ESG investing — that is “environmental, social and governance” money management — goes by many monikers. Some call it “sustainable investing,” others “impact investing.” The United Nations, which coined the term two decades ago in the wake of the Enron and Exxon Valdez scandals, sometimes refers to it as “inclusive investing.” All these phrases imply that capitalism can consider factors outside of quarterly earnings when making investment decisions.

Others are less sanguine about the movement. Unfettered free market advocates view it as misguided. Elon Musk has used his Twitter megaphone to call ESG “the devil incarnate.” Recently, the Financial Times, while pointing out that the term “ESG” was mentioned in almost 20% of corporate earnings calls last year, simultaneously said ESG’s ambiguity has set it up for a “reckoning.”

Rhetoric aside, here are some facts

The Securities and Exchange Commission has begun the process of developing mandated disclosure regimes for funds that consider ESG factors in their marketing material. Millennial and Gen Z investors have been voting with their wallets, demanding that ESG-like items are incorporated into investment decisions. The market has seen a major increase in corporate board focus on the issue, as well as investment funds offering ESG products.

Consider how much the estimates of dollar-based ESG assets range — from tens of trillions to nearly a hundred trillion — depending on the source. This massive variation demonstrates the current market’s inability to successfully quantify (or even define) what exactly we mean by those three magic letters.

Where is ESG investing going next?

What does ESG’s growth and current ubiquity mean for residential MBS markets?

When thinking about ESG in RMBS, right now there are three considerations that can help the mortgage market properly capitalize on the momentum behind the ESG movement. If done responsibly, ESG and RMBS should coexist in a positive, self-reinforcing, meaningful way, and one that establishes the residential mortgage market as a best practices leader in the movement overall.

To get there, first, Residential Mortgage-Backed Security (RMBS) issuers, investors, and rating agencies should avoid trying to boil the ocean. The E, S and G components are all very different, and at times unwieldy. Sometimes these factors are in outright tension with one another. Is affordable housing construction that requires trees to be torn down a social good, or not? Care needs to be taken so that the market doesn’t bite off more than it can chew.

The RMBS market should break ESG factors down and analyze them one at a time. Environmental (E) metrics are currently the most advanced. RMBS issuers and investors analyze not only environment hazard risks, like homes being in flood or wildfire zones, but also collateral features that have a positive environmental impact like solar panels. Data like the percentage of loans in a pool with LEED or Energy Star certifications, for example, are also good places to continue building a market.

The residential MBS market can also build from some of the infrastructure that already exists for the “S” – social – component of ESG. Ginnie MBS, for example, could be included in funds that focus on social impact, as they typically pool mortgages to borrowers with little credit history or needing down payment assistance. Same with “first-time homebuyer” flagged mortgages.

Where the market can get a bit more forward leaning would be with ideas such as a first-generation homebuyer flag, a measure of the proximity of affordable housing to public transportation, or whether new affordable housing will help a community meet its suggested/required affordable housing level.

Other ideas include more disclosure to investors around borrowers who received down payment assistance or are below a certain Area Median Income (AMI). These are all data elements that could be collected at origination and passed along to investors, and they fit nicely within the scope of how the market already operates today. The market should begin requesting these types of data flags from issuers and begin collecting and disseminating the needed data to ESG-focused investors.

Market participants must remember that, as fiduciaries, asset managers must tether all decisions to returns unless an investment mandate specifies otherwise. Certainly, ESG factors that analyze the sustainability of an asset do impact the fundamental value of securities. But for mortgages, the market can also be looking at ways to enhance pricing on MBS that offer both ESG components and improved, or at least more predictable, yield. Think, for example, of the reduced convexity of low balance loans.

Building out disclosure around low balance pools – reporting on whether they constitute underserved markets, low-to-moderate income (LMI) borrowers, neighborhoods that had historically been redlined, etc. – while also showing that the reduced refinance elasticity benefits investors and lowers rates to borrowers is a perfect place for RMBS to grab hold of already established practices and enhance them with ESG investing in mind. For a market already sophisticated in taking borrower factors into account for prepayment speeds and credit risk, looking at places where more details about homeowners can help both convexity risk and enhance underserved access to credit is an obvious win.

Next, RMBS market participants must understand that disclosures are going to be the key to success. The RMBS industry needs to work together to develop ESG disclosures that are as consistent and transparent as possible. One thing the recent raids at Deutsche Bank or fines against BNY demonstrate is that authorities are actively policing any accusations of “greenwashing,” ensuring ESG claims don’t get ahead of reality (see my previous comment on the market’s failure to consistently measure ESG assets). Sound data disclosure standards are the solution.

ESG investing means a lot of things to a lot of people. Maybe it’s the way eight billion people can share a planet and enjoy equitable and sustainable long-term growth. Maybe some of it is too amorphous to last. But considering how investments impact our world in the long-term is a very worthwhile goal, and one that many RMBS investors are seeking.

For the RMBS market to embrace the opportunity in front of it, building from what we already do well and staying laser-focused on transparency and data disclosure are the most important ingredients right now.

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June was a rough month for jumbo-mortgage securitizations, with only two private-label offerings brought to market valued at roughly $821 million.

The two jumbo-loan deals that did make it out of the gate last month were issued by Rocket Mortgage and J.P. Morgan Chase via the Rocket Mortgage Trust and J.P. Morgan Mortgage Trust conduits. The Rocket prime jumbo deal was backed by mortgages valued at $337.9 million and the J.P. Morgan deal was collateralized by jumbo mortgages valued at $483.4 million.

Prior to June, Rocket had sponsored three other prime jumbo securitizations backed by mortgages valued at about $1.9 billion. The most recent of the three was in April, with the other two in January and February, according to deals tracked by Kroll Bond Rating Agency (KBRA). Through June of this year, then, Rocket has sponsored a total of four private-label securitizations secured by prime jumbo loans valued at slightly north of $2.2 billion.

