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Fannie Mae earnings falter as GSE gears up for even rougher 2023


Earnings at Fannie Mae in 2022 sank to $12.9 billion as the housing market deteriorated, down dramatically from $22.1 billion in 2021, the government sponsored enterprise reported Tuesday.

Last year’s $9.3 billion decrease in net income was primary driven by an $11.4 billion decline in home prices and a $1.6 billion shift to investment losses, which was partially offset by a $1.1 billion increase in fair value gains, the GSE said.

In the fourth quarter, Fannie Mae recorded $1.4 billion in net income, down from $2.4 billion in the third quarter and $5.2 billion a year earlier. In a slowing housing market, Fannie Mae also boosted its provision for losses for the third consecutive quarter.

“Our 2022 results reflect a housing market in transition. We’re proud that Fannie Mae helped approximately 2.6 million households buy, refinance, or rent a home last year, while generating solid earnings and continuing to build our net worth,” CEO Priscilla Almovodar said in a statement.

Almovodar, who took over late last year following a wave of departures in Fannie’s C-Suite, added that the GSE expects that “there will be economic headwinds in 2023 and that housing affordability will continue to remain a challenge for many homebuyers and renters.”

The GSE said its net worth reached $60.3 billion in 2022, up from $47.4 billion just a year prior. Despite the gain, it remains “significantly undercapitalized,” with a shortfall of $258 billion.

Fannie Mae’s single-family MBS issuances were $628 billion in 2022, down from $1.39 trillion in 2021 and $1.34 trillion in 2020, which Fannie staffers attributed to lower refinance activity due to higher mortgage rates. In a bright spot, serious delinquency rates remain low. On the single-family side, they accounted for just 0.65% in the fourth quarter, Fannie Mae’s 10K filing shows.

The GSE is forecasting total single-family originations to decrease by 29% in 2023, dropping from an estimated $2.36 trillion in 2022 to $1.69 trillion in 2023. Its economists project refi origination volume to be just $367 billion in 2023, down from $704 billion last year. It expects a “modest recession” to occur in the first half of the year, resulting in higher unemployment.



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Inflation cooled again in January in a bumpy downward trend


Consumer prices continued to climb in January, but they rose at the lowest yearly pace recorded since October 2021, according to data released Tuesday by the Bureau of Labor Statistics (BLS). This is welcome news for the Federal Reserve, which is continuing to raise interest rates in an attempt to curb inflation via consumer spending.

The Consumer Price Index rose by 6.4% in January compared to a year ago. In December, the index posted a yearly increase of 6.5%.

“While this is the smallest year-over-year price increase since October 2021, today’s report suggests that the downward trend in inflation may be bumpier than had hoped. It means that the Federal Reserve will push forward with rate hikes through the spring, which will increase borrowing costs for consumers and businesses,” Lisa Sturtevant, Bright MLS’ chief economist, said in a statement. “The January inflation report comes on the heels of adjustments to fourth quarter CPI numbers, which indicated that the pace of disinflation at the end of last year was slightly slower than we had thought. It also follows an exceptional strong January jobs report and rising consumer confidence, which propped up consumer demand.”

The annual increase can be attributed to large yearly jumps in the indexes for shelter (7.9%), food (10.1%), energy (8.7%), household furnishings and operations (5.9%), medical care (3.1%), recreation (4.8%), and new vehicles (5.8%).

The all items less food and energy index rose 5.6% in January, its smallest yearly gain since December 2021. The large yearly increase in the cost of shelter accounted for nearly 60% of the index’s increase.

The CPI rose 0.5% month over month on a seasonally adjusted basis in January after falling 0.1% in December. Energy was by far the largest contributor to the month-over-month increase in the all items index, rising 2.0% from the month prior, thanks to a 6.7% monthly jump in the cost of natural gas and a 2.4% increase in the cost of gasoline.

The index for food also posted a notable gain, rising 0.5% from the month prior.

“The personal consumption expenditures (PCE) index, a key measure of core inflation, will be released later this month. This price index excludes volatile food and energy prices,” Sturtevant said. “The Federal Reserve and other policymakers have become more focused on ‘supercore’ inflation, an even narrower set of prices that also excludes housing.”

Month over month, the all items less food and energy index rose 0.4%, with a 0.7% monthly increase in the shelter index accounting for nearly half of the monthly increase. Compared to December, the rent index and owners’ equivalent rent index each rose 0.7%.

Other categories that contributed to the monthly increase included motor vehicle insurance (1.4%), recreation (0.5%), apparel (0.8%) and household furnishings and operations index (0.3%). Meanwhile, the indexes that dropped on a monthly basis included used cars and trucks (-1.9%), medical care (-0.4%), and airline fares (-2.1%).

According to Sturtevant, none of this is good news for prospective homebuyers looking to purchase a home in the near future.

“Home prices have risen much faster than incomes over the past three years. The Fed’s rate increases, which have led to higher mortgage rates, have made the cost of buying a home even more costly. Slowing demand in the housing market was part and parcel of the Fed’s strategy designed to cool consumer demand to bring down inflation,” she said. “In many markets across the country, the housing market has bottomed out and buyers are back, often facing still-low inventory and stiff competition. Those fortunate enough to own a home who have seen their equity rise to record levels and who have locked in historically low mortgage rates are sitting pretty. However, individuals and families who are hoping to buy their first home will find a difficult — and expensive — process awaiting them in the spring housing market.”



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7 Tips And Tools For Thriving As A Real Estate Investor In Any Market


This article is presented by DoorLoop. Read our editorial guidelines for more information.

Can you win in any market?

No seasoned real estate investor would deny the importance of keeping up with macro and micro market conditions. Ignore either, and you don’t really stand a chance.

With that said, lately, conversations of a downturning market have swallowed up evergreen advice. So, it feels like not enough is being said about tried-and-true strategies, principles, and tools. 

Why does this matter? It’s these very strategies that are invaluable for being successful in any market, whether that be to:

  • Maximize your profits
  • Reduce the energy spent managing your rentals and reduce stress
  • Streamline systems and processes to save time 
  • Anticipate issues or roadblocks by preparing in advance

Getting a read on a changing market is vital to the success of your portfolio, but there’s a lot you can do now that will help you be a more successful investor, whether the market goes this way or that. 

Before we start, let’s talk about what we won’t cover.

Besides obvious tips (I know, you’ve read a billion articles with those, and you’re tired of it), the things include:

  • Considering your local market
  • Maintaining a property
  • Choosing the right property

If you were looking for general, boring tips like those, then I’m sorry to disappoint, but there are plenty of other articles you can read on BiggerPockets that cover that.

Instead, below, we’ll be talking about more creative (but still evergreen) tips that aren’t so obvious. Some may ride that line, but the reason I include them is because I feel there’s something that’s often missed about the topic. 

While you’re bound to have heard some of the tips I’m going to cover before if you’re a seasoned investor, my goal is to give you something new and actionable you can take with you to actually improve your business no matter how long you’ve been investing. 

Ready? Let’s talk about it. 

1. Expand Your Networking Opportunities Beyond Just Agents And Investors

As a real estate investor, the value of connecting with other investors who may be able to fund your deals or be a partner on a project is clear.

Connecting with local agents who can find you deals you’re willing to invest in is also straightforward and something you’ve likely already done as well.

And you’ve probably already tried or actively participated in local networking events and groups.

But one area I’ve seen investors at times not take full advantage of is connecting with other local professionals, such as:

  • Title companies/officers
  • Contractors
  • Loan officers

Depending on the types of deals you do, there are many other people that play a vital role in the process of buying and selling real estate that you can benefit from.

Don’t be shy about it, either. These are mutually beneficial relationships that can and will bring you deals and them business.

2. Factor Vacancy Rates Into Your Overhead

Handling vacancies is just a part of managing rental properties. If you’ve been at the game for a while, you know that. How landlords handle vacancies, however, can vary greatly.

The most important thing you can do is make sure you have funds put aside for vacancies, which allows you to have a way to immediately turn around and:

  • Market the property
  • Get an inspection done
  • Get the unit cleaned

All without having to worry about it affecting your bottom line for that month.

The most common numbers thrown around are 5-15% of your gross monthly rent, with 10% for vacancies being conventional wisdom. However, you’ll need to figure out what number works best for you depending on factors such as your market and the type of properties you’re renting. 

Some landlords don’t like putting anything aside at all, in some cases using a line of credit (LOC) to handle surprise expenses. However, this is risky and needs to be handled properly to not incur additional debt.  

3. Find A Great Property Management Company That Matches Your Style

If you’re newer to real estate investing, contracting a property management company could save hundreds of hours per month and your sanity.

If you’re a seasoned investor, however, you may have had a bad experience with a property management company, dropped them, and never given it another try.

The problem with hiring a property manager is that they’re like any other partner in your business: you need to mesh well. If you don’t, it doesn’t work. 

Not every property management business operates the same way. Some companies will have a process that works for you, while you may clash with others. 

Also, every property management firm is run by people. Some of those people you’ll click with, others you won’t. 

You should read up on how to find a property manager that works for you and take some time to learn what you should be looking for before trying a few out.

4. Screen Tenants Fully And Don’t Be Afraid To Turn Someone Down

Sometimes, you have to take what you can get. I get that. However, in many markets, you can and probably should be a bit pickier than you typically are in how you select tenants. 

A better tenant will save you an immense amount of time and money over the course of a lease. They’ll lead to fewer calls, issues, and more time.

It may be worth waiting a bit longer than you typically would to see if you can find someone that is a better fit. 

Make sure to run full background checks, too, not just criminal background and credit reports. Use a service like TransUnion’s SmartMove® that offers access to unique reports such as:

  • Eviction history
  • Income insights
  • ResidentScore system

Doing so will give you a fuller picture of whether that applicant is a good fit, leading to fewer tenant issues over the long run. 

