Mortgage Industry Outlook: FHLB Des Moines 2018 Mortgage Conference

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1 Mortgage Industry Outlook: FHLB Des Moines 2018 Mortgage Conference April 2018 Presented by Mike Fratantoni Mortgage Bankers Association

2 Purchase Volume Rising: Seasonality Increasing in Importance Source: MBA Weekly Applications Survey 2

3 Refis Have Leveled Out Source: MBA Weekly Applications Survey 3

4 Forecast: Steady Purchase Growth Source: MBA Forecast 4

5 MBA Forecast Summary GDP Growth 2.5% 2.4% 2.3% 2.1% Inflation 2.1% 2.3% 2.3% 2.5% Unemployment 4.4% 3.8% 3.7% 3.9% Fed Funds 0.625% 1.375% 2.375% 3.125% 10-year Treasury 2.4% 3.2% 3.5% 3.5% 30-year Mortgage 3.9% 4.9% 5.4% 5.4% New home sales (000s) Existing home sales (000s) 5,538 5,638 5,786 5,866 Purchase originations ($B) 1,110 1,172 1,250 1,317 Refi originations ($ B) Total originations ($B) 1,710 1,610 1,645 1,712 Mortgage debt outstanding ($B) 10,010 10,370 10,760 11,130 Source: MBA Forecast 5

6 Volatile Stock Market Source: Federal Reserve, NYSE 6

7 Trade Worries 7

8 Job Growth Unexpectedly Strong Source: BLS 8

9 Wage Growth Slowly Increasing Source: BLS 9

10 Core Inflation Stepping Up 3.0 Consumer Price Index Year over year percent change (0.5) All Items exc. Food & Energy All Items (1.0) Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Source: BLS 10

11 Global Yields Have Increased Source: Thomson Reuters 11

12 Source: Congressional Budget Office 12

13 Changing Investor Perceptions of Fed Rate Path 13

14 Rates Expected to Increase Source: Federal Reserve, Freddie Mac, MBA 14

15 Millenials Hitting Peak Housing Demand Years Millions Avg= Headship rates increase from 15% to 45% Born 1980 or later Born Born Born 1947 or earlier

16 Potential for 16 Million Additional Households by 2024 Changing Demographics and Economy Plus Trends Projected Changes in Households, by Age Millions million million million -2 Using Forecasted Headship Rates Non-Hisp. White Black Asian Other Hispanic Source: IPUMS CPS and MBA 16

17 Higher Levels of Education, Especially Among Women 40% Percent of Women and Men with Bachelor's and Higher Degrees, Age % 38% 30% 31% 25% 23% 20% 15% 10% 5% 0% Bachelors Women Masters+ Women Bachelors Men Masters+ Men Sources: IPUMS CPS and MBA 17

18 College Graduates Earn Nearly Twice the Wages of High School Graduates 100 US College/High School Premium College versus high school real wage gap (%) Source: IPUMS CPS, MBA, Autor (2014) 18

19 Diverging Homeownership Trends 75% Homeownership Rate of Year Old Heads By Education 70% 65% 65% 60% 55% 53% 50% College Degree, year olds No College Degree, year olds Source: IPUMS CPS, MBA 19

20 The Rise of Alternative Student Debt Repayment Plans $700 Chart of the Week - January 27, 2017 Federal Direct Student Loans in Repayment ($B), By Repayment Type $600 $500 $400 $300 $200 $100 $0 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 Fixed Payment Other Graduated payment Income-Contingent Income-Based Pay As You Earn REPAYE Source: Office of Federal Student Aid and MBA 20

Where do Households Want to Live? Growth in Cities Among College-Educated 25-44 Year Olds, Suburbs for Rest The aggregate US population is growing faster in the suburbs relative to downtowns.

21 Where do Households Want to Live? Growth in Cities Among College-Educated Year Olds, Suburbs for Rest The aggregate US population is growing faster in the suburbs relative to downtowns. But the population of 25-to- 44 year old college-educated Americans is growing three times faster in downtown areas than in the suburbs in the 50 largest CBSAs. Source: Couture and Handbury (2016) estimates using Census and ACS data 21

22 A Decade of Unusual (for the US) Housing Growth Millions Net Change in Households, by Structure Type and Tenure (millions) Rented Owner-Occupied Single Family Multifamily Single Family Multifamily Single Family Multifamily Source: Adjusted CPS, MBA 22