J.P. Morgan has been far more active this year, with nine prime-jumbo offerings through the end of June valued at $7.8 billion — two involving high loan-to-value prime jumbo-loan pools. But like Rocket, the lender has seen its private-label securitization activity fall off sharply in the past few months, with only one prime jumbo deal offered in May and one in June. 

Across both the Rocket and J.P. Morgan jumbo offerings, a noticeable trend is the wide spread between current mortgage rates and the weighted average coupon (or interest rate) for the loan pools backing the securitization deals. That average coupon has been creeping up as the year moves forward for securitization deals sponsored by both lenders, according to bond-rating reports for each, but it is being outpaced by fast-rising market rates — propelled by the Federal Reserve’s monetary tightening policies in its battle against inflation.

A huge volume of loans was originated at much lower interest rates last year during the height of the refi boom, and many of those loans were still winding their way through the securitization pipeline in 2022, given most loans have several months of seasoning before being securitized. That has created a distortion in execution and pricing in the secondary mortgage market.

For Rocket, according to KBRA’s bond-rating reports, the average coupon on its jumbo offerings has risen from 3.02% to 3.91% between its first jumbo transaction in January to its most recent deal in June. For J.P. Morgan, according to a bond-rating report from Fitch Ratings, the average weighted coupon for the jumbo loan pools in its offerings has increased from 3.3% in April — prior comparable data was unavailable in the report — to 3.8% in its most recent offering in June.

In both cases, the most recent coupon figures fall well short of current market rates for 30-year fixed mortgages. That pattern has escalated since the start of the year, when interest rates started to shoot up dramatically.

For the final week of June, the rate for a 30-year fixed mortgage was in the 5.7% range. Even with big drop in rates in the first week of July — the sharpest decline since 2008, to 5.3% for a 30-year fixed rate mortgage, according to Freddie Mac — the spread remains wide between the average coupons of the Rocket and J.P. Morgan jumbo offerings and current market rates.

The average contract interest rate for 30-year fixed-rate jumbo mortgages (balances greater than $647,200) is even a tad lower than the prevailing market rate of 5.3% — coming in at 5.25 percent for the week ending July 8, according to the Mortgage Bankers Association’s weekly mortgage applications survey.

Digital mortgage exchange and aggregator MAXEX reported in its recently released June market update that the overall reduction in mortgage originations, “due to higher rates, increased rate volatility and widening spreads continued to impact the demand for RMBS [residential mortgage-backed securities] in June.”

“Just two [jumbo-securitization] deals priced in June, compared to three in May,” the MAXEX report states. “June’s issuance was more than $500 million below May’s numbers and more than $1.5 billion lower than April’s issuance.”

That slowdown in the private-label securitization volume compared with the start of the year is not isolated to prime jumbo deals, either, according to data from KBRA.

Year to date through June 2022, KBRA’s deal-tracking data shows that 111 prime and nonprime securitization deals hit the market backed by loan pools valued in total at some $52.8 billion. Last year, over the same time frame, 97 PLS transactions were recorded backed by mortgage pools valued at $39.6 billion. 

Of note, however, is that the bulk of the prime and nonprime PLS deal volume in 2022 so far is from the first quarter of this year — 67 deals valued at $33.9 billion. Volume dropped off considerably in the second quarter, as rates continued to rise, to 44 deals valued at $18.9 billion, according to KBRA data, 

“The market for securitizations has all but dried up, with just two prime jumbo RMBS issuances and one agency-eligible investor issuance printing for June,” MAXEX reported. “To put it into perspective, RMBS issuance in June 2022 [based on MAXEX’s deal tracking] totaled less than $900 million, versus the June 2021 total of nearly $5 billion.”

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Demand for mortgages declined for the second consecutive week, led by a dip in purchase mortgage applications — despite rates on a downward trend.

The market composite index, a measure of mortgage loan application volume, decreased 1.7% for the week ending July 8, according to the Mortgage Bankers Association (MBA). The refinance index rose 2% from a week earlier and the purchase index dropped 4%.

“Purchase applications for both conventional and government loans continue to be weaker due to the combination of much higher mortgage rates and the worsening economic outlook,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting.

Freddie Mac PMMS showed purchase mortgage rates dropped 40 basis points to 5.3% last week. Rates during the previous two weeks dropped by half a percent but were still well above the 30-year purchase rate of 2.9% from the same period in 2021. 

The trade group estimates the average contract 30-year fixed-rate mortgage for conforming loans ($647,200 or less) remained at 5.74%, unchanged from the previous week. Jumbo mortgage loans (greater than $647,200) dipped to 5.25% from 5.28%. 

After reaching a record average purchase loan size of $460,000 in March 2022, the figure declined to $415,000 last week led by the potential moderation of home price growth and weaker purchase activity at the upper end of the market, Kan added. 

The refi share of total applications rose to 30.8% last week, largely due to an uptick in conventional and Federal Housing Administration (FHA) refinances. The overall refi index remained 5% below the average level reported in June, according to the MBA.

“With the 30-year fixed rate 265 basis points higher than a year ago, refinance applications are expected to remain depressed,” said Kan. 

In a separate projection made by the MBA in June, of the $2.4 trillion origination volume forecast for 2022, about $730 billion is expected to come from refis. About $2.3 trillion, more than 40% of the $4 trillion origination volume, came from refis in 2021. 

The FHA share of total applications decreased to 11.7% from the previous week’s 12%. The United States Department of Agriculture (USDA) share also declined to 0.5% from the week prior’s 0.6%. The Veterans Affairs (VA) share of total applications slightly rose to 11.2% from 11.1%.

The share of adjustable-rate mortgages (ARM) applications also rose, accounting for 9.6%. According to the MBA, the average interest rate for a 5/1 ARM increased to 4.71% from 4.62% a week prior. 

The survey, conducted weekly since 1990, covers 75% of all U.S. retail residential mortgage applications.

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One of the most valuable tools rental property investors have in the U.S. is the 30-year fixed-rate mortgage. Surprisingly, this style of mortgage is very much an outlier compared to what’s typically offered in other countries. Most countries tend to offer adjustable, variable, flexible, or renegotiable rate mortgages, all of which pose an inherent risk with the potential of an unexpected interest rate hike during ownership of the property.

