The housing industry has been an economic driver for the US economy for over a century. Between
the materials needed to construct real estate and the services surrounding its marketing and sale, the economic impact is broad and far reaching. When the housing market struggles, the economy as a whole may struggle. One aspect of the housing industry that is as important as any is mortgage finance. Historically, American homeowners have financed their home purchases using a traditional 15 or 30-year fixed rate mortgage offered by most lending institutions. Adjustable, or variable rate mortgages, have always been available in the US market but have made up a smaller portion of the market, roughly 10%. However, this might change as the US financial industry is experiencing seismic shifts among the players and regulations that affect residential lending.
Characteristics of Other Developed Nations' Mortgage Industries
The mortgage industry looks very different outside of the US. Two things that stand out are the types of mortgages that are widely used and the structure of the mortgage industry. Variable rate mortgages are far more common outside the US as well as more short and medium term rollover features. Government support through institutions like Freddie Mac and Fannie Mae are unique to the US mortgage industry and are far less common overseas. Default rates are lower outside of the US, where variable rate mortgages are more common, defying evidence that these loans are inherently more risky. To think that the US could learn a lesson or two from foreign nation's mortgage markets is not consistent with the lead the US typically takes in areas of finance and credit.
Housing and Banking are Flagging, Is Mortgage Finance to Blame?
While US stock markets continue to enjoy the now 6-year old bull market, this success throws in to sharp relief the weakness found in the US real estate market. While there are patches of strength in popular markets in the west and the northeast, the broader real estate market is experiencing overall weakness. Away from the success of Silicon Valley and Wall Street, which support their real estate markets, the rest of the country is not as fortunate. There have been several theories about why real estate is floundering, from a weak labor market to a preference for rentals by 'Generation Xers.' However, an obvious place to look has been ignored by many: the lending institutions. After the collapse of the subprime market and the real estate market itself, lenders of all kinds found themselves under siege by regulators and legislators looking to place blame and attempt to recover losses. The response to the crisis was to pull back and restrict credit creation. The large banks that did not go bankrupt or get absorbed by competitors, pulled in their reins and started tightening lending standards and limiting their mortgage products, such as popular home equity loans, or HELOCs (Home Equity Line of Credit).
What no one was paying much attention to was how much lenders were limiting their credit and how strict they had become. Anyone who tried to get a loan during this time, 2009-2013, knows how difficult it had become. After several years separated the crisis from the recovery, and the real estate market continued to struggle, some other specter was at odds with the market. As the Fed maintained its zero-interest rate policy (ZIRP), margins for financial institutions continued to compress. Now, years later, profit margins for banks have tightened resulting in less incentive to make the loans that were once its bread and butter. This economic reality combined with increased scrutiny and tightened regulation, has caused lenders to make the rational and logical business decision to reduce loan origination. If the profits are limited and the penalties are severe, why pursue the business?
What Is to be Done?
What can be done to invigorate this market and incentivize lenders to originate more loans? Maybe this is the wrong question. Maybe the better question is: Who can step in and fill the void in lending left by traditional lenders? If we assume tighter profit margins are a reality going forward, the answer could lie in nontraditional sources of credit that can survive and thrive on the thinner margins that exist today. One such place could be lenders such as Kickstarter or the Lending Club. Investors accustomed to thinner returns could be enticed by these margins and provide the liquidity borrowers need to fund their real estate purchases. The application process could be similar to the traditional lenders, so it would not require re-invention. One obstacle to overcome is to gain an acceptance and comfort level in this type of credit creation by the masses. One way to achieve this acceptance would be a collaboration between existing brick and mortar companies looking to gain access to this market with these new lenders. One example of this would be a partnership between Kickstarter and E*trade.
Characteristics of Other Developed Nations' Mortgage Industries
The mortgage industry looks very different outside of the US. Two things that stand out are the types of mortgages that are widely used and the structure of the mortgage industry. Variable rate mortgages are far more common outside the US as well as more short and medium term rollover features. Government support through institutions like Freddie Mac and Fannie Mae are unique to the US mortgage industry and are far less common overseas. Default rates are lower outside of the US, where variable rate mortgages are more common, defying evidence that these loans are inherently more risky. To think that the US could learn a lesson or two from foreign nation's mortgage markets is not consistent with the lead the US typically takes in areas of finance and credit.
Housing and Banking are Flagging, Is Mortgage Finance to Blame?
While US stock markets continue to enjoy the now 6-year old bull market, this success throws in to sharp relief the weakness found in the US real estate market. While there are patches of strength in popular markets in the west and the northeast, the broader real estate market is experiencing overall weakness. Away from the success of Silicon Valley and Wall Street, which support their real estate markets, the rest of the country is not as fortunate. There have been several theories about why real estate is floundering, from a weak labor market to a preference for rentals by 'Generation Xers.' However, an obvious place to look has been ignored by many: the lending institutions. After the collapse of the subprime market and the real estate market itself, lenders of all kinds found themselves under siege by regulators and legislators looking to place blame and attempt to recover losses. The response to the crisis was to pull back and restrict credit creation. The large banks that did not go bankrupt or get absorbed by competitors, pulled in their reins and started tightening lending standards and limiting their mortgage products, such as popular home equity loans, or HELOCs (Home Equity Line of Credit).
What no one was paying much attention to was how much lenders were limiting their credit and how strict they had become. Anyone who tried to get a loan during this time, 2009-2013, knows how difficult it had become. After several years separated the crisis from the recovery, and the real estate market continued to struggle, some other specter was at odds with the market. As the Fed maintained its zero-interest rate policy (ZIRP), margins for financial institutions continued to compress. Now, years later, profit margins for banks have tightened resulting in less incentive to make the loans that were once its bread and butter. This economic reality combined with increased scrutiny and tightened regulation, has caused lenders to make the rational and logical business decision to reduce loan origination. If the profits are limited and the penalties are severe, why pursue the business?
What Is to be Done?
What can be done to invigorate this market and incentivize lenders to originate more loans? Maybe this is the wrong question. Maybe the better question is: Who can step in and fill the void in lending left by traditional lenders? If we assume tighter profit margins are a reality going forward, the answer could lie in nontraditional sources of credit that can survive and thrive on the thinner margins that exist today. One such place could be lenders such as Kickstarter or the Lending Club. Investors accustomed to thinner returns could be enticed by these margins and provide the liquidity borrowers need to fund their real estate purchases. The application process could be similar to the traditional lenders, so it would not require re-invention. One obstacle to overcome is to gain an acceptance and comfort level in this type of credit creation by the masses. One way to achieve this acceptance would be a collaboration between existing brick and mortar companies looking to gain access to this market with these new lenders. One example of this would be a partnership between Kickstarter and E*trade.
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