I was struck by a comment made by the Mortgage Bankers’ Association President David Stevens: “It’s time to acknowledge all the safeguards added to mortgage lending. It’s time to start talking about housing finance like the beneficial activity that it is. It’s time to let people know it’s OK to start trusting the system again. Most of all, it’s time to change the dialogue of distrust to a dialogue of confidence.”
While I applaud his courageous vision of a world where housing finance instills confidence in consumers, there is a massive divide that exists on the path from distrust to confidence. The only way to bridge that gap is with trust.
I’ll start with the first part of the quote: “It’s time to acknowledge the safeguards added to mortgage lending.”
I speak to customers every day about these safeguards, and quite honestly they still ask me questions that these safeguards don’t address. “Do you think values are going up or down?” If I’m about to originate a 3.5% down payment loan for a first time homebuyer how do I honestly answer that? The purchase contracts in the state of Arizona have a market conditions advisory that warns that the “buyer and seller assume all responsibility…should the return on investment not meet their expectations.”
That leads to the next logical question: “Is this a good investment?” An investment according to the Intelligent Investor is “an operation which, upon thorough analysis promises safety of principal and an adequate return.” Does a house purchase with a 3.5% or 5% down payment in a flat or declining real estate market with average selling commission rates of 6-7% qualify under this definition?
Both of these questions speak to a bigger issue that is often glossed over in the effort to make the sale and originate the loan: have market values truly stabilized?
All you have to do is google “housing values 2014” to see that this year was a pretty good year across the board for appreciation, and next year is likely to see prices flatten out a little but still stay on the upswing. It may not be all rainbows and puppy dogs, but there doesn’t appear to be any precipitous cliff in the foreseeable future.
According to Corelogic, foreclosures ticked up in September, and the downward trend is holding. That should help us breathe a sigh of relief that the chances of a new wave of upside down homeowners is less likely because a flood of shadow inventory isn’t suddenly going to come on the market at 70% of the price paid on home sales the past year.
Do we trust these positive signs enough to say the worst is over, and confidently expect that values will at least rise in the coming years? Ability to repay, QM, lender compensation restrictions, and regulatory reform aren’t going to help customers who don’t know for sure if the house they bought or are going to buy is going to gain or lose value. So how DO we rebuild trust?
We could start by honestly assessing whether financed homeownership is a sustainable investment and still the foundation of American wealth, or a speculative gamble that requires all the regulatory oversight and forensic analysis of a high risk financial endeavor. If we don’t have the data to support the notion that homes will at least have a steady level of appreciation, we can’t honestly call mortgage lending an investment oriented activity for consumers.
That’s fine: to build trust, we just learn to sell the reality of a speculative real estate market, and educate customers about the real risks and benefits, and give them strategies for best case and worst case outcomes.
One more thing: actions within this industry are going to speak louder than words. If we don’t have confidence that the loans we are making won’t end up resulting in fines and buybacks, and don’t trust the integrity of the information we receive from customers to the point where we forensically analyze every component of the application, we can’t ask consumers to have confidence in financed homeownership.
Once we trust all of the partners that make up the housing industry, and decide whether we are selling loans for investment or speculation, then we can start promoting a message to build the trust of consumers.
Until then, it’s going to be difficult to ‘let people know it’s OK to start trusting the system again.’