Not only are fixed-rate mortgages excellent for letting investors skip those unexpected rate hikes down the road, but there have been notable periods where the interest rates on these mortgages have been remarkably low, making the cost of borrowing money almost trivial. 

But what happens when those interest rates increase, potentially to levels we aren’t used to seeing? Suddenly monthly mortgage payments are noticeably higher, which hits our cash flow returns. Does it mean it’s time to slow down or stop investing in rental properties? How do you counter higher interest rates on your mortgage to stay profitable with your rental property?

The best way to decide this is by understanding how rental properties make money, the factors you can control in a rental property and its profits, and knowing what to look for in a prospective rental property to help set you up for the greatest chance of successful returns, despite a higher mortgage payment.

Rental Properties are Long-Term Investments

One of the biggest things you should remember with rental properties is that they are, in fact, long-term investments. Sure, some people may see a quick equity profit through improvements or value-adds, and some may land deals with significant cash flow from the start. Still, as a general rule, you must remember that rental properties see the most profit over the long haul.

Often when we analyze a rental property’s finances, we only see the cash flow number that’s right in front of us. It’s easy to forget that the projected cash flow is simply what’s projected today. That number doesn’t account for rent increases over time (while keeping a fixed mortgage payment), appreciation, demand, and inflation. All of those factors will continuously change, hopefully for the better. 

How a Rental Property Makes Money

Before learning about real estate investing, you may have known that rental properties can be very profitable but not necessarily understand exactly how they can be so profitable.

The five ways that rental properties can make money are:

  1. Cash flow
  2. Appreciation
  3. Tax benefits
  4. Equity built via mortgage paydown
  5. Hedging against inflation

When you understand the details of each of these profit centers, you will not only become savvier about the power of holding a rental property for the long-term instead of the short-term, but you’ll also begin to realize that the expense of an interest rate that’s a couple of points higher than what you’re used to likely doesn’t hold a candle to the profit potential over the lifetime of the rental property.

You may already be saying, “But those other profit centers are speculative, and cash flow is still important, and the higher mortgage expense increases my risk by lowering my cash flow.” Yes, and that can very well be true. But what you want to do in this situation is two things:

  1. Learn to balance the profit centers. If cash flow is down, which happens with a higher interest rate, look for other profit centers with potential. Maybe you’re buying in a gentrifying high-demand area, so you could speculate that appreciation potential is very high. Or perhaps you’re investing during a time of extremely high inflation. What could you do in that situation? Think of it like a bar graph with a bar for each profit center. If one is down, are any of the others up? If they’re all down, that’s a problem. If some are higher than usual, do those balance them? All of it depends on your unique situation.
  2. Put a big focus on location and demand. Just as with that example, one of the keys is investing in properties that will lend their hand to the appreciation bar especially, as well as inflation and rent demand. As long as people desire the property they own, the greater the profit potential from the profit centers will be, and the more they will continue to increase over time.

When you understand how rental properties make money, you can begin to wear the investor hat rather than the consumer hat. It’s the consumer hat that causes people to think that increased interest rates are deal-breakers, whereas people who truly understand how rental properties profit will not only learn to see how to look past the interest rates but also give them perspectives on how to compensate for it.

Rent Increases

As already pointed out, a rental property’s projected cash flow is based on today’s rents, not tomorrow’s. Rents increase for two reasons: appreciation and inflation. 

Guess what doesn’t increase over time and is not affected by appreciation or inflation? Your mortgage payment when you have a fixed-rate mortgage. 

This means your cash flow spread will continue to grow over the life of your rental property as you continue to increase rents.

Your expenses, such as property tax and insurance, may increase over time, but they’re unlikely to increase at a rate anywhere near what rents will increase. Overall, you’ll see that rents will continue to pull farther and farther away from your fixed-rate mortgage expense, and your profits should continue to grow exponentially.

Forcing Profit Increases and Lowering Expenses

While I’ve been emphasizing the long-term, there are proactive things you can do to create more equity faster. Let’s go over them.

Improving the property

The more desirable your property, the more value it will generate and the more demand it will drive. While many profit centers will kick in on their own over time and increase the property’s value and rents, you can also do things to your property to increase desirability and force those profit increases more quickly. 

The most basic way of improving a property is by rehabbing it. When you upgrade a property, making it nicer and more attractive, you not only increase the overall value of that property, but you can also ask for higher rents. You’re merely speeding along those profits past what the higher interest rate is costing you.

Refinancing your mortgage

Don’t forget that you may not be tied to that higher interest rate forever. Mortgage interest rates fluctuate, just as property and rents do. If the interest rate drops lower than what you originally signed up for, you can refinance the property at that lower interest rate. Of course, it’s not a guarantee the rates will drop, but if they ever do, you can make that move and increase your cash flow.

Picking the right location

If you’ll notice, this isn’t the first time the location of a rental property has been brought up. As mentioned before about buying in a path of demand to ensure appreciation potential, you can also make even more strategic moves when you learn how to analyze neighborhoods and identify areas with an extremely high chance of appreciation. Forces like gentrification, population growth, and job growth can increase values.

Of course, banking specifically on gentrification, as with any appreciation, is speculation. You not only want to learn how to identify areas that may experience gentrification, but you also should have a contingency plan in case gentrification doesn’t occur. You wouldn’t want all your eggs in one profit center basket if that basket were to tip over. But if you buy at the right time (which often means you have to move quickly and not spend forever hesitating, or you may lose the deal), gentrification can certainly force more profits.

Going Up Against Inflation

While inflation impacts most areas of our lives negatively, the one place it can help is with rental properties. Your fixed-rate mortgage expense stays the same for the loan term, despite what happens to the dollar’s value. You pay back the loan in yesterday’s dollars, not tomorrow’s.

