More on Student Debt & Millennial's Impact on Housing; Home Price Trends

Poor Baby Boomers. The industry is so fixated on waiting for the "trophy generation" Millennials to figure out what they want for housing (see updates a few paragraphs down) that no one seems too concerned about older folks. But the National Reverse Mortgage Lenders Association/ Risk Span Reverse Mortgage Market Index (RMMI) grew for the tenth straight quarter. The RMMI, which evaluates trends in home values, home equity and mortgaged debt of homeowners, aged 62 or older every quarter, has reached its highest level since Q3 of 2007 at 183.87, a 2.5% increase from Q2 of 2013. The index indicates that Americans 62 years old and older now have more equity in their homes since 2007 and senior home values have grown by more than $97 billion in Q3, whereas collective home equity continues to increase, reaching a total of $3.84 trillion.

Banks... they just aren't making any more of them, and the numbers are going down due to M&A. In the last week or two we learned that in Texas Guaranty Bank & Trust ($1.3B) will acquire Preston State Bank ($122mm) and The First National Bank of McGregor ($149mm) will acquire Oglesby State Bank ($14mm). One state up, American Heritage Bank ($1B, OK) will acquire First National Bank in Pawhuska ($31mm, OK) for about $4.2mm in cash. And for fans of mortgage banking, Elkins, W.Va.-based Citizens Bank of West Virginia Inc. has acquired the business operations of Reliance Mortgage Co.

They aren't making any more Millennials either. Young adults today, often called the millennial generation, are more likely to be foreign born and speak a language other than English at home, compared with young adults in 1980...and take pictures of themselves and broadcast them over the internet. The U.S. Census Bureau pegs the Millennial group as age 18-34, thus born between 1981 and 1997. That definition is good enough for me.

Maybe some of them will go to college for free. Orange County is not exactly the hot bed of liberalism and progressive thought, and this article on free junior college proves it. But it does raise some issues about the cost of a college degree obviously impacting future home buyers.

Because overall, student loan debt lowers the likelihood of homeownership by age 30 or so for a group of individuals who attended college during the 1990s. If you don't believe me, ask the Federal Reserve Bank of Boston which published the most recent comprehensive study on the topic.

Remember, however, that our government earns income from all those ex-college students making their debt payments. The last figure I saw came from USA Today in late November 2013, and it noted that our government ("we're here to help") made a $41.3 billion profit for the 2013 fiscal year. There are companies out there, however, that are actively refinancing student debt - such as San Francisco's Social Finance.

Yes, a frequent news item is the level of student loan debt outstanding. The claim in the press is that student loans that young adults are saddled with are preventing them from purchasing homes. What is the current policy of how student loans are factored into a borrower's ratios? Here is exactly what FNMA has to say: "Fannie Mae requires that all deferred installment debt, including student loans not yet in repayment, be included in the calculation of the borrower's debt-to-income ratio. In determining the payment for deferred student loans, Fannie Mae currently requires that the lender obtain a copy of the borrower's payment letter or forbearance agreement or calculate the monthly payment at 2% of the balance of the student loan. Research has shown that actual monthly payments are typically lower than 2%. In addition, many student loan repayment structures now use an income-based approach in calculating changes in the payment due over time. As a result, Fannie Mae is modifying the monthly payment calculation from 2% to 1% of the outstanding balance. In addition, for all student loans, regardless of their payment status, the lender must use the greater of the 1% calculation or the actual documented payment. An exception will be allowed to use the actual documented payment if it will fully amortize the loan over its term with no payment adjustments." Therefore even if the payment is deferred we still have to factor in either the actual future payment or use the 1% calculation.

CNBC reports in 2014 renters paid 4.9% more than they did in 2013. Analysts say increases like this will eventually push Millennials into home ownership. Here's a great short video from The RE Source and Dave Savage of Mortgage Coach on working and winning with Millennials in Real-Estate and Lending. The guys talk about what matters most, and how to best communicate with this younger generation that currently makes up 36% of the workforce.  Lots of great takeaways in just 4 minutes, "Less is more, like never before" check it out.  CLICK HERE TO WATCH THE VIDEO.

Other countries are dealing with this as well. And they have a few creative things going on overseas with regard to students and home buying. For example, this from the UK.

Last year I attended a school graduation where one of the graduates showed up to the ceremony wearing prison stripes, holding a ball and chain strapped to his leg, and a sign that read, "Class of 2014: Part of the Debt Chain Gang." Some may think it's well within his rights to use the event to create awareness....I however think a kindergarten school graduation is no place for political discourse. But the facts are the facts: young adults are being saddled with harder economic realities than generations past. Some may even attempt to quantify their misery...and they have. It's called the Youth Misery Index; the index adds together youth unemployment, average graduating student debt (in thousands), and national debt per capita (in thousands). Youth unemployment is at 18.1%, one of the highest levels since World War II. Average graduating student debt has reached $30,000. National debt per capita is $58,400....add it up and the Youth Misery Index for 2014 comes out to 106.5. In 2013 the index was calculated at 98.6; in 2012 it was 95.1; in 2011 it was 90.6; at the start of the financial crisis the index was 69.3....when the YMI was first calculated back in 1993, the American youth's misery was 53.1. Fun with numbers.