5. Expand Your Toolbelt To Include Creative Financing Tools

If you’ve dipped your toes into creative financing already, you’ll know there are a variety of ways you can find and make profitable deals that are outside of the typical process. 

When the market changes, what worked before may not work any longer (or for a period of time). Some types of deals are mainstays in every market, but how hot they are is another story. Still, others you may want to stay away from altogether, depending on market conditions. 

Short-term rentals aren’t always hot, for example. Neither are fix-and-flips, depending on what kind of deals you typically do and your market.  

To help combat that and allow you to find more deals that make sense based on what you’re looking for (and find ways to grab properties you otherwise wouldn’t be able to), you can sometimes use creative financing.

This includes a variety of strategies, such as:

  • Seller financing
  • Subject to
  • Certain hybrid approaches 

Creative financing is a whole different beast, so there isn’t enough space here to dive into the details. However, you can start with this article.

6. Systematize As Much Of Your Process As Possible

You need to work to streamline and systematize your process in every way possible. That includes how you:

  • Choose which properties to invest in
  • Renovate your properties
  • Manage your properties
  • Collect rent
  • And more

Time saved is money saved and the more you widen your margins the more likely you are to be able to make a particular deal and property profitable.

The other benefit to systematizing? You can teach a team.

If you have a few dozen doors and you still don’t have more than a VA on your team, you’re probably keeping things too close to the chest. 

Systematizing saves you time and money, and can even make it easier to expand your reach into further markets. 

7. Invest In Property Management Software

I know, if you’ve been doing this for a while, then any change to your process can feel like nails to a chalkboard. I’m sure that’s how Blockbuster felt when they turned down buying Netflix for just $50 million too. 

What’s my point? Change is almost always uncomfortable, but adapting is necessary for survival. And what has been one of the biggest upgrades to the portfolio and property management process in the past two decades? Property management software.

Gone are the days of spreadsheets and notepads, and in their place have arrived streamlined, centralized, and simplified systems that make:

  • Everything easier to locate and track
  • A variety of tasks take less time than they used to
  • Make more possible with less effort

Not every property management tool is created equal, but most tools will help you in a variety of useful ways and areas, such as:

  • Rent collection and late fees
  • Listing, screening, and leasing
  • Maintenance and tenant communication
  • And more

Conclusion

The number of great tools, resources, and wisdom out there is limitless. You truly can make it in any market if you know how to play it. 

Some factors are outside of our control, but by building out your toolbox, you’ll have more opportunities to build a successful portfolio in a way that works for you. 

One of the best tools we’ve found at DoorLoop after speaking with thousands of landlords is simply knowledge and information, whether that’s knowing about landlord-tenant laws, how to properly evict a tenant, or access to documents such as forms, checklists, and applications. 

That’s why we put together an all-resources zip file with all of our best checklists, templates, and other resources. It includes: 

  • A collection of checklists such as an apartment maintenance checklist, deep cleaning checklist, sales and negotiations, and an HOA audit checklist
  • Lease agreements and rental forms for every state
  • Landlord reference letter, introduction letter, termination letter
  • Chart of accounts template
  • A residential property questionnaire to find out how happy your tenants are and where you can improve
  • Security deposit return letter
  • And way more

Being a successful real estate investor in any market is a tall claim, I know. But you’ve never had more access to better information than now. Make the most of everything, and don’t be afraid to reach out to your fellow investors for advice and guidance.

This article is presented by DoorLoop

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DoorLoop is the highest-rated property management software online

DoorLoop is the easiest-to-use, highest-rated property management software used to manage hundreds of thousands of units in more than 100 countries around the world. Attract tenant applications, manage leases & work orders, collect rent on autopilot, run accounting & reports, communicate with tenants, and much more from anywhere with ease. 

Learn More About DoorLoop

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.



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Housing Market Tracker: Inventory drops as mortgage rates move higher


The housing market experienced more volatility last week, with housing inventory dropping as mortgage rates moved higher.

Here is a quick rundown from last week:

  • Purchase application data had a 3% week-to-week increase. The start of 2023 has been good, considering mortgage rates have stayed above 6% most of the time.
  • Weekly housing inventory continues to decline, as we saw a decrease of 13,238 units, double the amount we had this time last year. However, we are working from a higher level in 2023.
  • The 10-year yield jumped aggressively, continuing the decisive move from jobs Friday, and mortgage rates have moved from the recent lows of 5.99% back to 6.50%.

Purchase application data

We saw a weekly increase of 3% in purchase applications and the year-over-year data is improving, although it is still down 37% from last year. The extremely high comps that we had to deal with from October 2022 to January 2023 are coming to an end, which means that every month we should see the year-over-year declines move lower, even if the data just stay flat. 

Last year, we had a historical dive in purchase application data, but recently we found a bottom and purchase apps have bounced from the lows. Since Nov. 9, when this data line started to get better, and excluding the traditional extreme slowdown the last and first week of the year, it’s been positive outside of one week. I am keeping an eye on how much growth we can get with mortgage rates over 6%.

This week, we will get a good test with the purchase application data as mortgage rates have risen recently. I am looking forward to seeing how the data reacts to higher rates. Unlike the COVID-19 recovery, which was fast and sharp, we are now dealing with a much different backdrop. Morgage rates are higher and we’re working from much higher home prices as well. 

The one benefit of the housing market now is that days on the market are no longer teenagers, which means we are getting closer to a more balanced marketplace. This means buyers have more say now in the home-buying process. Finally, all the positive data we have seen since Nov. 9 looks forward 30-90 days, so the existing home sales will show better data coming up.

Weekly housing inventory

When I saw a slight increase in housing inventory in January, I got very excited because some of the demand collapse we saw in the second half of 2022 was from people choosing not to list their homes because of their fear of buying another. So, when I saw the slight inventory increase, I thought this was a good trend.

Before 2020, weekly housing inventory bottomed out in the January/February timeframe, and then the seasonal spring increase would start. From 2014 to 2016, housing inventory bottomed out in January. From 2017 to 2019, the inventory levels in January and February were very close to each other before the seasonal push higher. 

However, since 2020, this hasn’t been the case — inventory has tended to bottom out a little later in the year. In 2021, inventory bottomed out in April, and in 2022 inventory bottomed out in March.

In the last two weeks, housing inventory has been declining significantly and I hope we are coming closer to the bottom of the seasonal inventory decline. Unfortunately, last week we saw a bigger decline in inventory than the previous week, as units fell by 13,238 according to Altos Research.

So I am crossing my fingers that we are getting closer to the end of the seasonal inventory decline because the last thing we want to see is bidding wars again, especially with demand working from much lower levels than what we saw in 2020/2021, and the early months of 2022. The positive aspect is that inventory is still higher than last year

  • Weekly inventory change (Feb. 3-Feb. 10): Fell From 456,990 to 443,416
  • Same week last year (Feb. 4-Feb. 11): Fell from 255,662 to 249,161

Because I could see that housing demographics were going to be good in the years 2020-2024, I really didn’t want to see inventory break to all-time lows during this period. This reality created my fear of home prices overheating, which they did, and once mortgage rates rose, the housing market took an extreme affordability hit. Last year, we had a historical dive in housing demand and didn’t get much inventory. 

Unfortunately, we have a good shot of the next existing home sales report showing even lower inventory levels than the 970,000 level we are dealing with today. This means 2022 and 2023 are the only times in recent history where the NAR active listing data is under 1 million.

10-year yield and mortgage rates

In my 2023 forecast, if the economy stayed firm my 10-year yield range was between 3.21% and 4.25%, equating to mortgage rates staying in a range of 5.75% to 7.25%. For some time now, I have discussed how it would be hard to break under 3.42% with follow-through bond buying, meaning mortgage rates would fall further. The market made a few attempts to break that level, but now bond yields have reversed higher.

The question this week with the CPI report data being released, is whether we will see a W forming in this chart, which would mean bond yields head back to 4.25%, or whether the downtrend continues. Over time, the growth rate of inflation will cool down once rents get accounted for in a more real-time fashion.

Also, part of the 2023 forecast is that if the labor market breaks, the 10-year yield could get to 2.72%, which would mean mortgage rates in the low 5% range. And if the spreads get better, we could even have a 4-handle on mortgage rates. For now, though, the labor market is still solid.

The week ahead

This will be an exciting week for economic data, bonds and housing. First and most important, this week’s purchase application data is vital. It will be the first apps data amid a half a percentage move higher in mortgage rates, and the next few weeks will be critical, too, if rates stay at 6.50% or head higher. Remember, you should prioritize numbers over people; if the tracker data goes negative, you go with data rather than a personal belief.

The big move for rates should be the Consumer Price Index report this week. If it’s hotter than expected, we could see bonds act negatively to that report. Also, this week we have jobless claims, retail sales, Producer Price Index inflation, the homebuilders’ confidence survey, housing starts and the Leading Economic Index!

It’s going to be a busy week with economic data that can move the bond market and mortgage rates. One thing is certain from the data: mortgage rates heading lower, even to just 5.99%, shifted the housing market, which is something to remember as we go forward



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Jay Farner is leaving Rocket Companies


Jay Farner will retire as CEO of Rocket Companies in June, ending his 27-year stint at the firm. He stepped down as member of the board of directors last week, Rocket disclosed in a filing with the Securities and Exchange Commission. 

On February 8, Farner notified the board of directors of Rocket of his intent to retire as CEO effective June 1 and as vice chairman and member of the board effective immediately, according to the company’s 8-K filing on Monday. 

“More than 27 years ago, fresh out of college, I decided to join a small mortgage company led by Dan Gilbert,” Farner said in a statement. “I never could have predicted the amazing journey that one decision would have taken me on, and I want to thank Dan for his mentorship, guidance and friendship over the years,” Farner said. 

