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Housing market turning corners, but risks and regulatory concerns persist

Category | Financial Regulations
Housing market turning corners, but risks and regulatory concerns persist

After nearly six months of uneven sales activity, the housing market seems to have turned a corner during the third quarter of 2014.

Property values have stopped rising so dramatically, lending themselves to better affordability for buyers, and the secondary market has resurfaced as a valuable element within the lending environment. The collective impact of the Qualified Mortgage and Ability-to-Repay rules, implemented by the Consumer Financial Protection Bureau back in January, has been relatively muted, as noted by the Urban Institute’s recent analysis. Lenders have mostly learned to navigate the parameters of QM, and wholesale lines have become instrumental in helping brokers and other second-party servicers match loan products with borrowers who otherwise might not meet qualification standards.

Subservicer responsibility and liability 

As a recent Mortgage News Daily piece detailed, given the need for younger buyers to enter into the homebuying population, more companies are again using subservicers as part of their risk assessment strategies. It’s a trend that’s begun drawing more attention from the CFPB, especially as a wider range of new and innovative products begin to saturate the marketplace. Currently, it remains the responsibility of the seller or servicer to monitor and oversee the performance of the subservicer or third party, but as MND’s Rob Chrisman wrote, if the phenomenon continues to correlate with the market’s resurgence, the bureau could be looking more thoroughly into this dynamic.

“There is a growing body of evidence is showing that the housing market, which has been largely disappointing in 2014, may have turned a corner this summer,” Chrisman wrote. “Builder sentiment/confidence has increased. After four months in contraction territory (below 50), the National Association of Homebuilders index crested above 50 in July and climbed higher, to 55, in August. July housing starts jumped to an eight-month high in a welcome affirmation of the improvement in homebuilding sentiment. Building permits also shot up.”

Chrisman added that single-family sales and listings were up, but noted that the CFPB’s oversight can extend into new territory based on growing concerns, as opposed to evidence that an issue has already arisen. This is important for all mortgage market participants, particularly those dealing with non-QM products and doing business with higher-risk borrowers.

“As such, the CFPB seems to say that the mere existence of a practice that it believes poses significant risks to consumers is sufficient to warrant a civil penalty in the millions,” Chrisman wrote. “This means that companies cannot take comfort in the fact that a practice the CFPB may deem problematic resulted in only potential, not actual, consumer harm. The potential for consumer injury appears to be as unacceptable to the CFPB as injury in fact.”

Shock waves in the Bay Area jumbo market, for both investors and residents 

Elsewhere in the non-QM market, the recent earthquake that struck the California Bay Area sent literal tremors through a number of properties, but also caused reverberations for those investing in the high-priced San Francisco and San Jose communities.

A HousingWire report noted the forewarnings of Moody’s Investor Service, which three years ago detailed reasons to be cautious with the Bay Area housing market. Not only in San Francisco, but also across the bay in Oakland, Alameda and Berkeley, many properties carry jumbo loans, as the region’s median property value has spiked from $483,400 in 2011 to $769,600 in 2014. Since jumbo loans don’t meet QM criteria, the area has been home to a strong residential-mortgage backed securitizations market.

Of course, RMBS pose inherently different risks, which led Moody’s warn against damages for investors if the Bay Area were to be hit by an earthquake, causing property values to plummet. If the owners of these properties elected to abandon them, investors could be left holding deteriorated certificates and facing serious credit-quality issues. In its U.S. Geological Survey, Moody’s also noted that there was a 63 percent chance the region would be hit by an earthquake of 6.7 magnitude or greater sometime before 2038, essentially reminding investors that the area’s geographical positioning – combined with its sharply appreciating prices – left the housing market on ground that was both figuratively and literally shaky.

The earthquake that struck Aug. 24 was centered in the Napa Valley, some 60-plus miles north of San Francisco, and registered a magnitude of 6.0 on the Richter scale, making it the largest to hit the region in 25 years. Perhaps that means the Bay Area is safe from another shock for the near future, but regardless, it served as a stark reminder of the realities associated with the region. The jumbo market’s renaissance is buoyed by the area’s rising values, but the always-present threat of natural disaster leaves many professionals wary of the different level of risk that exists there.

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