Look at inflation as compared to the interest rate of the mortgage. Many experts argue that the mortgage interest you pay over the term of a 30-year fixed mortgage is less than the expense of paying for the same property in cash with today’s dollars because of inflation. 

When the inflation rate is higher than the interest rate on your mortgage, your profits will continue to outrun the expense of that mortgage.

Keys to Remember

It would be easy to read this article and believe that if you hang onto a rental property for a long time, it will be very profitable because no matter what your expenses are today, everything will catch up and shift into a profit. 

That isn’t going to be true for all properties. Not all rental properties will be profitable, and many factors can challenge the various profit centers. It’s especially important to remember that speculation doesn’t always pan out, and you should avoid speculation more often than not. 

The intention of this article isn’t to mislead you into thinking that any property will make for a profitable property, but it’s instead to show you how to look at and analyze potential rental properties with the understanding that a higher interest rate won’t eat as much of your income up as you think.

It’s also important to be educated. For instance, what you believe is a high-interest rate may be “normal.” We’ve gotten used to seeing historically low-interest rates. We’ve been spoiled, and it misleads us into thinking that we can only be profitable if we have stupidly low-interest rates on our mortgages.

Lastly, if the interest rate continues to stress you, consider putting more money down on the loan so your payment will be decreased. Plus, you may even land a slightly lower interest rate as you increase your down payment.

If you’ve invested during periods of higher interest rates, what’s the most creative financing structure you’ve used on your rental properties with those rates, and how did it turn out 10 or 20 years down the road of owning your property? Let us know in the comments!

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Lenders continued to tighten credit standards in June as higher mortgage rates slowed refinance and purchase activity.

The monthly Mortgage Credit Availability Index (MCAI) fell by 0.3% in June, according to the Mortgage Bankers Association. A decline of the index, benchmarked to 100 in March 2012, indicates lending standards are tightening, while an increase suggests loosening credit. 

Credit availability was mixed by loan type. The conventional MCAI rose 1.2% while the government MCAI dipped by 1.7%. Of the component indices of the conventional MCAI, the jumbo MCAI increased by 1.4% and the conforming MCAI climbed by 0.6%. 

“Mortgage credit availability decreased slightly in June, as significantly higher mortgage rates compared to a year ago slowed refinance and purchase activity and impacted the overall mortgage credit landscape,” said Joel Kan, associate vice president of economic and industry forecasting at the MBA. 

Purchase mortgage rates, measured by the Freddie Mac PMMS Index, were at 5.3% last week. While rates are on a downward trend due to concerns about a potential recession, they remain well above last year’s 2.9% 30-year purchase rate. 

Borrowers’ demand for mortgage loans fell last week driven by a 7.7% decline in refi applications and a 4.3% dip in purchase applications from the previous week, according to the MBA.

Although there was reduced supply of lower credit score and high loan-to-value (LTV) rate-term refinance programs, the decline was offset by increased offerings for conventional adjustable rate mortgage (ARM) and high balance loans, Kan said.

In a market with a shortage of inventory and soaring rates, an increasing number of homebuyers have been opting for ARMs this year, which carry lower rates for an initial period of fixed interest and amortize over a 30-year term. Application volume for ARMs hit a 14-year high in May, making up nearly 11% of all mortgage applications. Last week, it consisted of 9.5% of all mortgage applications. 

“With higher rates and elevated home prices, more prospective buyers are applying for ARMs, but activity remains below historical averages,” Kan said. 

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San Francisco-based Unison is extending its reach in the heartland by expanding its shared-equity loan program to homeowners in Nebraska.

The move follows the opening of an office in Omaha earlier this year and reaching the milestone as of June 30 of having in force $6.1 billion in equity-sharing agreements with some 9,000 homeowners across 29 states and the District of Columbia.

“With our recent office expansion to Nebraska, this was the next logical step for us,” said Unison founder and CEO Thomas Sponholtz. “Due to the current market conditions, many consumers are seeking affordable housing options, and we are thrilled we can now offer greater origination capabilities in Nebraska. 

“With this announcement, we are expanding the number of consumers we can partner with to offer an option that doesn’t require interest or monthly payments.”

Unison currently operates in states bordering Nebraska to the south, including Kansas and Missouri and Colorado. Its operations also extend to the three West Coast states; the Southwest, other than Texas; and most states east of the Mississippi River. It does not yet have operations in most deep South states, other than Florida, nor in most of the Midwest states west of the Mississippi River, other than Minnesota and Missouri — and now Nebraska.

Earlier this year, Unison also completed a $443 million private-label offering backed by shared home-equity loans — with plans to pursue future securitizations as well. The company, through its fintech platform, offers homeowners the opportunity to tap their home equity without taking out a loan — via Unison’s shared home-equity product called a residential equity agreement (REA).


Prioritizing home equity solutions in a rising rate environment

The 2022 housing market has been underscored by interest rate spikes and refi decline and lenders are working hard to adjust to new borrower trends. HousingWire recently spoke with Barry Coffin, managing director of home equity title/close at ServiceLink, about the ways lenders can capitalize on these trends by revving up their home equity solutions.


“Home prices have been increasing rapidly over the past year, creating a record $24 trillion of wealth,” Unison said in announcing the securitization transaction. “… This transaction offers the opportunity for investors to access residential real estate equity and increases liquidity for homeowners across the country looking to monetize the equity in one of their most valuable assets — their homes.”

Unison, through an REA contract, advances the homeowner a portion of the equity in the property in exchange for a lien position and a share of the home’s future appreciation. Unison also shares some of the downside if the property loses value over the course of the contract. 

“Our presence in Nebraska has continued to grow since our office opening earlier this year,” added Unison President Ryan Downs, who is leading the Omaha office. “We are seeing greater interest in our solution and are thrilled to have boots on the ground where we can service our clients in person and remotely as well as tap Nebraska’s financial services and technology talent pool.”

As part of a Unison’s REA product, the company will invest up to 17.5% of a home’s value after a 2.5% risk-adjustment haircut on the value of the property. The company and homeowner then share in any appreciation, or depreciation, of the home’s value over the course of the contract. 

