Here’s what to worry about
Because of our extensive work as the largest quality control provider for lenders and others, we have a window on factors that all market participants should keep an eye on. Having performed post-close quality reviews on thousands of loans in the past year, we are seeing an increase in errors and a general sloppiness in the application, documentation and approval process.
These errors may be due to the accelerated speed at which originators are processing loans, as they try to capitalize on the refinance opportunity created by record-low interest rates. The tenure of loan underwriting personnel also may be a factor. Well over half — 60% — of mortgage underwriters have been in their current position for two years or less. The average experience of a loan underwriter has plummeted, in large part a hangover from the last housing crisis, when many mid- and senior-level employees fled to other industries.
A second concern is the large number of people seeking to buy a home for investment purposes or who already own an investment property. If interest rates stay low, even more investors may be attracted to the housing market. There may also be a greater incidence of fraud, as some borrowers claim that their properties are owner-occupied to qualify for lower rates, while planning to rent the units. When the banks discover the fraud, borrowers will be faced with significantly higher interest rates.
Alternatively, if the rental income expected by these owners (whether legitimate or not) fails to materialize, their mortgages could be headed for default.
Finally, while the Federal Reserve and other market experts believe inflation will remain well-controlled, a material spike in inflation, pushing mortgage rates toward the high single digits mortgage rates toward the high single digits, could have a devastating impact on housing. The bond market would be the first to react to inflation, as it erodes bondholders’ future cash flows. The resulting increase in bond yields would then be reflected in mortgage loan rates.
Still, it will be important to watch for alternative data – such as quality-control lapses or a rise in loan applications for investment properties – that may raise concerns that the air is escaping from the housing market. It would be especially worrisome if there were to be higher-than-expected inflation at the same time that forbearance ends and properties came flooding onto the market.