Bill Emerson, who served 15 years as Farner’s immediate predecessor, will replace Farner on an interim basis starting June 1. Emerson will fill the seat on the board vacated by Farner and serve for a term expiring at Rocket’s annual meeting of stockholders in 2004 until his successor is elected.

“Mr. Farner’s retirement from the board was not because of a disagreement with the company,” the SEC filing reads.  

According to Rocket, the board started a search for a permanent CEO and hired a firm to evaluate internal and external candidates.

“Since being appointed CEO of Rocket Mortgage in 2017, and subsequently CEO of Rocket Companies in connection with the August 2020 IPO, Jay has overseen the most rapid period of growth and profitability in our 37-year history,” Dan Gilbert, founder and chairman of Rocket, said in a statement. 

Prior to becoming CEO, Farner served as president and chief marketing officer of Quicken Loans, Rocket Mortgage predecessor, for more than eight years until February 2017. 

In 1996, Farner joined Rock Financial, the company’s former Michigan-only brand. He was vice president of web mortgage banking of Quicken Loans, Rocket Mortgage predecessor, in 1998 before being promoted to president and chief marketing officer in 2009, a position he held until February 2017.

The Rocket Mortgage online platform launched in 2015, which the firm claims to have “revolutionized the mortgage process as the first end-to-end digital experience, leveraging decades of technology investment and innovation.” 

Emerson, currently serves as the vice chairman of Rock Holdings, Inc., Rocket’s majority stockholder, a position he has held since February 2017. Since August 2020, Emerson has also served as vice chairman of Bedrock, a Detroit-based real estate firm specializing in acquiring, developing, leasing and managing commercial and residential buildings. 

Emerson, who ran Rocket Mortgage predecessor Quicken Loans between 2014 and 2017, is also a member of the board of directors for several industry organizations, including the Housing Policy Council and the Mortgage Bankers Association.

Farner’s retirement comes at a difficult period for the lending giant. Rocket Mortgage was overtaken by rival United Wholesale Mortgage in the third quarter in mortgage originations and has struggled to adapt to a market with few refinancing opportunities.

The Detroit-based lender originated $25.6 billion in mortgage volume in the third quarter, less than 31% or UWM’s production volume of $33.5 billion in the same period.

Rocket, like most mortgage originators, has suffered financially over the last six months. The lender reported an adjusted net loss of $166 million in the third quarter, posting its first unprofitable quarter since going public. 

While Rocket hasn’t reported its fourth quarter earnings, “the company reaffirmed its previously announced fourth quarter 2022 adjusted revenue guidance,” the filing stated.  

In its third quarter earnings, Rocket projected to close loan volume in the range of $17 billion to $22 billion, with gain on sale margins between 230 and 260 basis points (the overall GOS came in at 269 bps in Q3).

Mortgage origination volume dropped sequentially to $19.7 billion in the fourth quarter from $25.6 billion in the previous quarter, according to data from Inside Mortgage Finance.



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Deephaven Mortgage appoints Aaron Drago as new COO


Non-QM lender Deephaven Mortgage, owned by alternate investment firm Pretium, has appointed Aaron Drago as its chief operating officer.

“Aaron combines a depth of operational experience with a focused and disciplined approach to process optimization. This will serve Deephaven well as we scale operations to meet strong demand for our products,” said Deephaven president and CEO John Keratsis in a statement.

Drago’s responsibilities include continuing the optimization and performance of the company’s daily operations, its long-term growth, and ensuring the satisfaction of its customers and correspondent partners.

His aim is to empower brokers and correspondents to serve more non-QM borrowers, he said in a statement.

“In nautical terms, we’re a yacht, rather than a cruise ship, with the flexibility to make changes that cater to customers’ emerging needs,” Drago said. “I’m excited to help us innovate our operations and leverage technologies to build on that advantage…”

Prior to joining Deephaven, Drago was the chief operations officer for the Southeast and Mountain West divisions of Guaranteed Rate.

He has held several leadership positions, including senior vice president and head of home equity fulfillment, and SVP and head of digital and operations analytics at Wells Fargo; head of operations strategy and process governance and head of shared services innovation and excellence analytics and reporting at TD; the SVP, VP and AVP of various verticals at Bank of America; senior business intelligence consultant at Mariner and solutions architect at arcplan, Inc., among others.

Last month, Deephaven tapped business development veteran Tyler Bohn as its managing director of national accounts.

In April 2022, Deephaven appointed Anthony Gulotta to lead its wholesale sales on the East Coast and in June, Paul Howarth as its regional vice president of wholesale sales, to expand the firm’s non-QM footprint in the western half of the country. 

In May, Lisa Heitzmann joined the company as its chief operating officer and later went on to join LGH Consulting LLC as its principal.

In 2020, the lender shuttered its non-QM operation and laid off workers, but made a return in 2021 and issued a $146.2 million security backed by non-QM mortgages.

Keratsis believes the non-QM market “is poised for long-term, sustainable growth,” he said in an interview with HousingWire last November. The company has plans to build its wholesale and correspondent distribution channels, and to add enhancements to its non-QM customer experience, he added.



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Rate lock activity rose sharply from December’s depths


The drop in mortgage rates and seasonal tailwinds boosted mortgage rate lock activity by 32% in January, ending a nine-month streak of declines, according to Black Knight’s originations market monitor report.

“Mortgage rates declined in January, continuing a trend that began in early November 2022,” Kevin McMahon, president of Optimal Blue, a division of Black Knight, said in a statement.

The 30-year fixed-rate mortgages, tracked by its Optimal Blue Mortgage Market Indices, fell 36 points to 6.16% last month, continuing a downward trend that began in November. 

Purchase locks set the pace, rising 32%, while refinances increased as well, with rate/term locks up 37% and cash-out locks rising 25%, according to the report. 

Cash-out refinances remain down more than 85% from last year and rate/term refinances are still down more than 88% from the same month in 2021. The refi share of lock volume edged up slightly to 15%. 

Purchase lending accounted for 85% of the volume, but rate and affordability pressures have continued to challenge purchase lending. 

The dollar volume of such locks is down 44% year over year and 14% below January 2020 levels. The share of locks with adjustable rates fell to 8% in January as lower rates pushed borrowers back toward fixed-rate offerings. 

The largest 20 metropolitan statistical areas by lock volume all saw double-digit growth, with Chicago, Nashville and Charlotte producing 50% month-over-month gains from December.

An increase in rate lock activity is welcome news, but was also expected due to seasonal rebounds in January, McMahon said. He noted mortgage originations continue to face significant rate, affordability and inventory headwinds, and lock volumes are still down more than 60% from the comparable period last year.

“With rates picking back up in early February, it will be interesting to see whether the rebound in lock activity will hold,” McMahon said. 

The average loan amount rose from $336,000 to $340,000 while the average purchase price climbed from $419,000 to $421,000.

Credit scores fell four points among cash-out refis from December to January, which were also down 36 points over the past 12 months. Credit scores for rate/terms declined by nine points from the previous month but remained relatively unchanged for purchase transactions.



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The Self-Fulfilling Crash Prophecy


Mortgage rates were about the only thing stopping the almost unbelievable home price run-up of 2020 through 2022. With higher mortgage rates, homebuyers were forced to bid on smaller houses or stick to renting while waiting for the good old days of 3% rates to return. But it doesn’t look like we’ll be heading back to sub-4% rates anytime soon, and homebuyers are starting to take the hint. So as mortgage demand begins to rebound, could we be closing in on another boom in the housing market?

We’re back with another correspondents show as we touch on the latest housing market news from around the nation. First, we talk about how tech markets and unaffordable housing have taken a tumble while affordable markets kept afloat even during steep price drops. Next, we challenge a 2008-like crash prediction and explain why institutional investors are suddenly sending in rock-bottom bids in growing housing markets. Then, we hit on the revival of homebuyers, as mortgage applications shoot up and how we could dodge a recession with our slowing but growing economic climate.

We’ll also play a game of “Hot or Not,” where we touch on which real estate investing strategies are worth trying in 2023. From buy and hold real estate to risky flipping, the fall of short-term rentals, and more, our expert guests will tell you EXACTLY which tactics they’re using in 2023 and which ones to avoid at all costs! So stick around for the housing market news you NEED to hear to build wealth in 2023!

Dave Meyer:
Everyone, welcome to On the Market. I’m your host, Dave Meyer, joined by Henry, Jamil, James, and Kathy. How is everyone?

Jamil:
Great. Fabulouso.

Kathy:
Doing well.

Dave Meyer:
Good. Well, it’s good to have you all here. Jamil, we missed you while you were gone. It’s great to have you back.

Jamil:
Thank you.

Dave Meyer:
For everyone listening, we’re going to have two parts to this show today. We’re going to play a game called, Hot or Not, where our panelists are going to tell us whether they like certain strategies for this type of market, and then we’re going to go into what we call our correspondent show, where we’re going to be talking about some of the more important, and relevant news stories for real estate investors that are going on right now in February of 2023. Hey guys, ready to play Hot or Not? I feel like this could get mean. I feel like it’s like a middle school game. I have some repressed feelings about a game called Hot or Not.

Jamil:
A past trauma?

Henry:
Flashbacks of rejection.

Dave Meyer:
Yeah, just being notted a lot.

Jamil:
But is that website still up? Should we all put our pictures up on it?

Henry:
Absolutely not.

Dave Meyer:
I am on my work computer, and I’m not going to type in hotornot.com on my work computer.

Jamil:
Do they track keystrokes there on your work computer? Like what’s Dave typing today?

Henry:
Scott Trenches just watching you type all day.

Dave Meyer:
Yeah, sorry [inaudible 00:01:26] .

Jamil:
Although just to say I think if Dave was looking at Hot or Not, in my world, all that would appear would be sexy, or not sexy numbers.

Dave Meyer:
Oh yeah. Yeah.

