Policy

Tailwinds
by 22 bp to 25 bp.
• The Fed has driven long-term interest rates down through the
purchase of mortgage-backed securities. On December 31, the
central bank had $1.41 trillion of MBS on its balance sheet. In
2013, the Fed plans to purchase $40 billion a month of MBS and
reinvest maturing MBS assets—bringing monthly purchases to
between $60 billion to $65 billion month. By yearend 2013, the
Fed will own $1.89 trillion of MBS, representing approximately
20.8% of all mortgage debt outstanding.
• Unconventional monetary policies have reduced long-term rates
by 100 to 125 basis points, according to Goldman Sachs’ models.
In addition, market conditions in the Eurozone have lowered
10-year U.S. yields.
Monetary Policy

Takeaway
No one knows how the central banks’ endgame for
unconventional monetary policy will be played out
or what unintended consequences will occur.
Ultimately, interest rates WILL go up.
Monetary Policy

Regulatory Environment
• Uncertainty of about the constitutionality of the CFPB recess
appointment which might invalidate the Bureau’s mortgage rules
and trigger Dodd Frank provisions.
• Impact of the QM and proposed QRM rules mortgage lending, as
currently proposed.
• New mortgage rules, spanning more than 4,000 pages, are requiring
a massive re-engineering of mortgage lending system.
• Regulatory burdens are driving small lenders out of the
mortgage space.
• Risk of borrowers gaming system under loan modification
requirements embedded in the loan servicing rule
• FHA fiscal crisis. Will FHA be bailed out by taxpayers? How will
the agency’s financial crisis impact credit availability to first-time
homebuyers?
Headwinds

Tailwinds
• GSEs’ seven-year exemption from QM.
• FHFA’s development of a secondary market platform for the
mortgage market.
• FHFA’s creation of risk-sharing structures for mortgage assets
to attract private capital to the mortgage market.

Takeaway
2013 was going to be the mortgage industry’s watershed year in
which ―rules of the road‖ were put in place by the regulators and
the housing market would clear. By 2014, the ―new normal‖ in
the housing finance industry would evolve.

Takeaway
2013 was going to be the mortgage industry’s watershed year in
which ―rules of the road‖ were put in place by the regulators and
the housing market would clear. By 2014, the ―new normal‖ in
the housing finance industry would evolve.
However, court rulings regarding the constitutionality of Director
Cordray’s recess appointment could invalidate the Bureau’s
mortgage rules and trigger Dodd Frank provisions for mortgage
underwriting. Chaos would return to the mortgage space.

Housing Market
3.8 million homes in the shadow inventory, representing a
30 month overhang.
Headwinds

Housing Market
13.8 million underwater mortgages on December 31, comprising 27.5% of all mortgages
outstanding. These borrowers are underwater an estimated $1 trillion, according to Zillow.
Headwinds

Housing Market
Stringent loan underwriting
requirements continue to
depress home sales
Headwinds

Housing Market
Renter occupied household formations are the
driving force in today’s market.
Headwinds

Housing Market
Tailwinds
Housing supply had declined to pre-boom levels. The annual inventory
change for homes in the U.S. was down 19.4% in 2012.

Housing Market
Tailwinds
Housing sales are forecasted to increase to 5.2 million in 2013
and 5.7 million in 2016, according to Goldman Sachs’ forecasts.

Housing Market
Tailwinds
GS analysts qualified their forecast, writing:
"To the extent that the reduction in foreclosures cannot be
easily converted into other forms of distressed sales such
as short sales, we may see fewer distressed sales, and
therefore, fewer total existing home sales.‖

Housing Market
Tailwinds
• Demand for housing was stimulated by 1.0 million household
formations in 2012. Household formations are projected to top
1.2 million in 2013.
• Housing affordability is near a 20-year high. Today, the cost to
buy a home is cheaper than renting with price-to-rent ratios
returning to early 2000 levels.
• The share of distressed home sales continues to decline from
32% of home sales in December 2011 to 24% of sales in
December 2012.

Housing Market
Takeaway
The housing recovery is predicated upon (i) low interest rates;
(ii) limited supply of homes for sale; and (iii) investor appetite for
cash purchases of homes (which comprised 20% of existing
home sales in 2012). Remove any one element and the
recovery will falter.

Concluding thoughts…
Lawmakers will NOT enact structural reform of the GSEs. Fannie Mae
and Freddie Mac are too embedded in the housing finance system and
the housing market is too fragile for lawmakers to implement GSE reform
of the GSEs for the foreseeable future.
We’re on the path to becoming a renters’ society. So long as Congress
continues to embrace a re-distributive policies, rather than pro-growth
policies, the U.S. will continue its evolution into a renters’ society. Today,
the home ownership rate stands at 65.3% [63.4%, net of severely
delinquent mortgages, according to Amherst Securities.] Will we
ultimately become France with a 50% homeownership rate?
The financial crisis did irrevocable damage to the nation’s contract law.

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