23 Declining Inventories for Sale Constraining Existing Home Sales Source: NAR, MBA 23

24 Single Family Starts Still Gathering Steam; MF Steady 2200 Single and Multifamily Housing Starts (Seasonally adjusted annualized rate) Thousands Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Single Family Starts (SAAR) MF Starts (SAAR) Total Completions (SAAR) Source: Census, MBA 24

25 Lack of Labor Holding Back Single Family Housing Starts Source: BLS, NAHB 25

26 House Price Growth Outpacing Income Growth; Price Gains to Slow Source: FHFA, BLS 26

27 Source: MBA Powered by Ellie Mae s AllRegs Market Clarity 27

28 Source: MBA Powered by Ellie Mae s AllRegs Market Clarity 28

29 Source: MBA Powered by Ellie Mae s AllRegs Market Clarity 29

30 Expansion Within Credit Box for Purchase Volume What, if any, stretching of terms to get loan approvals have you seen over the past six months? Debt to income ratios (DTI)/Loan to value ratios (LTV) Approval of nonconforming/jumbo or out of market loans Approval of non qualified mortgage loans Accepting lower credit scores 0% 10% 20% 30% 40% 50% 60% 70% Source: Poll of RMQA and Fraud Prevention Forum Attendees, September 2017, N = 75 30

31 FHA Credit Easing Source: HUD 31

32 Shape of the Mortgage Industry Share of Home Purchase Volume (#) by Company Type Share of Refinancing Volume (#) by Company Type 60% 60% 50% 40% 30% 20% 36% 30% 27% 24% 21% 21% 25% 26% 26% 25% 25% 23% 36% 40% 42% 46% 48% 51% 50% 40% 30% 20% 52% 45% 47% 34% 27% 26% 20% 19% 16% 17% 18% 18% 22% 28% 31% 41% 47% 49% 10% 4% 5% 5% 5% 5% 5% 10% 7% 7% 7% 8% 8% 7% 0% Large Depository Community Bank Credit Union (<$10bn Assets) Independent Mortgage Bank 0% Large Depository Community Bank Credit Union (<$10bn Assets) Independent Mortgage Bank Source: HMDA 32

33 IMB Net Production Income (basis points) $ Net Production Income (bps) $ Avg. Production Volume ($M) $ $600 $ $ $ $200 $100 (8.3) $0 Q417 Q317 Q217 Q117 Q416 Q316 Q216 Q116 Q415 Q315 Q215 Q115 Q414 Q314 Q214 Q114 Q413 Q313 Q213 Q113 Q412 Source: MBA s Quarterly Mortgage Bankers Performance Report, 33

34 IMB Fully-Loaded Production Expenses ($ per loan) $900 Fully-Loaded Production Expense ($ per loan) Avg. Production Volume ($M) $800 $700 $600 $500 $400 $300 $200 5,603 5,779 5,818 6,368 6,959 8,025 6,932 6,769 7,000 7,195 6,984 7,080 7,747 7,845 7,120 6,969 7,562 8,887 7,774 8,060 8,475 $100 $0 Q417 Q317 Q217 Q117 Q416 Q316 Q216 Q116 Q415 Q315 Q215 Q115 Q414 Q314 Q214 Q114 Q413 Q313 Q213 Q113 Q412 Source: MBA s Quarterly Mortgage Bankers Performance Report, 34

35 CBCU Network Survey Participants* Alliant Credit Union Alpine Bank of Colorado Associated Bank Atlantic Capital Bank Auburn Bank Bangor Savings Bank Bank 34 Bank of Clarke County BankSouth Mortgage Banner Bank BECU Bank-Fund Staff FCU Bryn Mawr Trust CB&T Mortgage Centier Bank Central Mortgage Company Chartway Federal Credit Union Choice Financial Clear Mountain Bank Colonial Savings, F.A. Commonwealth Bank Community Bank, N.A. Consumers Credit Union CP Federal Credit Union Crescent Mortgage Company Elevations Credit Union Enterprise Bank & Trust Fidelity Bank First Federal Bank First Midwest Bank of Poplar Bluff First Savings Bank First Tech Federal Credit Union FirstBank Firstrust Bank Fulton Mortgage Company Greater Nevada Mortgage (GNM) Great Plains National Bank Holyoke Credit Union Home Savings Bank Huntingdon Valley Bank Johnson Bank Jonah Bank of Wyoming Lafayette Federal Credit Union Legacy Mutual Mortgage Level One Bank Lake Michigan Credit Union MB Financial Bank, N.A. Mercantile Bank of Michigan Meridian Bank Michigan First Mortgage Midland States Bank Mortgage Center L.C. Mountain America Credit Union North American Savings Bank, F.S.B. Navy Federal Credit Union NFM Lending Nicolet National Bank NIH Federal Credit Union Northwest Savings Bank Pentagon Federal Credit Union Pima Federal Credit Union PrimeLending Republic Bank Schools Financial Credit Union SchoolsFirst Federal Credit Union SEFCU Mortgage Services South State Bank Starion Bank The Provident Bank TowneBank Mortgage United Nations Federal Credit Union Virginia Credit Union, Inc. * Completed at least one or more question in survey; Sample size: 72 MBA s CBCU Flash Polling Survey March 13, 2018