The homeowner has up to 30 years to pay off the initial investment, plus Unison’s appreciation cut, through a sale or refinancing of the home — or through a contract buyout after three-year lock-in period. As part of the REA, Unison’s share of the home’s appreciation can range from 20% to 70%, depending on size of the equity investment advanced. 

“We’re sitting in an equity position side by side with the homeowner,” said Matthew O’Hara, head of portfolio management and research at Unison Investment Management, which is under the Unison umbrella. “So, if the price goes up, the homeowner benefits, and we benefit as well. 

“If the price goes down, the homeowners are losing some of their equity, but we are also losing equity in our position at the same time.” 

O’Hara added that Unison’s move into the private-label securitization market supports the company’s expansion efforts because it is an optimal way to decrease its cost of financing while also creating more liquidity for originating shared home-equity contracts — with the goal of lowering REI costs for homeowners. 

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Luke Tomaszewski, an appraiser doing home inspections in the aftermath of the housing bust, was traveling as much as an hour across Chicago just to snap exterior photos of bank-owned properties.

Sitting in traffic, Tomaszewski wished he could pay an Uber driver to take the photos instead.

“When we started, the idea was to obtain exterior photos as fast as possible, at a time when Uber, Lyft and marketing technology was advancing, and anyone with a smartphone could get exterior photos,” said Tomaszewski, who worked to turn his idea into ProxyPics.

The company, which employs about 17 people, was founded in 2015, and is one of those approved to provide the Freddie Mac data report for its new remote inspection program.

At $50 to $100 per inspection, according to ProxyPics, it’s certainly less expensive than sending an appraiser. It’s also simplified and scaled back. For example, in a call-out to prospective data collectors posted on its website, ProxyPics adopts gig-worker language.

“ProxyPics will notify you when photo assignments are available near your current location,” according to the website. “Work whenever it’s convenient for you, wherever you are.”

It’s a model in stark contrast to that of inspections for traditional appraisals. It may also be viewed as revolutionary for an industry in which the most significant change to the appraisal process in the past few decades was the advent of appraisal management companies as an intermediary between lenders and appraisers. 

Others may view ProxyPics as the kind of disruptor responsible for creating the same gig economy it now occupies: Uber, Lyft, DoorDash, GrubHub, InstaCart. After all, it wasn’t so long ago appraisers received assignments via fax machine.

Companies such as ProxyPics stand to benefit from a major Freddie Mac policy change, which goes into effect this month. Starting in July, the government-sponsored enterprise will allow remote inspections on some refinance loans it buys.

But while desktop appraisals may save a few gas miles, and certainly will provide opportunities for a coterie of private sector companies, it’s not yet clear whether they are superior to traditional appraisals, and if they ultimately will reduce racial bias, a key GSE policy goal.

A Freddie Mac representative declined to comment for this story.

Made to order

Beginning July 17, Freddie Mac will accept some mortgages with hybrid appraisals — but the list of caveats is lengthy.

First, the option only applies to refinances. For cash-out refinances, the loan-to-value amount may not exceed 70% for a primary residence, or 60% for a second home. For other refinance transactions, the loan can be for as much as 90% of the home’s value.

Mortgages for manufactured homes, investment properties, duplexes and fourplexes are not eligible.

The property data reports Freddie Mac will ingest include some 200 distinct data points. On Freddie Mac’s property data report form, the inspector must provide data for whether there is dampness, settlement and infestation evident in the property; the condition and age of the roof; and whether the property has a washer-dryer hookup, among other required fields.

The form also requires the data collector to certify he or she has “unbiased professional conclusions,” no interest in the property and no interest or bias toward the parties involved in the transaction.

A certification lightens the legal liability of bias. But an attestation, however comprehensively phrased, can’t dissolve deep racial prejudices or make the appraiser workforce more diverse.

Fannie Mae also plans to use hybrid appraisals more often in 2022, as part of its equity plan, which is intended to “reduce costs to the borrower and reduce potential risk of bias by creating greater separation between the appraiser and borrower.” 

Fannie Mae representatives said the GSE has evidence alternative appraisal approaches result in fewer instances of confirmation bias. Its appraisal modernization pilot, which used hybrid appraisals, showed an 18% point reduction in confirmation bias compared with traditional appraisals, which rely on human observations and, as such, potentially could be riddled with overt or subconscious bias. Alternative appraisals, however, rely more on objective data and an “arm’s-length” process between the appraiser and the homeowner or buyer, sometimes assisted by technology, a spokesperson for the GSE said.

Both desktop and hybrid appraisals, according to Fannie Mae, “have the benefit of reducing contact between borrowers and appraisers, thus lowering the likelihood of valuations being affected by personal or unconscious biases.”

Another benefit for the GSEs is access to the vast dataset hybrid appraisals may generate. But it’s unclear who else will have access to the data.

Given how reluctant the GSEs have been to share the appraisal data they already have, John Brenan, chief appraiser at appraisal management giant Clear Capital, sees little hope for a public repository of floor plans, for example. The GSEs have so far rebuffed demands from academics, fair housing groups, lawmakers and federal agencies to make appraisal data public.

The GSEs “collect all of this [appraisal] data, but they’ve kept it close to the vest,” Brenan said. “Something has to give. If they say, ‘Sure, we’ll make it available,’ but only 5% of companies can access it, that’s not mission accomplished.”

Think of the savings

Clear Capital’s Brenan describes his vision of a hybrid appraisal as one which can drastically reduce wait times.

“An agent does a floorplan scan when they make a listing. An offer comes in at 5 p.m. that afternoon. The seller accepts it; they go into contract. The borrower says, ‘I need a loan,’ and the bank says, ‘We want to do a desktop appraisal.’ Then they submit an order to us and the appraiser gets it the next day. The appraiser can do it all within 24 to 48 hours.”

Quicker turnaround essentially means less work per appraisal — as Brenan put it, “The amount of work that an appraiser does for a hybrid appraisal has been less.” But the reduced fee may prompt the worker to take on more jobs.

