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The mortgage market's next opportunity

 
Think Tank
Peter Reinhart,
 Esq.
Director of the Kislak Real Estate Institute at Monmouth University
Senior Vice President and General Counsel for Hovnanian Enterprises, Inc. for 33 years.

The U.S. mortgage market has enjoyed historically low mortgage rates for so long that the pool of potential refinance customers has shrunk dramatically, forcing mortgage professionals to not only layoff employees, but to also seek a new audience in which to concentrate their business. But which part of the market is primed to take off now that refinancing is tapering off—is it purchase loans, home equity loans, do we dare even suggest that non-prime lending could be the next profitable audience?

To learn more about where the mortgage market is headed next, we interviewed Peter S. Reinhart, Esq., director of the Kislak Real Estate Institute at Monmouth University.

Q: “With refinancing on the decline and home sales waning, where's the next business opportunity for mortgage lenders--home equity lending, non-prime lending?”

A: Mortgage refinancing activity typically increases when mortgage rates are falling for a steady period and again once rates begin to rise off those low levels. Static rates do not stimulate much refinance activity at all.

The bulk of refinance activity is mostly behind us because interest rates have not increased much in recent years. Mortgage rates have been holding at a very low pattern. Over the past few years, the majority of the refinancing activity was from older mortgages with much higher interest rates. Again, since rates have been so low for so long, there is little rate incentive to refinance again.

Are home purchases the next big thing?

If refinancing is fading, it stands to reason that purchase loans would be the next viable avenue for mortgage business. That said, existing and new home sales have flattened in recent months due principally to a sluggish economy. There are signs of increased employment growth, including more better-paying jobs being created.  If positive employment trends continue, home sales should increase.

In addition, statistically, pent up demand is growing as household formation stagnates.  At some point this pent up demand should result in an uptick in sales.  

If not home sales, what about home equity lending?

I do not see an increase in home equity lending to any degree. Home values are just now approaching pre-recession values in most markets and the rapid increase in values in the first few years following the end of the recession has leveled off.  Therefore, the comfort level of homeowners to take on more debt is not high at this time.

Non-prime lending  

There are some lenders tiptoeing back into non-prime lending but with much stricter underwriting requirements. That said, I do not see any significant growth in non-prime lending, particularly with the tighter underwriting rules placed on mortgage lenders.

For the housing market to gain steam…

For the housing market to gain steam, economic conditions need to continue to improve with the resultant improvement in consumer confidence.  If Congress were to do something to lessen the student debt load, that might encourage more first-time homebuyers to enter the housing market and thereby enable more move-up sales, fueling the purchase market. Another boon to purchase-loan activity is foreign homebuyers.  In certain markets, foreign buyers are a significant force in the market, however, more than half of international buyers pay cash and do not require financing.