Jamil:
It’d be like pie charts, versus line graphs.

Henry:
Look at that IRR. Mmm.

Dave Meyer:
It’s true. It’s just data visualizations, and people talking dirty about them. All right, well, enough of that. Let’s get on to our show, where we’re going to be talking about different strategies. I want to hear from each of you, is this strategy right now hot or not? And I guess it’s not like hot, like are people doing it? Is it, would you do it? So let’s start with short term rentals. Henry, hot or not?

Henry:
I’m going with nyet.

Dave Meyer:
Nyet? Okay.

Henry:
Not, not hot. I say that with a caveat. I’m doing it with a couple of deals, but I think what you’re starting to see with the Airbnb kind of slow down, both seasonality obviously is playing a role, but also the increased inventory of Airbnbs is causing demand to go down, which is causing pricing, nightly rates to come down.
And I think you saw a lot of people who had gotten into the Airbnb space because they were just like, “Oh, I can make five times what I’d get long-term rent. I just got to throw some furniture in there, and stick it up on Airbnb? Heck yeah.” Right? So, you’ve got a lot of people in this space who are truly running a business, who are truly looking at the metrics, and setting their properties apart, providing the amenities necessary in their particular regions.
They didn’t do that kind of market research. They’re not true operators. And so I think that if you look at Airbnb from that perspective, in 2023, you’re going to see a lot of those people who just kind of came in hoping to capture a bunch of cash, they’re going to fall to the wayside.
I still think buying properties at deep enough discounts that you can afford to pivot, and you can put those on Airbnb, I still think there’s some benefit there and you can make decent money with Airbnb. But, you have to operate it properly. Do the proper market research, offer the right amenities, have the right business practices in place, be able to do the proper marketing.
You didn’t have to market before, you just had to have it out there, and now you have to market, and set yourself apart. And so, it’s a more… I don’t even want to call it a more difficult strategy now. It’s what it should have been in the first place, is it’s a business, and you should treat it that way.

Jamil:
Hospitality.

Henry:
Yeah.

Jamil:
It’s hospitality. We got to get back to hospitality, right Henry? I mean let’s… There’s a Airbnb here in Phoenix, Arizona, it’s always booked because they have llamas.

Dave Meyer:
There. Everyone go out and get a llama, just go get a llama.

Kathy:
Llama. I never thought about it.

Dave Meyer:
Put a llama on it.

Kathy:
There’s one here that has a giraffe, so yeah.

Dave Meyer:
What? That seems illegal.

Kathy:
It’s a famous giraffe. It’s the one from…

Henry:
It’s the Toys “R” Us giraffe?

Kathy:
No.

Dave Meyer:
It’s Geoffrey? It’s Geoffrey.

Henry:
He retired from Toys “R” Us?

Kathy:
It’s the one from the Bachelor one, the Vegas one. What am I trying to say? The movie.

Henry:
The Hangover?

Kathy:
The Hangover. Yes, yeah, it’s the one from The Hangover. It’s that one. Yep. It’s a rescued giraffe from Hollywood.

Dave Meyer:
Honestly, you know what? I would stay there. I’m curious now. All right, so everyone, it’s short term rentals are hot if you have an obscure farm animal, but if you don’t, be very careful about it, is apparently the lesson. Does anyone else disagree? Anyone else want to give me hot or not for this? Jamil, it sounds like not? Kathy or James?

Jamil:
Yeah, not.

James:
Not.

Kathy:
Not. Not right now. I keep reading stories that actually it’s increasing now, and that vacation properties are kind of back in style, but I could tell you in our own case, we’re down 50% from last year, if not more.

Dave Meyer:
Same. Yeah, mine mine’s down a bit too, and I don’t know, I feel like it was a gold rush, and now it’s back to just grinding it out, like any other business. It’s not like the easy money any more like it once was. But maybe it’ll rise again. We’ll see. All right, let’s move on to buy and hold. Kathy, I’m just going to give you a layup right now.

Kathy:
Hot. So hot. So, so hot.

Jamil:
I mean, can anyone disagree with that?

James:
Yeah, I’m a, I’m going to disagree with that.

Dave Meyer:
You are?

James:
I’m a not on buy and hold.

Dave Meyer:
Really?

James:
But it depends on what you want to buy. Like the BRRRR properties I think are really hot. That’s a hard to buy. But for us, at least in our market, the lower income stable ones where you’re just putting 20% down, like a traditional rental property, and that’s kind of how I’m defining that the, you’re still competing against first time home buyers, and that market is competitive. Yes, the market’s down, but we’re moving stuff, and so it’s hard to get a good, stable, just buy and hold. And again, I’m classifying this as single family rentals. I think there’s a lot of multi family, a lot of BRRRR opportunities, but if you just want that straight base hit, single-family rental deal, not a good yield right now, I would get something else.

Dave Meyer:
Yeah, that’s interesting. So you’re saying basically you like rental properties, but it needs to have some sort of value add component.

James:
Yeah. It needs to have value add. I just don’t think the opportunities are there. If you want your base hit rental deal, 20% down, carpet, paint, release, the margins are not good. Not with the rates right now. And you have to put more money down, and I think you can get into buy and hold, but you got to get the ones that no one wants, or the ones that are a little bit hard, and then those deals are substantially better than they were 12 months ago. So there’s opportunities, and holdings, but just not for your straight base hit deals. This is thought… I think for me, you can get 3x your return in the other spaces.

Kathy:
It’s funny, I would’ve thought that, but I just had a conversation with our Indianapolis team at Real Wealth, and they said the cash flows today are the same that they were before, because rents have gone up so much in those areas, and now there’s more inventory.
Last year you couldn’t even get anything, and if you did you’d have to outbid other people. You’re not having to do that now, but the rents have gone up, and they’re holding. So he said it’s no different, and in so many cases the sellers are actually paying points to bring your rate down, and so you’re probably getting the same, if not better rate than you could get last year. So, I thought that was really interesting, and we had looked at the proforma, and tore it apart, and he was right. It’s similar.

Jamil:
Right now. I like buy and hold as a short term strategy. I know that kind of sounds crazy, but I think that if… Because I’m allergic to holding stuff, and I’m going to continue to be that way, because of past trauma, 2008, and getting my hand burnt when I was trying to buy a multi-family.
But what I’m going to say is, I am still seeing opportunities to buy really, really deeply discounted property out there, and if I can hold it just this period of time of pain where I think things start to stabilize, and once we come around the bend, if I can at least break even between my purchase, until my exit, which I think will be 18 to 24 months from now, I am looking for substantial returns on that. So, I just want to buy, hold. I don’t even care if I cash flow, just break even until I can take my exit, and cash in my chips at the casino.

Dave Meyer:
All right, so that’s like lukewarm, lukewarm, not hot or hot. It’s like-

Jamil:
Yeah. Yeah.

Dave Meyer:
Yeah. Okay.

Henry:
I mean, I agree. I think James and Kathy are both right, honestly. It’s similar to the Airbnb conversation. There was a gold rush when the market was super hot, and you could get 2% interest rates, and things were going up in value so quickly. So, you could buy something at a slight discount, and all of a sudden you’re renting it out, rents were going up, so you can make the cash flow work.
You’re not going to find those easy opportunities as much, the ones James was talking about. You’re not going to be able to make those pencil. But if you can, and are good at looking, and finding undermarket value deals, I mean, the discounts that we’re able to get, and then the rents that we’re able to get from, after we renovate those properties, man, we’re cash flowing just as much as we were before.
And a lot of the times it’s making more sense, because typically in my business, we keep the multis, and we sell the singles, but right now, the way we’re deeply getting the discounts on these singles, it makes more sense sometimes for me to just keep them as rentals, even if I do it in that short term timeframe, like Jamil is talking about, when I can sell them at more of a discount.
So even if it’s not something I want to keep in my portfolio forever and ever, the cash flow makes sense right now, because if I do turn those deals, like for example, I have a deal right now, I’m closing today, I’m going to make a $17,000 profit. It would’ve made more sense for me to just renovate it a little bit, stick a tenent in, and cash flow it every month until the market changed. So, the numbers are just making more sense as rentals on single families, depending on the type of discount you’re able to get, and how much you got to spend on that reno.

Dave Meyer:
For sure. All right, well let’s do one last one. Let’s talk about flipping here. James, hot or not?

James:
I think it’s hot. If you find the right opportunities, but it has to be ones that… Where we’re having success in flips right now is going in the spaces that everyone’s freaked out by. There is a lot of opportunities in there. When we’re buying an average price of seven to 950,000, the discounts are about 15% cheaper than the flips that we’re looking that are 300 to 500 on the acquisition.
And so, it can be hot if you get into the right space. I think the overall investor demand is that the not right now. No one’s really looking for flips, which is another good thing for us. We can go find those opportunities that are there. I mean, I just bought a house, we contracted it yesterday. I would’ve paid 600 for this at the beginning of the year, or at the beginning of 2022. We just contracted over 435.

Jamil:
[inaudible 00:12:08].

Henry:
Wow.

James:
And not only can I flip it, I can also build a daddy with a backyard.

Dave Meyer:
Oh, nice.

James:
But because it was a full permit job and it’s going to be a 12 month project, everyone’s like, “Nah, I don’t want to deal with this right now.” So, the margins have… Starting to really increase on the ones that are tougher. So if you can hang in there, and actually go after… Go where no one else is going, and you can absolutely crush it right now.

Dave Meyer:
Anyone else have thoughts, hot or not, on flipping?

Kathy:
I would’ve said not hot, but James is so hot that it’s making flipping sound hotter. But he makes a really good point that, I mean really, I wasn’t flipping when it was super hot for everybody, because I’m just not good at it, but maybe it’s time to start. But there’s a lot of belief that rates are going to go down in May, because the inflation numbers are going to look so much better year over year, and the average is year over year, and that may is really the month that that’s going to happen. And so, if you were to get something now and try to sell it in May, that could be really good timing, now that you mention it. It makes a lot of sense if you get it now with the discount, and then resell when mortgage rates are better.