“You can see that appraisers would recognize that and say, ‘I can take a percentage of what I used to, I can do more appraisals, and the way I make money is on volume.’”

How much less, Brenan wouldn’t say. But Fannie Mae, based on 121,000 property data collection submissions in its pilot from April 2021 through March 2022, said lenders were able to shave off, on average, four days compared to traditional appraisals.

The cost savings was about $90 to consumers, although a spokesperson said pricing for appraisals is set by the market and Fannie Mae is not involved. Appraisal costs vary widely, depending on the complexity of the assignment, but could fall anywhere from $250 to upward of $500.

But while Clear Capital expects appraisers to charge less for desktop or hybrid appraisals, Brenan said the company will not reduce the fees it charges on desktop or hybrid appraisals, versus traditional appraisals.

Many appraisers remain skeptical of efforts to reduce costs in the short term through hybrid and desktop appraisals. Pushing too hard to cut costs also may dissuade appraisers from adopting alternative appraisals.

“You can’t go to an appraiser and say, ‘You’ll do 10 times more at half the price with hybrid appraisals,’” said Mike Walser, president of Incenter Appraisal Management. “Most appraisers would look at you like you have three heads.”

Walser thinks asking appraisers to lower their fees also may discourage top appraisers from adopting remote inspections. Long term, he said, the speed of a hybrid appraisal — not just savings on appraisal fees — will be a “huge industry benefit.”

The prospect of reducing appraisal costs at scale is tantalizing. It’s not discernible, however, how much of the initial savings on desktop appraisal assignments is due to modernization, and how much is the result of the current market, in which overall demand for appraisals has dropped dramatically, amid the ever-increasing cost of borrowing money.

“Since the market has softened, many appraisers are doing appraisals for a lot less, which has translated into a [cost] reduction on desktop appraisal assignments,” Brenan said.

The hybrid approach also could reduce reliance on a dwindling workforce of specialists. The appraisal backlog during the height of the refinance boom caused widespread frustration among lenders.

“The average age of an appraiser is 60 years old; there will be a wave of retirements in the next two to five years,” said Walser. “There are a little over 40,000 unique appraisers [handling] all loans in [the GSE] portals — and when that drops to 30,000, it will be really difficult.”

Sharp edges

As the cost of borrowing money rises, mortgage lenders are implementing a raft of cost-reduction measures. The mortgage industry, per the latest jobs report from the U.S. Bureau of Labor Statistics, hemorrhaged 5,000 jobs in May, Inside Mortgage Finance reported. Property data collection firms, however, are enlisting scores of independent contractors to carry out inspections for hybrid and desktop appraisals.

Of ProxyPic’s 65,000-strong panel of property data collectors, 2,000 to 3,000 are inspectors, real estate agents or appraisers — a figure Tomaszewski said he hopes to grow to 7,000 or 8,000. Clear Capital representatives said the company has a pool of 3,000 independent contractors, who are licensed real estate agents and brokers, conducting property data collection for hybrid appraisals.

Freddie Mac requires data collectors to be trained, but that training need not be in person. 

During Fannie Mae’s hybrid appraisal pilot, the company required data collectors to be bonded or insured, background checked, vetted and professionally trained by the property data collection vendor, and be a member of an eligible labor force, which includes real estate agents, appraiser trainees and insurance inspectors, a spokesperson said.

Both ProxyPics and Clear Capital provide virtual training for their property data collectors. Clear Capital verifies the license number furnished by property data collectors, so that, for example, data collection candidates can’t submit their driver’s license number and claim it is a mortgage origination license.

ProxyPics has technology to ensure data collectors are actually taking pictures of the subject property. Using a geofence, its mobile app will shut down if the collector tries taking a picture outside the property’s geographic area. It also uses satellite imagery to make sure the floor plan checks out.

But Tomaszewski said there are limits to the company’s capabilities. For example, it’s not feasible to scrutinize every property data collector to ensure he or she does not have a financial interest in a property, or a bias toward one of the parties in a transaction.

Still, property data collectors must attest that they do not stand to benefit from the transaction, Tomaszewski stressed. But he said, ultimately, “If you want to commit fraud, you will.”

Many in the mortgage industry are still getting comfortable with the March introduction of desktop appraisals. Now, as both GSEs move toward another alternative appraisal model, it remains to be seen whether appraisers will embrace it.

“Let’s knock off some of the sharp edges,” Walser said. “Take the next six months with a big grain of salt.”

The post The hybrid appraisal is here. Who benefits? appeared first on HousingWire.



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Just how bad was the mortgage market in June, when rates climbed north of 6%? Rate locks fell across all loan types last month, and were down 11% overall from May, according to Black Knight.

The company’s monthly mortgage originations report also revealed that 82% of locks in June were purchases, the lowest share of refis since the company began tracking data in 2018.

June’s data represents how interest rate-dependent the originations market has become, said Scott Happ, president of Optimal Blue, a division of Black Knight.

“With 30-year rates hovering below 6% – still historically low – we’ve seen the rate/term refi market dwindle to next to nothing, with increasing downward pressure on cash-out activity,” said Happ. “Eventually, equilibrium will return but as of June, the market seems to be having trouble adjusting to a rate environment anywhere above the historically low levels reached during the pandemic.”

Cash-out refinance volume fell 13% from May, while rate-term refis fell 9% and purchase loans fell 11%. Purchase rate lock volume is down nearly 16% from June 2021. But a closer look reveals even more troubling news on the purchase front.

“However, when we look at purchase lock counts to exclude the impact of soaring home values on volume, we see the number of purchase mortgages is off some 21% from last year’s levels,” Happ said.

Mortgage rates, as measured by Black Knight’s Optimal Blue OBMMI pricing engine, jumped past 6% in mid-June before pulling back to finish the month at 5.79%, a jump of 44 basis points from May. 