Wells Fargo Securities, LLC Economics Group recently released an article titled, "Making Sense of Household Formations", predicting that household formations should strengthen along with the economy in the coming years. Household formation drastically fell during the recession and has remained low over the past few years. Between 2008 and 2010, only 500,000 new households were formed in the United States, compared to the typical rate of 1.3 million per year. The downfall of household formations can be attributed to an increase in loan debt, growth in college and trade school enrollment, lack of job opportunities and weak income growth. These factors have led Millennials to move back home with their parents for a prolonged period of time. Data suggests that of those aged 25-34 years old, 13.9% live with an older family member, an increase from 10.8% in 2005, which means more than 1.5 million young adults are living at home. The sluggish rate of household formations may be the cause of the slow housing recovery. Fortunately, growth in household formations should be seen this year, due to an improving job market. Non-farm employment growth has increased and the unemployment rate has dropped. Wells Fargo Economic Group predicts that household formations should rise to 1.5 million in 2015. To learn more about Wells Fargo predictions, click here.

Turning our collective gaze to the markets, the smartest guys in the room believe that the Federal Open Market Committee (FOMC) will vote to begin increasing interest rates sometimes this year. The FOMC is made up of twelve voting members, including seven members of the Board of Governors, the president of the Federal Reserve Bank of New York and four additional Reserve Bank Presidents who rotate annually. There are currently two vacant seats, so the voting power of the FOMC is predominantly in the hands of ten people. At the FOMC's December meeting, there were mixed reviews of when interest rates should increase. Some members recommended that interest rates should increase early this year as the economy should reach full employment by the end of 2015 or 2016, whereas others believed rates should increase mid 2015-to later in the year as inflation indicates indifferent demand.

That is all well and good, but there is a lot going on in the day-to-day security markets. Investors are selling their higher coupon securities and buying lower coupon securities, resulting in some wild price movements out there. And overall MBS prices are lagging Treasury securities - who wants to pay 106 for something that is going to pay off next week at 100 (par) resulting in a 6 point loss? With 10y rate 1.76%, current coupon basis 60bps, and primary secondary spread 130bps primary residential mortgages rates are being set ~3.625-3.75%.

The New York Federal Reserve Bank announced readiness sale for next Tuesday with four odd lot GNMA pools totaling a max of $23.7 million. Priming the pumps! And there are certainly thousands of analysts at investors and Wall Street firms trying to second guess each other on prepayments, market direction, coupon spreads, how the price of oil will change things, and so on. Stay tuned!

Today is a travel day for me to Southwest Florida, thus the early commentary. But we have a lot of data coming out starting with the Consumer Price Index (CPI). Then we'll see the Industrial Production and Capacity Utilization twins, both seen lower from last reads. At 9:55AM EST is the University of Michigan Sentiment, 93.6 prior. We'll see how all that impacts rates including our 10-year T-note which closed Thursday down at 1.77% and in the very early going is at 1.73%.

Jobs and Announcements

Under the "companies expanding" banner, a client of Menlo Company (MenloCompany.Com), a leading M&A and production growth management firm, is expanding its Retail Lending Footprint. "Its model organizes regional lending centers, built on and around your team, to provide a unique and highly service oriented offering of mortgage services to consumers in your market. So if your company and/or production team is looking to be acquired (or transitioned) to lead the expansion in your market, contact Rick Roque. The main requirements are production / LO driven with the leadership to manage more than $5M per month in volume, be focused on Retail Mortgage Lending (e.g. not commercial, real estate or insurance), be purchase focused - but successful refinance teams or companies may be of interest.

Citibank, N.A. is searching for experienced, high-performing Home Lending Officers (HLOs) in key Citibank retail markets including New York, Boston, Washington, D.C., S. Florida, Chicago, Los Angeles and San Francisco.  HLOs work with customers to offer lending solutions that meet their home financing needs and promote Citi and its financial services. HLOs work as a team with bank branch staff to drive mortgage originations and will develop key referral relationships with Realtors, Builders, etc. to develop self-sourced business. "Ideal candidates will have expert knowledge of lending products, services and pricing alternatives and the ability to explain them to clients and referral sources. Citibank offers the best of both worlds - an established global brand with a 200-year history that operates in many ways like a small local lender. Citi has exclusive products and relationship pricing discounts and offers one of the best retail branch partnership models in the industry."

And congrats to Linda Bomar, who has been named VP of Sales at Indecomm Global Services, a leader in business process outsourcing, consulting, learning, and technology solutions to the mortgage industry. Linda will spearhead Indecomm's sales efforts to the mortgage industry and is joined by John Feehan, Director of Sales. Both bring their stellar reputations and solid relationships to expand Indecomm's sales organization and are seeking to add additional talent to their sales team. To learn about the positions available or to submit a confidential resume, contact Linda Bomar.