Jamil:
Personally, of course I flip houses on TV, and so A, I have to for a part of my life, but secondly, the price point really matters. And for me, I’m staying away from the luxury, or, I’m not super luxury, but that between 750 and 1.5 million kind of price point, I’m staying away from flipping anything in that range. I’m really liking manufactured homes. I’m really liking really, really, really, really entry level fix and flips with minimal repairs, that that product is still moving. It’s profitable, and as long as you can acquire at a good price, it’s safe.

Dave Meyer:
All right. Hot. Enough said. Flipping is hot.

Henry:
Yep. I got two deals. I got two deals I’m going to net six figures on at flips right now, in this crazy market.

Dave Meyer:
Nice.

Henry:
And we’re talking six figures in Arkansas, so the margin is… That’s huge for here.

James:
Yeah. What kind of cash on cash return is that? Is that like two, 5000%?

Henry:
Yeah, well, I literally have no money in either one of the deals, so it’s infinite for me.

Kathy:
Smoking hot.

Dave Meyer:
James, those are the type of numbers I look at on hotornot.com, just those types of IRRs. All right, well we’re going to take a quick break, but then we will come back with our correspondence show.
Okay. Serious time everyone. All right, that was fun. Now, let’s talk about the news. James, you have a story for us about how the housing market is performing. Can you share something with us?

James:
Yeah, so this article is from Fortune Magazine, and it says, “Well, we are in a bifurcated housing market correction. Just look at these four charts,” was the title, and what it references a lot. It talks about how John Burns, which is a great data source in general, was predicting at the beginning of the year, a big decline, versus what they were saying at Zillow, where Zillow was actually predicting a 24% increase this year, year over year.
And John Burns came out pretty negative at the beginning of the year, thinking that there was going to be a fairly big decline, and it turns out he was not wrong in a lot of the major cities, and what it looked like was, in the top 150 major housing markets, 100 of them declined pretty drastically. San Francisco was down 10.5%, Austin’s down 9.5%, Reno’s down 9.3%, et cetera. And then there was 50 that were really just flat.
And what it comes down to, we’ve all been talking about it for the last couple months, is just the affordability in the market, and the markets that have been the biggest decline also had the furthest appreciation, but they were already at the top of the market going into this last… Like in 2018, things were at the top, and people were hitting their affordability. Once rates dropped so low, it spiked everything up again. But once those rates started increasing, it just had to get back down to the affordability.
And so, it really talks about how they believe that rates are going to continue to increase for next year, and that you need to watch, in these… As you’re investing, or how I read it is how you’re investing, you can look at the markets, and where their affordability ranges are, and that has a huge, huge impact on whether that market’s actually going to decline.
It’s not about that fad of a market anymore, or like… Some of the novelty in the markets have worn off, and it’s really just comes down to straight affordable. Can the buyer pay this with what income that they’re making? And so, as a flipper, or an investor, how I kind of read that is we think rates are going to go up, then yes, we could see further decline, like in Seattle. Seattle was a big drop.
I know in Jamil’s market too, in Phoenix, we saw a big drop, and it all had to come in with that top end of the market. And so, if you think rates and affordability are going to continue to climb, that those could actually deflate even further. But, it is talking about how it really just made two different markets. You have your affordable markets, and your expensive markets, and the affordable markets have seen very, very little, to zero decline. Like in Charleston, they were saying, has saw zero, and the expensive markets are deflating down.
And I did think that was the interesting point. Yeah, it comes down to affordability, got two markets, and I actually think there is going to be a third market though. It’s not just going to be two. I think you’re going to have your affordable markets, like tech, and that’s what we’re seeing right now. Seattle, San Francisco, Austin, the markets have deflated about 10% from last year, and I’m seeing it about 25% down from peak pricing.
But now we’ve kind of hit this affordable market, and we’ve sold a ton of houses in the last 10 days. I was running about 35 to 40% pending on all of our… At any given time we have about 60 to 70 listings. We were running about 35 to 40% pending for the last six months, and now we are up to 55 to 65% pending, and I’m getting offers regularly on all product, not just affordable.
We listed our farmhouse flip for $3.25 million. We were anticipating to be on at 60 days. We got an offer in 10 days. And so, things are moving again. So, as a flipper, I’m going, “Okay, well if the rates are going to spike up, I just need to undercut my values a little bit.” But there is this sweet spot where things are trading, and it also leads to big opportunities in these deflated markets.
Because what this is saying, is it’s all based on affordability, if we all think rates are… I think rates are going to drop in the late quarter, that means I’m going to see some appreciation there, too. And that’s what you can check for to get those massive equity pops, and really change your whole trajectory in real estate, for me. So I’m looking for those opportunities that I’m going to see those equity pops, because it makes it kind of more of an equation. Like, “All right, if we know where it’s going to sell on the affordability factor, then we just got to watch rates, and we can run with the rates, and kind of watch those equity positions rise or shrink.”

Dave Meyer:
Are you saying, James, that you think it’s picking up in Seattle because prices have fallen so far that they’re now affordable again?

James:
Yeah, it just got out of reach for people, because there’s still a ton of buyers in our market. We listed a couple homes last week, or we have a listing coming up right now in Mount Lake Terrace. Mount Lake Terrace is… So it’s north of Seattle, good commuter city. We saw massive appreciation in this neighborhood the last two years. I’m talking about 50, 60% appreciation. Huge, because just location, development, and the city also being improved.
And it definitely shrunk about 10% from where it was in the peak, but I pulled up, or [inaudible 00:20:34] get into list, there isn’t one home for sale in the entire city of Mount Lake Terrace that I saw that would be… So I’m going to be the only house for sale.

Dave Meyer:
Whoa.

James:
And what happened is, there was a lot more inventory in the wintertime, which I do think the seasonal slowdowns are coming back. Seasonal slowdowns were always a real thing, until COVID hit. Wintertime, you’re always going to sell your… It is going to take longer to sell, it’s going to sell for a little bit less. And then with rates increasing, it got the inventory increased more. But I mean, we’re talking about, their inventory increased like 35, 40% in these areas, if not up to 80%, and it got absorbed in the last two weeks, very, very quickly.
And we’re actually starting to see some multiple offers again too, where things are getting actually bid up, as well. So, I feel like it had this sudden drop, we’re on the shelf, and now the consumers are… They have to buy it. There is so many buyers in our market, they just can’t get in reach with what’s coming to market. And now, with the pricing getting down to that sweet spot, things are getting consumed again. I mean, there is a substantial amount of buyers in our market, even with the high rates, and no inventory.

Dave Meyer:
Wow. Super interesting. Yeah, I’ve heard a lot of that. I was just talking to my real estate agent in Denver who was saying something similar, and I guess Seattle and Denver are probably those types of tech markets. What you were talking about, that tier of tech markets that are high priced, and have seen some of the furthest drops, peak to current, so far. Jamil, given you’re in a pretty pricey market there, what’s going on with you in Phoenix?

Jamil:
Well, we had a very seismic type report by the New York Post, where Goldman Sachs predicted a 2008 style crash in Phoenix, Austin, San Diego and San Jose, and they’re predicting 27% or greater price decline for 2023. So, this obviously created just a massive ripple effect of conversations amongst the investor community, and real estate agents, and whatnot. So, my phone was blowing up, and so of course I start doing some digging, and looking at how true is this prediction.
And looking at the corrections, of course, each of these markets have seen declines, and what I’ve seen so far, from peak to present, we’re looking at about a 9.9% peak to present drop in Phoenix, Arizona, San Jose. And again, data is varying between different sources, but it’s all relatively close, from in San Jose I’m seeing about 8.9% peak to present, San Diego, 6.7% peak to peak to present decline, and in Austin, 14% peak to present decline, which is… I mean that, to me, if I’m looking at a possible market that could have that type of depression, or that type of crash, it could potentially be Austin.
But again, the fundamentals in each of these markets are really strong, and you still have very, very strong lending criteria. Days on market on average is like 30 days, or less in each of these markets. You’re also seeing these surges in first time landlords, which is an increasing thing, which is an interesting thing to think about, because people who have cheap debt in these markets, rather than just go and throw their house on the market, and sell it at a steep discount, they’re deciding to turn into landlords, and they’re going to hold that house, and keep that cheap debt, and possibly remove that from creating inventory increases.
The other interesting piece, because I have KeyGlee in my world, we’re in one of the nation’s largest wholesale operations, and I’m looking at buying, and what the institutional buyers are doing, and it’s just interesting timing that we see a report like that come out, and the institutions that we’re working with are all turning up, they’re buying in those markets.
And then when I say turning up, I mean they’re reaching back out to us. They’re emailing saying, “Hey, send us everything,” but our buy boxes have changed dramatically. So now, they are decreasing substantially where their offer number would’ve been. And so, it’s like they’re looking at a report like that as their justification for coming in, and trying to purchase that 25% below where they would’ve been purchasing, say, three or four months ago.
So it’s like this, is report creating movement which will actually fulfill the prophecy that this situation could potentially occur? So, that’s interesting. But, on the other side of that, after the holiday season, we looked at our pendings, just here in Phoenix, Arizona, and I mean, it’s spiked, just like James was reporting, in the last little while his flips, he’s at what, 50 or 60% pending, where normally he’d be at like 35, 40% pending.
We’re seeing something very similar here in Phoenix, Arizona as well. So, how does that happen? How is a 30% decline supposed to occur, when we still have low inventory, when building has screeched to a halt, when we’ve got home locked buyers, because interest rates were low for all that time, and they do not want to let go of that asset?
I mean, I don’t know. I don’t see it. I don’t see it. I don’t see it naturally happening. But again, everything that we’re looking at, and working with right now, are not natural real estate cycle phenomenon. This is all manipulation. It’s all so many different factors, and agencies, and institutions, and doing things. I’m not a conspiracy theorist, I’m just looking at the writing on the wall and I’m like, “Who’s controlling? Who is the puppet master here, and how do I become friends with that person?”