Government loan products gained market share as the Federal Housing Administration (FHA) and Veterans Affairs (VA) lock activity continued to increase at the expense of agency volumes, a trend likely reflected in another decline in the average loan amount from $351,000 to $359,000.

Average credit scores rose to 723 in June while cash-out refinance scores fell to 693, the lowest since Optimal Blue began tracking the data in 2013. 

Black Knight’s monthly market monitor reports provide origination metrics for the U.S. and the top 20 metropolitan statistical areas (MSA) by share of total origination volume. 

The New York-Newark-New Jersey MSA had the highest rate lock volume at 4.5% in June. The Washington-Arlington-Alexandria area had the second-highest lock volume rate (3.8%) trailed by the Los Angeles-Long Beach-Anaheim (3.5%) area.

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This week’s question comes from Mantas on the Real Estate Rookie Facebook Group. Mantas is asking: My buddy placed an offer substantially above asking price and the seller, before accepting the offer, asked my friend if he would pay the difference if the appraisal came in lower than the offer. Anyone encountered this situation and what would be the best response if any?

Ah, the classic appraisal gap/appraisal contingency. During hot housing markets (like we’ve been experiencing over the past two years), these types of offers have become more and more common. A seller wants to be sure that they can get the sales price they want and the buyer often has to pay the price to cover the appraisal difference. But what are some ways to get around this if your appraisal comes back low?

If you want Ashley and Tony to answer a real estate question, you can post in the Real Estate Rookie Facebook Group! Or, call us at the Rookie Request Line (1-888-5-ROOKIE).

Ashley:
This is Real Estate Rookie Episode 198.

Ashley:
My name is Ashley Kehr, and I’m here with my co-host Tony Robinson.

Tony:
And welcome to the Real Estate Rookie Podcast where every week, twice a week, we bring you the inspiration, information, and answers to your questions to help you kickstart your real estate investing journey. And today we’ve got a really cool question coming in from the Real Estate Rookie Facebook group, and if you guys are not in the Real estate Rookie Facebook group, make sure you join. It is honestly one of the most active, the most engaged Facebook groups that I’ve seen for real estate investing.

Tony:
Today’s question comes from Montes Receivus, so Montes, hopefully I said your last name the right way, but Monte’s question is, “So my friend just encountered this situation I’ve never heard of before. My buddy placed an offer substantially above asking price, and the seller, before accepting the offer, asked my friend if he would be willing to pay the difference if the appraisal came in lower than the offer price. Very ballsy question. Has anyone encountered the situation before, and what would be the best response, if any?” So Ash, what are your thoughts on this?

Ashley:
Yeah, so an appraisal, it’s so tricky, and Tony, I’ve heard you mention this before about how it’s more of an art than a science, and I think that’s such a great advice because you can’t say for sure exactly what a property is going to appraise for even if you look at the comps or you look at what income it is bringing in. So this buddy, what they’re saying could happen, it definitely could happen where there could be a difference in the appraisal. So a couple things I do are do as much research as you can ahead of time as to try your best to estimate what the actual appraisal is going to be. So one thing I do is pull up the comps. I use Prop Stream. You can go to your county GIS mapping system and look at properties. You can also just go to a MLS listing website like Realtor or Zillow and pull up the comps from there. And then go ahead and look at what are some differences between those comps, too. Maybe one property has a garage, one doesn’t, kind of take those into your measurements there.

Ashley:
Then when you meet the appraiser, bring all the information you have. So if there was a new roof put on, there was upgrades done to the property, bring that with you. Maybe if you own property down the road, or you know somebody who does, and they had an appraisal done, and it works in your favor, bring a copy of that appraisal. So it goes both ways. Some appraisers will take as much information as you can give them and say, “Oh wow, thank you. This is going to make my job so much easier.” Some will be like, “Nope. No thanks. I don’t want to even look at it.” But might as well be prepared if it’s somebody that’s going to take the information that you want. As far as the appraisal coming back lower than you want it to, I don’t personally have any experience, and that’s why I’m going to turn it over to Tony. So my little tips were just to help you get prepared for the appraisal, and now Tony’s going to actually help you with what happens when the appraisal does not come back how you want it.

Tony:
Yeah. And Ashley, all fantastic points. I appreciate you sharing that with the listeners, and Montes, to kind of go back to your initial question as well, it actually isn’t that crazy for a seller to ask that of a buyer. So it is common that if there’s kind of this bidding war situation going on, that the purchase price exceeds what the property will appraise for, and there’s a name for that. It’s called the appraisal gap. And we saw a lot of this happening over the last 12 months as the market went bonkers, and there was multiple offers, multiple bidding, people bidding on the same property. You saw a lot where the properties were getting placed under contract for a price that was potentially significantly higher than what the property would appraise for. So in a market like this, Montes, it is common. It’s not that crazy the seller to ask that from the seller.

Tony:
And a lot of buyers, when they’re submitting offers in a competitive market, they’ll even include in their initial offer what appraisal gap they feel that they’d be willing to, they’d be willing to go up to, but say that you feel that the appraisal just came in low, right? Not necessarily that you went way over what it was valued at. If you feel that it came in low, you can challenge an appraisal. Okay? We have you successfully challenged a few appraisals, and what we were able to point out was some discrepancies in the report that the appraiser put together. So for example, one that we just did, the appraiser had the square footage off by, I think, almost 200 square feet, right? And that makes a difference in what the value of the property is. The comps that the appraiser chose, we found other more similar properties, better comps, and the same mile radius that the appraiser used that he just overlooked for whatever reason.

Tony:
So find holes in the appraiser’s report that you can point to say, “Hey, here’s an inconsistency here. Or here’s an inconsistency here. Or here’s a better appraisal comp here, or here is some information that was incorrect.” And if you can push back, sometimes the appraiser will admit and make those changes, other times I’ve had it to where you can actually get a second appraisal ordered, and then if all else fails, maybe it’s just about finding a different lender, right? If the lender isn’t willing to jump through those hoops to help you fight that appraisal, you can always go out, find a different lender, they’ll be able to reorder another appraiser. They’ll be able to order another appraisal from another appraiser which will help you hopefully get a better opinion of the value of the property. So that’s what we’ve done in the past to help us get around some of these appraisal gaps that we’ve seen. But all else fails, you might, Montes, your friend might just have to come out of pocket to actually cover the difference between the purchase price and the appraisal price.

