The chief of U.S. Bank's mortgage business said Tuesday that the national home market is not as strong as it might appear and that the mortgage industry must brace for a rough 2014 amid rising interest rates and tight federal lending standards.
Rising rates — 4.7 percent for a 30-year mortgage on Tuesday compared with 3.3 percent in May — have pulled the rug out from under the refinance market. Meanwhile, tighter lending standards are excluding many potential borrowers with low or moderate incomes.
The result is that U.S. loan originations will be cut by nearly half between 2012 and 2014, according to projections from the Mortgage Bankers Association.
"The market is going to be much smaller," said Rick Aneshansel, president of U.S. Bank Home Mortgage. "There's probably going to be less processors, less underwriters, less closers, less companies — every portion of the industry will be affected to some degree."
As the refinancing market contracts, layoffs in the mortgage industry have already been happening, for instance, at Wells Fargo, the nation's largest mortgage servicer.
"I think our future's bright, but the next 12 to 18 months are going to be tougher," Aneshansel said.
Much of the recent good news about home construction and sale prices can be traced to a massive infusion of investor dollars in housing, he said, speaking at the fall conference of the Minnesota Mortgage Association and Minnesota Affordable Homes Congress.
Low home prices, low rental vacancy rates and the lack of better investment opportunities have combined to funnel Wall Street money into the home market. Firms like Blackstone, Warren Buffett's Berkshire Hathaway and individual investors are paying cash for properties and turning them into rental properties, including in the Twin Cities.
"This is clouding the issue with the administration, with the regulators," Aneshansel said. "Everybody thinks housing is robust and there must be plenty of credit out there, because there's so much good news in housing starts and home purchases. The purchase market is growing, so what's wrong?"
What's wrong is that purchases of homes by investors account for an estimated 30 percent of U.S. home sales, Aneshansel said. Goldman Sachs analysts go further, estimating that more than half of home purchases in 2012 and 2013 were made with cash, "driven by the significant role that investors are playing."
This will eventually stop, as hedge funds find something else to do with their money. Then the U.S. housing market will look different.
"This is late-stage, and we're not going to see that continue for a long time," Aneshansel said. "You take that 5 million annual sales rate of house units that are happening right now, and you take 25, 30, 35 percent out of it, and it puts a completely different spin on the marketplace."
Existing home sales rising
The news is not all bad. Applications for mortgages on home purchases and existing home sales are both rising. Aneshansel cited a report from the Joint Center for Housing Studies at Harvard University that projects a "multi-decade-long housing building boom" driven by surging demand from Latino and other minority households.
The Joint Center projects that the number of minority households will grow by 8.7 million over the next 10 years, accounting for 70 percent of new households. Until lending standards loosen, a big portion of this new wave of potential home buyers will be excluded from the market.
"These are first-time home buyers entering the market — they don't have a 20 or 30 percent down payment," Aneshansel said.
Requiring down payments of 20 percent or more and credit scores in the high 700s is a far cry from 2005, when some mortgage originators were booking "liar loans" that required no proof of income.
Aneshansel acknowledged that the mortgage industry as a whole "caused a lot of pain to this country," but said mortgage originators must work to persuade government regulators that the "pendulum has swung too hard" on lending standards, making it too difficult for people with low and moderate incomes to buy a home.
"We've gotten overkill," Aneshansel said. "The expectation of perfection that's coming out of Washington, and not being allowed to have a judgment call on whether somebody can afford and buy their first home — the pendulum has just overswung."