Kathy:
I could tell you one of the puppet masters is the one we’ve been talking about for a year now, and it’s the Fed, and what they’ve been doing. And this isn’t my article, but it’s an article that’s really good, and I’ll just share it really quickly. It’s from National Association of Home Builders, and I think you guys also saw this, how many households were priced out by higher mortgage rates in 2022.
And it shows these graphs of when interest rates went from 3.25%, to percent to 7% in a matter of months. I mean, what a shock to the system. This is doubling the payment in just a matter of months. And in that process, it went from 44 million people who could afford to buy a home, down to 26 million in a matter of months. We’re talking 15 million people priced out, boom, just like that, in a matter of months. I’ve never seen anything like it.
Now, recently, we went from that 7% rate down to about 6.4%. So this article is basically saying in the last few months that brought 2.6 million people back into the market. Now, as over the next few months, most people are assuming, and seeing that with inflation going down, so will mortgage rates, mortgage rates follow inflation, and that we will probably get into the high fives. And that brings in a whopping almost 8 million more people who can afford to buy.
So, a lot of what, again, James was saying earlier, and what you are saying now, Jamil, of like there’s this change, it’s because now there’s more people who can come back in, and they’re learning, and they’re being educated by their mortgage broker that, “Hey, you’re going to pay a little bit more to get your rate down maybe to the fives, maybe a point or two.”
I just talked to a mortgage lender yesterday who said, “It’s just like a point or so to get you into the fives.” And again, that’s bringing in 8 million more people, and paying that one point is a lot less than the higher prices that they were paying before. And you have a lot of people who are sitting on cash, ready to buy, and suddenly couldn’t, but had the down payment. So, it’ll be a lower down payment, but the difference goes towards paying down the rate. So, that may be one of the reasons you’re seeing more people coming back in, and sales picking up.

Dave Meyer:
And people are coming in with FOMO. They missed the opportunity.

Kathy:
Yeah.

Dave Meyer:
Because rates spiked, and now they’re back in it, and they are moving right now. They are really jumping on stuff. They don’t want to get priced back out again.

Kathy:
Yeah.

Dave Meyer:
When you put it that way, Kathy, it’s pretty amazing. The housing market has been as resilient as it is.

Kathy:
Yeah.

Dave Meyer:
The fact that we’re seeing, I think the Kay Schiller came out the other day, in a seasonally adjusted manner. It’s just 2.5%, peak to trough, to peak to current is 2.5% declines, and that’s with what, 30% of buyers being priced out? It is pretty remarkable, and I think why, to your point, Jamil, 30% declines. Maybe in a few markets, who knows, but it just seems unlikely, especially with what’s happened in the last couple weeks with there’s a lot of activity going on.

Kathy:
Yeah. And it’s important to note that with sales down, sales down 30%, you’re getting a smaller pool of properties to even look at, and averages to even look at. It was kind of like in 2009, when everything was a foreclosure that was on the market, then prices seemed really low, but it wasn’t a real price, it was just foreclosure prices, because that was the main what was on the market, and that’s what we’re seeing. What’s on the market is maybe being discount, but that doesn’t really state the whole, it’s sales are down so low, it’s just a small percentage of what’s out there.

Dave Meyer:
Yeah, absolutely. Well it’s interesting what you said Jamil. I’m curious to hear how it evolves with these institutional buyers, because you’re sort of at the forefront of it in Phoenix. I think it would be interesting to know, in some of those other markets that you mentioned, you said like San Jose, I don’t think that’s a big institutional buyer area, or San Diego, it’s so expensive.

Jamil:
Not a huge institutional buyer area, but they do buy there, and it’s some of the… Also those smaller portfolio buyers, which are still… It’s still in the hundreds of millions of dollars when we’re talking about access to capital, and their ability to purchase. So, I mean, they’re still buying, they’re turning on the taps.

Henry:
I am with you Jamil. I get it. I also, not a conspiracy theorist, but I mean, you can put pieces together of a puzzle, and if it makes a picture, it makes a picture. But what you’re saying is echoed in my market, it’s also right in line with the article that I brought to share, which is that mortgage demand has jumped 28% in one week, as interest rates are now at their lowest point in months.
And so, the highlights of the article are just saying that the average interest rate for a 30 year fixed is around between 6.2 To 6.4, and more people are applying for mortgages. It’s up 25% week over week. Now, putting that into perspective, that’s still down 35% from 12 months ago at this same time. But when you look at rates being at their lowest point since September, that’s significant.
And I think what you’re starting to see is that people are realizing that the two and 3% interest rates, that ship has sailed. I think people are finally starting to get it. We’re not going back there. We’re not going to get that low again. I mean frankly, a lot of people don’t want to get that low again, because what does that mean for what’s happening in the economy, if we have to get there again?
And so, people are just starting to realize that this is what you pay for an interest rate now. Life happens, and things move on. Yes, people are… There is a subset of people who are priced out of the market, but that’s going to happen, no matter what interest rate you’re at. So, there are some people that can afford to buy, some people that can’t. I think people are starting to… I think the sticker shock is wearing off, and it’s just now this is what rates are, and life continues to move on.
People need to move for different reasons. People want to move for different reasons. And when you have two income households who have stable jobs, and are making a decent salary, it’s easier for them to afford homes. And what I’m seeing in my market is echoing that. It’s echoing what you’re saying as well. We listed a flip, which would be considered for a luxury flip in my market, and that’s a “risky” strategy right now unless you’re James Dainard. So, those luxury flips, we put it on the market, we had it on the market for 24 hours, had 10 to 12 showings, and got four offers, all over asking price.

Jamil:
Over asking.

Henry:
Over asking. One of them… We listed it at 550, and we are under contract at 570.

Dave Meyer:
And what’s the median home price in your area, Henry?

Henry:
The median home price in my area is like 300.

Dave Meyer:
Oh, so this is really upscale.

Henry:
275 to 300. Yeah.

Dave Meyer:
Okay.

Jamil:
I think I want to move to northwest Arkansas, man.

James:
Yeah, I think we all should move there.

Dave Meyer:
We keep saying that, but I don’t even know if they have an airport. How do you even get there?

Henry:
We have an international airport. You have to remember-

Dave Meyer:
Sure.

Henry:
That the Waltons funded this place. Do you think the Waltons aren’t going to have an international airport built here, where they can get in and out?

Dave Meyer:
I think they have an airport that they use. I don’t know if we’re allowed to use it.

Henry:
Private.

Jamil:
Henry, was that 20% spike in mortgage applications national, or just in the-

Henry:
National.

Jamil:
Region… That’s nationally?

Henry:
Yes.

Jamil:
Guys.

Henry:
Mortgage applications are up. More people are entering the market because I think they feel a little more comfortable that these are what the rates are going to be, and people are applying for home loans. And also, to echo what Jamil was talking about, the money is starting to be in demand again.
I’ve had two conversations in the last seven days. One with an institutional buyer, just like Jamil was talking about, called me and said, “Hey, send me anything. Send me what you have, we want to buy.” And one a bank, yesterday, a banker, small local bank literally reached out to me and said, “Hey, we need your business. I can still do loans with a six in front of them,” which is, when you’re talking about commercial lending, we’re usually paying a higher rate, so that’s solid. So he’s like, “Bring me what you got. I can do loans with a six in front of them. I’m willing to be flexible with the rates and terms.” So, they’re wanting to lend, more people are buying, and so I kind of see what you’re saying, Jamil. I see what you’re saying.

Dave Meyer:
I like it. All right. Well, that’s super interesting. I mean, I think that we’re in this really odd spot with mortgage rates, where people don’t know if they’re going to go up or down. And so, anytime there’s this… Like over the next year or so, where if there’s these short term fluctuations where they go down, people are jumping in.
And I think this just goes to show something that people overlook from a housing market perspective, is just demographics. There are just a lot of people who want to buy homes, and they are willing to wait for a little bit for a mortgage rate, but most people aren’t like us, where they’re sitting around looking at the interest rates, and forecasting what they’re going to be in May, and then October, and thinking about their strategy. They’re like, “I want a house. It went down half a point, and I’m going to jump in now.” It just goes to show, that’s how homeowners who make up 70% of the housing market make their decisions. It’s not what we’re talking about. All right, Kathy, let’s round it out. What do you got for us?

Kathy:
Well, this is actually a blog from the JP Morgan website. It’s JP Morgan Chase. The Economic Outlook for 2023, Trends to Watch. This was actually written in December, but I really think they’re pretty spot on so far. They said, “The US economy likely will slow this year, but the economy will grow.” So, it’s like half a percent to 1%. So, super slow growth, but that’s not a recession. That’s important, I think, for a lot of people who are hearing… I mean, all you have to do is type in recession on Google and you might want to get a handkerchief, and just cry a little bit.
But yes, the economy is slowing, but it doesn’t really look like a recession is coming quite yet, and they kind of predict it would be maybe towards the end of the year, or 2024, but mild. So, we shall see. It depends a lot on what the Fed does. Now the Fed just raised rates another 0.25%, and it looks like they’re going to do it again probably in their next meeting, another 0.25%.
And they’ve been saying for a long time they’re shooting for about a 5% fund rate, Fed fund rate, and they’re almost there. So, it could just be one more. A lot of people are in agreement that it would just be one more quarter percent rate hike, and then it just holds there for a bit.
And based on what we’re seeing, where we keep seeing job growth, and we keep seeing jobless claims declining, in spite of everything that’s happened this year, that could be true. That could be true that it’s a very mild recession at the end of the year. So those thinking that it’s going to be a 2008, it’s different. It’s different. Totally different dynamics this time around.
And then, as far as the housing market, you guys all said it all, I think we know it may be better than JP Morgan. I don’t know their lenders. They might probably need to know what to expect too. They’re expecting residential investment could be down 10 to 12% in 2023.
So again, that’s not a 2008 housing market crash, and that’s an average, meaning that some areas would do worse, and some areas would do better. And that’s what we were talking about, these different markets. I’ve been following John Burns Real Estate for many, many, many years, and that was always his message is that every single market is different. And there, again, no national housing market, and some are going to be more affordable, some are going to be less affordable, some are overpriced, some are underpriced. You’ve got to know your market in the end, when it comes to housing, but the overall economy really doesn’t look as bad as some people want to tell you it will be.