Ashley:
Yeah. And I think the thing to take away from this episode is to at least try to dispute that appraisal if that does happen, where there is that gap, the difference. Do what you can to try to get a new appraisal or have the appraiser re-look at his configuration and what he computed as the appraised value.

Ashley:
Well, thank you guys so much for joining us for this episode of Real Estate Rookie. You guys can send us a DM on Instagram or leave a message in the Real Estate Rookie Facebook group. And if you guys are enjoying the show, please leave us a five star review on your favorite podcast platform.

Ashley:
I’m Ashley at Wealth from Rentals and he’s Tony at Tony J. Robinson. Thank you guys so much for listening.

 

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What does it mean to get a positive job report with all the talk about a recession, which ramped up starting in January 2022? Let’s look at the U.S. jobs and economic numbers as five of my six recession red flags are up today.

The June data shows that we added another 372,000 jobs as we get closer to the employment numbers before COVID-19. We did have 74,000 negative revisions to the previous reports, however, the internals of this jobs report is the most interesting aspect. Let’s take a look together.

From the Bureau of Labor Statistics: Total nonfarm payroll employment rose by 372,000 in June, and the unemployment rate remained at 3.6 percent, the U.S. Bureau of Labor Statistics reported today. Notable job gains occurred in professional and business services, leisure and hospitality, and health care.

The unemployment rate for men and women ages 20 and over is 3.3%.

A tighter labor market is a good thing; this means people with less educational backgrounds can get employed as we have many jobs that don’t require a college education. The unemployment rate did tick up for those with less than a high school diploma in this report. 

Here is a breakdown of the unemployment rate and educational attainment for those 25 years and older:

—Less than a high school diploma: 5.8%.
—High school graduate and no college: 3.6%
—Some college or associate degree: 3.1%
—Bachelor’s degree and higher: 2.1%

During a job recovery, the data line I love to track is the employment-to-population data for the prime-age workforce, ages 25-54. That’s the proper working-age workforce. The employment-to-population percentage did fall in this report. It’s currently at 79.8% and the pre-COVID-19 level was 80.5%. This is something I am keeping an eye on for the future. As an analyst, the rate of change of a trend is always crucial. 

As the COVID-19 recovery got more robust, the internal labor market dynamics have been very positive for a while now, as we had a lot of job openings that needed to be filled. In fact, over a year ago, when we had a jobs report that missed estimates, I stressed early in this recovery that job openings would get to 10 million, which nobody, not even the people who work at the BLS, thought was possible.

Today, job openings are at 11.254 million, and this data line also had a noticeable decline. Remember, the rate of change is usually essential if it becomes a trend.

Total jobs data

Even though I retired my America is Back Recovery model on Dec. 9, 2020, I knew getting all the jobs back that were lost to COVID-19 would take some time. Even though the recovery was the fastest ever, getting all the labor back from a global pandemic and having an aging society wasn’t as fast as some had hoped. However, I was confident we should get it all job back by September of 2022.

—Feb 2020: 152,553,000 jobs
—July 2022: 151,980,000 jobs

That leaves us with just 573,000 jobs left to make up over the next three months, which means we need to average adding 191,000 jobs per month. And the unemployment rate currently stands at 3.6%.

Looking at the jobs data and which sector added jobs in March, construction and manufacturing jobs came in positively, and we only lost jobs in the government.

Job openings in construction and manufacturing have picked up recently. Even though manufacturing job openings did slip in the last job openings data, it is still historically high. However, keep an eye out for the rate of change in labor data.


Recession red flag watch

Where are we in the economic cycle? Five of my six recession red flags are up, so until they are all up, I don’t use the word recession.

Let’s review them in order, as my model is based on an economic progression model, which isn’t the most exciting way to look at economics. However, economics done right should be boring. Here are the recession red flags:

1. The unemployment rate hits 4%. This is a progression red flag, meaning the economic expansion is more mature.

2. The Federal Reserve starts to raise rates. Another progression red flag; expansion is more mature.

3. The inverted yield curve. This is more of a market-driven bond yield red flag. I had been on an inverted yield curve watch since Thanksgiving of 2021. This is when the two-year yield and 10-year yield slap high fives and say hi to each other. It’s another progression red flag, the more mature stage of the economy.

4. Find the overheating economic sector where demand can’t be sustained. Once that demand comes back to normal, people will be laid off. We see this in the durable goods data. A few companies are laying people off or putting into place a hiring freeze.

5.  New home sales, housing starts, and permits fall into a recession. Once mortgage rates rise, the new home sales sector does get hit harder than the existing home sales market. The homebuilder confidence index is falling noticeably, and while we never had the housing build-up in credit and sales that we saw in 2005, the builders will slow housing production down with higher rates. I raised my fifth recession red flag in the month of June.

Builders Confidence Index:

The final recession red flag!

6. Leading economic index declines 4-6 months before a recession. Historically, the Leading Economic Index fades into every recession outside a one-time huge economic shock like COVID-19. So far, it’s been declining for two months, slowly. However, you can connect the dots on this in the future months if you know the components of this index.

As the economic cycle matures, we must look at the economy differently. I believe progression economic models are more valuable than screaming the word recession. I am a big believer in the rate-of-change data: even if the data looks solid historically, we need to be mindful of inflection points in each economic cycle. This is why since the summer of 2020 I talked about how the housing market can change once the 10-year yield breaks over 1.94%, meaning 4% plus mortgage rates.

Once all six recession red flags are up, my talking points will be different, but hopefully, this economic model is easy for you to understand: math, facts, and data. Never forget, you always want to be the detective, not the troll.

The post What does another good job report mean for a recession? appeared first on HousingWire.



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