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Tuesday, Jul 5, 2022

Mortgage Brokers’ Bonanza

The coronavirus pandemic and efforts to suppress it have shaken the national housing market – and given some segments a considerable boost.The extended economic turbulence has driven interest rates to all-time lows between 2 and 3 percent. Attractive rates have, in turn, driven a massive boom in existing home sales and new mortgage applications. According to the Mortgage Bankers Association, national application volumes in August were up 22 percent from the same month in 2019.Broker Mac Cregger, senior vice president and regional manager of Angel Oak Home Loans, which has an office in Woodland Hills, told the Business Journal the residential purchase market is “the strongest I’ve ever seen in the 16 years I’ve been in the business.”The business mortgage market hasn’t recovered as quickly, with an office sector gouged by remote work and restaurant and retail sectors still stymied by regulations and cautious consumer behavior.Westlake Village-based Velocity Financial Inc. Chief Executive Chris Farrar told the Business Journal “transaction volume is down significantly,” on the commercial side.Residential rushAccording to Angel Oak’s Cregger, “the purchase and refinance markets have converged,” a direct result of unbeatable rates. “We’ve been sprinting for nine months.”Angel Oak issues traditional residential loans from government agencies like Freddie Mac and Ginnie May but specializes in nonqualified loans. It has an office in Woodland Hills.

Cregger, based at the company’s Atlanta office, explained low rates mixed with dwindling inventory and higher-than-ever property values make it easy for homeowners to not only refinance existing mortgages but also cash in on their equity positions and upgrade their personal residence or investment properties. Low rates also make expensive homes seem a bit more affordable. That’s good news for a large contingent of first-time buyers eager to leave behind apartment rentals in search of a roomier home in the suburbs.Data from the National Association of Retailers confirms the residential market’s tear.According to a November report from the group, existing-home sales grew for the fifth consecutive month in October to an annualized rate of 6.85 million – up 4 percent from the prior month and 27 percent from one year ago. More than 70 percent of homes sold in October were on the market for less than a month.

The association’s Chief Economist Lawrence Yun said in the report, “the surge in sales in recent months has now offset the spring market losses. With news that a COVID-19 vaccine will soon be available, and with mortgage rates projected to hover around 3 percent in 2021, I expect the market’s growth to continue into 2021.”The Valley market is just as hot.

According to a research note published by loan broker Ron Henderson, president of Multi Real Estate Services Inc. in West Hills, more single-family residential properties in the San Fernando Valley entered escrow this November than in the same month in 2019. It wasn’t an anomaly – the same happened every month since June.What’s more, homes are selling for higher prices.  According to Henderson’s note, the average price at closing for a single-family home in the Valley in November was just over $1 million, and the median price $810,000.

“That’s due to the lack of inventory in the lower price points,” Henderson wrote. “The construction of new affordable housing has fallen well behind the amount required to house the population for decades due to strict zoning, environmental requirements, local development fees, labor costs, and (NIMBY) opposition. … At some point there will be a market stabilization.”Public companyVelocity’s Farrar said the commercial market hasn’t rebounded as quickly as the residential side due to uncertainty.

“It’s more difficult to get a commercial loan. Lenders are nervous about the economy,” he said.  Velocity makes about half of its loans for small commercial assets. The other half are for single family and small multi-family residential properties.“We don’t have a lot of exposure to stuff that was the hardest hit, like movie theaters, hotels and motels, restaurants … but we definitely saw stress on our borrowers,” Farrar said.Last year was tough on the books for Velocity, which went public on the New York Stock Exchange in January. Its IPO issued 7.25 million shares at $13 each. The price fell in April to a low of around $2.50 when the market crashed, and has steadily climbed back to close Dec. 29 at $6.20.“We didn’t do as well as we thought going into the year, but it was nowhere near as bad as some were predicting,” Farrar said.He added he was encouraged by how well the company’s crisis plan held up under the stressful conditions of the pandemic.“We still made money for the year, so that’s great.”A quarterly earnings report filed Nov. 11 with the Securities and Exchange Commission lists third quarter income of $3.5 million, or earnings of 11 cents a share.

Also promising is that volume was solid when Velocity resumed issuing new loans in September.

According to the quarterly filing, “the relaunch has been met with strong demand from existing broker relationships and the addition of 396 new broker registrations resulted in $226 million in UPB of loan applications,” which it said mirrors pre-COVID totals.“It’ll continue to be strong for two to three more years,” Farrar told the Business Journal.Also headquartered in Westlake Village is Pennymac Financial Services Inc., a top 10 servicer of residential mortgages in the U.S. according to Inside Mortgage Finance. The company has a servicing portfolio of more than $400 billion in unpaid balance.

According to its third-quarter earnings report, net income for the period ended Sept. 30. totaled $535 million, or $7.03 per share, way up from $458 million in the second quarter and nearly triple that of the third quarter in 2019, which saw earnings of $122 million.Correspondent production volumes – a measure of new loan origination – reached record highs in the third quarter, totaling $54.2 billion in unpaid principal balance. That’s an increase of 44 percent from the prior quarter and 55 percent from the third quarter in 2019 – a symptom of the residential buying boom.

“PennyMac Financial again delivered record earnings in the third quarter, driven by increases in income from both our production and servicing segments,” Chief Executive David Spector said in a statement. “Record production income resulted from outstanding performance across all channels and continued growth in our higher-margin consumer and broker direct lending channels.”Wealth divideCregger said the mortgage industry’s pandemic-time activity illustrates the growing wealth divide in the U.S.“Low- to moderate-income households were affected hugely (by the virus). … Middle and upper-middle-class were affected much less.”That’s a big reason why homes are selling so quickly despite sitting at their most expensive valuations.And while purchasing is sky high, so are loan delinquencies.A report from financial analysis firm CoreLogic found 120-day delinquency rates hit a 21-year high in July at 1.4 percent; 90-day delinquencies were at 4.1 percent.

Even borrowers who have chosen government-backed forbearance plans will have to come up with months of backlogged payments.

According to Cregger, that doesn’t mean we’re in for a repeat of the 2008 housing crisis.

“People who face financial challenges will be able to sell their homes. In 2007, 2008 and 2009, men and women couldn’t sell their homes,” he said. “What it means in the next three years is that less people easily qualify for long-term mortgages.”Stricter loan access and rising real estate prices – an especially pertinent trend in the greater Los Angeles market – would make homeownership even more difficult for lower-income people or those with credit problems.

Cregger said government agencies will likely create specific loan programs to account for people who suffered credit issues as a result of the pandemic.

Whatever happens, he cautioned the housing market takes a long time to react to trauma.

“We’ll wake up 12 to 18 months from now and we’ll be dealing with the credit issues that happened 18 months ago.”

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