Dave Meyer:
I’m so glad you brought this up, Kathy, because I think that there is this overwhelming media narrative that there’s going to be a recession, and I think that is very unclear still. Economists, I just saw this poll by Bloomberg that said, I think it’s like 65% of economists think there’s going to be recession. So two out of three, that’s not a sure thing.
Goldman Sachs is the first bank that just upwardly revised their forecast. So, now they’re feeling more optimistic. They just said there’s going to be no recession in 2023. So, there’s some really interesting stuff here. The labor market is holding up surprisingly well. We just saw that GDP grew almost 3% in the fourth quarter. There’s interesting stuff here.
But I do want to say, that for the housing market in terms of appreciation and prices, narrowly avoiding a recession could be the thing that pushes housing prices down further, because that’s probably the only scenario I see where mortgage rates actually go up from where they are right now. Right?
Because if there’s a recession, that pushes down mortgage rates, and the only way I think mortgage rates go up is if the economy, if the yield curve kind of normalizes, and bond yields go up, and then we start to see mortgage rates closer to seven again. So, I don’t think they’re going to be crazy, but it’s just interesting that the overall economy doing well might be the thing that makes the housing market do worse.

Kathy:
Well, it wasn’t saying that the economy’s going to be robust, or again, growing. Normally you’d want to see a two or 3%, or 4% growth, and they’re saying maybe a 0.5% to 1%. So, I’m kind of still in the camp that mortgage rates are going to decline this year, based on the fact that the economy is slowing.
But this is, again, these are the headlines people see is, “Oh, the economy is down,” but oftentimes what they’re not seeing is, it’s the rate of growth that’s slowing. And that’s the same with housing prices. Like, “Oh, it’s down.” Yeah, the rate of growth is down, and that’s good compared to last year. So, again, read articles fully, because the headlines are meant to scare you, and unfortunately, too many people only read the headline.

James:
Does anyone else think that this is more of a slow squeeze, rather than a… It kind of had its jolt, now it’s like this slow squeeze that we’re going to be in for the next 12 to 24 months, but also, this slow squeeze could actually make rents go through the roof. As housing is just kind of out of reach, because if the economy’s not growing rapidly, that’s what we also saw. It wasn’t just rates, of why the housing market exploded. That was a huge portion of it, but it was also stock growth, investment growth, where access to liquidity was through the roof for people.
People were just printing money, and they could put money down. It’s like, “Oh, the house is up at 200 grand. Well, I’ll just put that down as by down payment.” And so the liquidity’s been squeezed, and so, right now, the cost of housing and the rent, it’s still a way out of whack. And so, I’m actually really starting to dig into some of these rental markets like, “Hey, I still see… Whereas I thought it was going to be stagnant, I’m actually starting to think that there could be some growth in some certain neighborhoods for sure.” Because the cost to own is just so out of whack still, and the slow squeeze is just going to make it harder to absorb that. Things will sell for pricing, but it’s going to be slower. So, in my opinion, rents are going to climb at that point.

Dave Meyer:
Interesting. Just because in markets, especially like in Seattle, just does not make sense financially to buy a house.

James:
No. Or like in Newport Beach. I mean, my rent payment’s a third of what my mortgage payment would be.

Dave Meyer:
Wow.

James:
No, it’s My rent payment is 50% less than my mortgage payment, if I put 50% down.

Dave Meyer:
What? That’s crazy.

James:
Oh, it’s crazy.

Dave Meyer:
Wow.

James:
I’m like, “It doesn’t make any sense to me. I’ll go buy an apartment building instead.” I don’t know. It just doesn’t… But yeah, so I could see some growth in that sector. The slow squeeze will actually, I think, get runway on the rents.

Dave Meyer:
All right. Well, I think that’s great advice. Don’t assume, just because people are saying that there’s a recession, and it’s a foregone conclusion that that is true. It’s actually a much more complicated, and nuanced economic situation, and that’s why there’s not really a real definition of recession. We’re just in this gray area.
I think Mark Sandy, the guy at Moody’s called it like a slow session. It’s like, it’s just going to be slow, and the economy’s going to be lame, but it’s not actually going to go backwards. So, there’s some nuance to it, and listen to shows like this, so you can understand it.
All right. Well, thank you all for being here. This was a lot of fun to have everyone back together. If you guys enjoyed this show, we would really appreciate some reviews. We get tens of thousands of people listening every week, but we only get like one review a week. All it takes is what? Five seconds. Go, give us a five star review on Spotify, or Apple. We really appreciate it. If you enjoy this type of show, and this type of content, it would mean a whole lot to us. Thank you all for listening. We’ll see you next time for On The Market.
On The Market is created by me, Dave Meyer and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Esparza, and Onyx Media, researched by Pooja Jindal, and a big thanks to the entire Bigger Pockets team. The content on the show On the Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

 

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.



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Baret Kechian, top loanDepot LO, sees bidding wars returning to his market


Beret Kechian, loanDepot’s top producer and branch manager, is joining a slew of mortgage loan originators who are cautiously optimistic about the mortgage landscape in 2023.

Kechian – who was Scotsman Guide’s eighth top LO in 2021 – saw demand for mortgages triple after the first week of January compared to a month ago as mortgage rates declined and people adjusted to seeing rates at 6%-levels.

Combine that with the lack of inventory in New Jersey and bidding wars are back, Kechian said in an interview with HousingWire.

“Buyers seem like they can’t get a break,” Kechian said. “I really think they had about three months last year where it was a buyers market in the fourth quarter. Literally, we’re right back to being a seller’s market again.” 

While his origination volume dropped by about 55% to $378 million in 2022 from the previous year, Kechian is confident he could capitalize on the purchase market by tapping into the network he’s been building with realtors over the last year. 

“We feel like we picked up more market share in 2022,” Kechian said.

He is also expanding his deal parameters to the suburbs beyond Hudson County, where about 90% of deals come from condo purchases. 

“It’s taken a lot more work to do a lot less volume, which is crazy to say,” Kechian said.

It’s still a volatile market for mortgages, but the goal for Kechian is to get back to the purchase mortgage sale levels in 2021, which were at about $460 million. He’s also expecting a sprinkle of refi business from borrowers who locked in rates at above 6.5% in the fourth quarter of 2022. 

Read on for more about Kechian’s perspective on the housing market, business strategies for 2023, and his take on the loan level pricing adjustment (LLPA) fees.

This interview has been condensed and lightly edited for clarity.

Connie Kim: Tell us about your main market. You seem to be licensed in three states, but the majority of your sales come from New Jersey.

image001
Beret Kechian, branch manager at loanDepot

Beret Kechian: I’d say like, you know, probably 90 to 95% would be New Jersey, with New York and Pennsylvania making up the difference. Within New Jersey, [and] specifically Hudson County – which is a place that’s right across from New York City – [it] is very much like a big time condo market, my bread and butter. 

But of course, we have a lot of clients that move out of condos once they have kids and get married. They move to the suburbs and they take us with them. So we still have a significant suburb influence, but they usually begin in Hudson County.

We have a really good niche and area where we are condo experts. We’re in an area that’s 90% condo [business], so it’s harder for lenders that don’t know this market to lend here. So more realtors in the area have started working with us. And usually, once they work with us, we hold on to them.

Kim: Looking at the 2021 numbers from Scotsman Guide, about 60% of your business came from purchase. I’m guessing your production pivoted toward purchase mortgages, but what does the number look like for 2022? 

Kechian: In 2022, it was almost 90% purchase mortgages. I only did like $30 million in refis and I think they were all done at the beginning of the year. The numbers shook out to be like $378 million. That’s what we submitted to the Scotsman Guide.

Kim: What did you do differently from the refi boom years of 2020 and 2021?

Kechian: The world opened up, which allowed us to see people physically more. So we kind of just connected with more people. We feel like we picked up more market share in 2022 and made more connections, working with so many more teams than we did in 2019, 2020 and 2021. There just wasn’t enough volume to make up the difference of losing all those refis — and then there just wasn’t a lot of volume in purchase because our area dipped due to the rates increasing and the lack of inventory.

The suburbs had a significant lack of inventory, and even the urban areas, there just wasn’t a lot of deals going on. So I think our share of the deals has gone up and we’re seeing it so far.

After the first week of January, our applications went up like 300% month over month. We went from like 13 applications for the last week of December and the first week of January to getting about 40 applications every week. 

While there’s still a lack of inventory, we’re seeing more deals happening. More buyers, I think, adjusted to this market and understand this is what it is. A lot of them are perfectly willing and happy to work with seven- and 10-year adjustable rate mortgages (ARMs) to keep the rates as low as possible. So the ones that are eligible for those are absolutely taking advantage. 

The 2-1 temporary rate buydowns have certainly been a factor. We’ve been advising them how to use it with the sellers. 

Lately, we’ve seen bidding wars come back where really good buyers are still not able to get houses. We have a lot of them looking and way more activities than in the fourth quarter.

Kim: If there are bidding wars in your market, are you expanding beyond your major market of Hudson County — especially given the inventory issue??

