The US is the largest home loan market in the world with over 70 million mortgage holders and US$10 Trillion in loans outstanding. While the top 6 domestic banks corner a bulk of market share, the industry is rapidly getting ancillarized and specialized. Home ownership rates have not significantly fallen since the subprime crisis of 2007-2008 and are stabilizing at a healthy 65%.
Today, the US mortgage market is on the cusp of 3 structural changes:
1. Higher regulatory scrutiny and increased litigation
Massive and punitive fines, as in the recent case of JP Morgan Chase and prolonged litigation like BAC-Countrywide led by the Department of Justice, State AGs, Government Sponsored Enterprises and Mortgage Backed Securities investors, have significantly increased the cost of future compliance. While, the Mortgage Backed Securities (MBS) market is getting back on its feet, servicing is under stress with the Consumer Finance Protection Bureau (CFPB) setting various standards.
2. Impending tapering of the Fed’s Quantitative Easing (QE)
This change has pushed up interest rates as well as put the brakes on refinancing , which accounted for a majority of the originations in 2012. Given the lower risk of refinancing and increased regulation, there is a rise of the “Independent Servicer” model and hence the market for mortgage servicing rights is becoming more attractive. The focus on non-price competition such as better customer service and faster loan-closing will take the pressure off higher perceived rates and protect declining Net Interest Margins.
3. Intent to shut down government sponsored enterprise (GSE)
Fannie Mae & Freddie Mac were at the center of the sub-prime crisis and were placed in receivership of the Federal Home Finance Agency after infusion of ~$190 billion in bailout funds. While, the GSEs have since repaid most of the funding through dividends, the proposed winding down will have multiple implications; the key being a spike in interest rates, which Moody’s estimates between 20%-30% and the need for large amounts of private capital.
The technology, operations, and outsourcing impact on banks from these changes will be significant. Investments in data and analytics will become important to meet the need for better compliance and also for the ability to predict loan and customer behavior. Mobile technologies that can help banks offer their clients a differentiated mortgage experience will gain prominence. There will also be an increased need for streamlined, efficient and rules driven origination as well as servicing. Independent Originators and Servicers will deploy platforms based on integrated technology. These platforms help the bank move from a CAPEX to an OPEX model through variablized pricing such as cost-per-loan. These would also help build agility in responding to the myriad compliance mandates and reduce operating as well as reputational risk for financial institutions.
I would like to hear your views on the state of the US mortgage markets and where you see it heading!