Kechian: Our realtors have been expanding, too. They have been telling me [that other] realtors are going to the suburbs more than they did and taking people out there. A lot of them that worked with us in Hudson County take us with them. We introduce ourselves to the realtors out there so they know we’re a tough team. A lot of times we ended up working with those realtors, which is a good thing. It’s taken a lot more work to do a lot less volume, which is crazy to say. 

It doesn’t make sense to refi, even with cash-outs. [Borrowers] would never take cash out of their property right now and sacrifice the rate on your mortgage. They would take a line of credit or an equity loan or a personal loan. They are not going to sacrifice that rate by 2%, 3% to grab another property. The only refis we’ve seen are either late financing type refis or a divorce situation, [and] literally nothing else.

I do see that changing, though. There will be some refis at some point this year because now there is a group of people that locked in rates at around 6.5%, 7% in the fourth quarter of 2022. Those guys will end up refinancing at some point in 2023, and we’re all over that, keeping an eye on those people, making sure that we’re finding that perfectly to them — and making sure we can save our clients money.

Kim: When you say buyers are entering the market – are they first-time buyers or existing homeowners?

Kechian: I think that we’re seeing a pretty good split, but I think a majority of the buyers are buyers that are renting right now. So first-time buyers, and even if they’re not first-time buyers, they’re renting currently on their primary residence, or they may own an investment property. So when they’re comparing rent to buy, they’re looking decent.

We’re seeing less move-up buyers than we did before. Because even though they might be running out of space a little bit, unless they’re absolutely bursting at the seams, it’s hard to give up a 2.8% rate and trade it in for 5% or 6% and also go to a more expensive property. So I think people are kind of hanging on a little bit longer than they would have previously. 

We’re not seeing a huge amount of the suburb move-up buyers because, again, unless their house is just way too small, I think a lot of people are hanging on and just kind of staying with the status quo, which is also hurting the inventory in the market. 

Kim: Who does your team consist of? Are there other teams within your branch?

Kechian: Individual loan officers mostly, [and] no other teams besides mine. My team consists of, obviously me — the lead. I have a production manager who’s licensed in a lot of states. I also have four other licensed loan specialists that work on my files, and then one assistant. So six licenses total under my umbrella (team).

I’m a producing branch manager beyond just doing my own production. We have loan officers that are licensed in other states, and the branch itself is licensed in other states. As a branch we did $1.5 billion in 2021. I did about $830 million of it that year. In 2022, our branch did just under $700 million. 

Kim: It’s not a secret that loanDepot laid off thousands of employees last year. I’m curious how that affected your team, your branch. 

Kechian: Some of our operations people that were supporting us had to go. I had to drop a production assistant, some processors, processing assistants and closers. Because, you know, production-wise, LOs are commission-based [they weren’t affected]. We were overstaffed at that point, so you don’t really have a choice. 

Kim: I want to ask you about the recent changes made by the Federal Housing Finance Agency in LLPAs. A lot of LOs have been raising concerns about hurting qualified borrowers — especially with the changes going into effect in the moving season. Do you have any concerns about the changes?

Kechian: Definitely not good. It’s going to push more people into private financing, like jumbo-type financing, even on conforming loan amounts. It’s going to push people more toward the private bank programs. Even inside a lender like us, obviously we have loans, we consult with different investors that we’re going to have to look at comparing Fannie Mae and Freddie Mac loans. 

They did make some positive changes for first-time buyers that make less than the area median income, and give them a relief from LLPAs, but it just doesn’t meet enough of the crowd.

Kim: How much of an impact do you think it will have on your business?

Kechian: That’s only going to affect the very small percentage of buyers, at least in my market. We’re in a high balance loan market, [and] we do a lot more expensive properties. While we do a significant amount of Fannie Mae loans, we still have so much stuff that we don’t sell to Fannie Mae and Freddie Mac, such as ARMs. 

We’ll still have plenty of options, but I think it’s going to hurt some buyers that don’t have a 20% down payment. It’s going to hurt that group, especially if they don’t have a 20% down payment and they make more than that average median income, or 120% of it.

If they make more than that, they’re going to really get hurt. Their rates are going to go up a quarter to three-eighths of a percent. So unless the market makes up for it by the rates coming down to kind of keep it equal, it’s going to be tough.

Buyers seem like they can’t get a break. I really think they had about three months last year where it was a buyers market in the fourth quarter. Literally, we’re right back to being a seller’s market again.

The inventory is more important than the rates, in my eyes. If inventory picks up and the market floods with new properties, even if rates come down, the prices will actually come down a little. They’re not going to go up, because the bigger problem is the lack of inventory and the rent prices. 

Kim: It’s still a very volatile market, so it would be hard to predict this, but do you have sales goals for 2023?

Kechian: I’d love to just make sure that we do more purchase business than we did last year. I’d love to get back to the purchase business we had in 2021. I think that year, we did $460 million in purchase volume, and I would love to get close to there, considering how many more partners we have this year than we did back then, and how much more we’re out and about than we were back then.

I think you’ll see a sprinkling of refis — nothing like 2021 or 2020 — but not that much unlike 2019. I’m anticipating in our world, maybe $50 [million] to $75 million in refis this year, unless there’s a major move down. If there’s any sort of drop in rates in the third or fourth quarter, where the 30-year fixed-rate for conventional loans gets down into the low fives or something, then you’ll see even a bigger number. 

I think as long as the economy is doing well, it’s bonus season right now in my area. We’re right across from New York City, so as long as people can buy their home and not be contingent on the sale, I think they’ll take their chances. Hopefully more people will do do that and those other homes that they are selling will become the inventory. 

If the business is there, and there’s deals to be had, I know we’ll get our share. I feel confident saying that. I think you’re going to find a lot of top teams doing very well — and then there’ll be a lot of marginal officers that took advantage of the refi market that probably will be looking for different careers.



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Mr. Cooper sees a $1.5T MSR opportunity in 2023


The servicing portfolio propelled Mr. Cooper Group‘s overall earnings in the fourth quarter of 2022 when cost-cutting initiatives weren’t enough to bring the origination business to profitability. And investors can expect the company to keep growing its servicing business in the months to come. 

Mr. Cooper reported on Friday it delivered $1 million in net income from September to December, compared to $113 million in the third quarter. The performance was impacted by a mark-to-market of $58 million, adjustments related to severance and property consolidation of $23 million, and equity investment losses of $10 million.  

On the originations side, the company registered a $2 million loss in the quarter, compared to a $46 million profit in the previous quarter. Mr. Cooper’s volume declined to $3.2 billion in the fourth quarter from $5.7 billion in the third quarter. 

The direct-to-consumer channel was responsible for 60% of total originations from September to December, with the remainder coming via correspondent lending. 

“We took rapid and decisive actions last quarter to reduce capacity,” Chris Marshall, vice chairman and president of Mr. Cooper, told analysts during a call. “As a result, we were roughly breakeven in the fourth quarter and are now on track for positive results.”

Jay Bray, chairman and CEO of Mr. Cooper, said that last October, as mortgage rates were trending higher, Mr. Cooper eliminated 1,000 positions, most of them in originations. Prior to that, Mr. Cooper announced layoffs of about 420 staff members in the second quarter, in addition to about 250 employees in the first quarter.

“We are now on target to earn approximately $10 million in EBT for the first quarter of 2023, which is consistent with the guidance we gave you last fall,” Bray said. “We feel good about driving these numbers higher if mortgage rates settle at meaningfully lower levels or if MBS pricing improves.”  

The company’s projections for 2023 are based on the federal funds rate reaching 5%, mortgage rates settling around 6% and conditional prepayment rates at 6% for the year. Mr. Cooper has $1.9 billion in liquidity. According to Bray, the company has several initiatives underway to reduce costs while improving customer experiences.  

Mr. Cooper sees a $1.5 trillion opportunity 

On the servicing side, Mr. Cooper’s portfolio reached $870 billion in the fourth quarter, up from $854 billion in the previous quarter. Owned MSRs increased 21% in the same period to $411 billion. Meanwhile, subservicing rose 24% to 459 billion. MSR’s acquisitions reached $22.7 billion from September to December. 

Mr. Cooper delivered a $159 million profit through its servicing business in the fourth quarter, compared to $81 million in the previous quarter. The company forecasts $600 million in operating EBT for 2023, which is a “conservative estimate,” according to Bray. 

Mr. Cooper expects a cycle-wide opportunity for MSR acquisitions this year. Based on the data for nearly 500 originators, the company estimates a backlog of as much as $1.5 trillion in unpaid principal balance (UPB) that needs to be sold in the market. The estimate is for $3.9 trillion from 2023 to 2025. 

“You’ve read public statements from industry leaders who decided to strengthen servicing portfolios. I’ll tell you that other large operators have quietly made the decision to exit,” Marshall said. “There’s no mystery about the reason for consolidation pressure is the critical need for scale, technology, operational skills and efficiency.” 

Bray said Mr. Cooper reviewed nearly 300 MSR deals the company was offered over the last two years. “We elected to analyze about two-thirds and then bid a little under half. We ended up winning 23% of what we bid on or 11% of the total deal flow. Going forward, we expect those ratios to remain relatively constant.” 

However, the executive highlighted to analysts not to expect the company to buy “every pool that comes to market,” only those the company is sure it can service efficiently. Wells Fargo is reportedly selling its MSRs as the company is exiting the correspondent channel and reducing its servicing pipeline. 

According to Moody‘s vice president Stephen Lynch, Mr. Cooper benefited from record-low prepayment speeds and higher interest income on escrow balances. 

“Mr. Cooper’s capitalization is among the strongest of its rated non-bank mortgage peers,” Lynch said. “It will allow the company to strategically acquire fee-generating servicing assets that should provide refinancing and purchase opportunities in a more favorable origination environment.”



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