36 Company Profiles Other or Not Reported 18% Credit Union (<$10b in Assets) 17% Large Bank or Credit Union (>$10b in Assets) 17% Smaller Community Bank (<$5b in Assets) 36% Larger Community Bank ($5b - $10b in Assets) 13% MBA s CBCU Flash Polling Survey March 13, 2018

37 Approximate Annual Production Volume in 2017 More than $5 $2.5 - $5 billion billion 8% 8% $1.0 - $2.5 billion 19% Less than $1 billion 65% MBA s CBCU Flash Polling Survey March 13, 2018

38 What is your forecast for full-year 2018 volume vs. full-year 2017 volume?* Down >20% 3% Up >20% 16% Down 1-20% 12% Flat 12% Up 1-20% 57% *Current MBA Industry Forecast as of 3/20/18: $1,610 billion in 2018 versus $1,710 in 2017, a 5.8% decrease in volume. MBA s CBCU Flash Polling Survey March 13, 2018

39 What is your expectation of Q volume vs. Q volume? Up >20% 4% Down >20% 2% Up 1-20% 38% Down 1-20% 25% Flat 32% MBA s CBCU Flash Polling Survey March 13, 2018

40 Gross Originations Volume Repeater Companies 217, ,448 Gross Originations Volume Q317 Q $000s # MBA Industry Estimates ($B) MBA s CBCU Flash Survey Q4 2017

41 Product Mix (% based on $) Product Mix (% based on $) 87% 81% 79% 80% 71% 66% 64% 50% 25% 43% 41% 37% 30% 30% 32% 30% Q117 Q217 Q317 Q417 15% 15% 13% Purchase Government Fixed Rate Held in Portfolio/Held for Investment Retail Bank Referred MBA s CBCU Flash Survey Q4 2017

42 Product Mix (% based on $) Repeater Companies Product Mix (% based on $) 76% 73% 65% 62% 32% 40% 35% 32% Q317 Q417 10% 9% Purchase Government Fixed Rate Held in Portfolio/Held for Investment Retail Bank Referred MBA s CBCU Flash Survey Q4 2017

43 Product Mix (% based on #) Product Mix (% based on #) 89% 87% 84% 85% 71% 66% 64% 50% 27% 41% 37% 36% 32% 29% 24% 25% Q117 Q217 Q317 Q417 16% 16% 15% Purchase Government Fixed Rate Held in Portfolio/Held for Investment Retail Bank Referred MBA s CBCU Flash Survey Q4 2017

44 Product Mix (% based on #) Repeater Companies Product Mix (% based on #) 82% 80% 66% 62% 28% 33% 34% 31% Q317 Q417 12% 10% Purchase Government Fixed Rate Held in Portfolio/Held for Investment Retail Bank Referred MBA s CBCU Flash Survey Q4 2017

45 Average Loan Balances ($) Average Loan Balances ($) 236, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,472 Q117 Q217 Q317 Q417 MBA s CBCU Flash Survey Q4 2017

46 Average Loan Balances ($) Repeater Companies Average Loan Balances ($) 393, , , , , , , , , , , , , , , , , , , ,924 Q317 Q417 MBA s CBCU Flash Survey Q4 2017

47 Average Expenses for 2017 Retail Originations Only ($ per loan) Average Expenses for 2017 Retail Originations Only ($ per loan) Sales Expenses $2,337 Processing, Underwriting, Closing, and Other Fulfillment Expenses $1,440 Technology, Post-Closing, Secondary, QC, and Other Production Support Expenses $832 Total Production + Production Support Expenses $4,608 MBA s CBCU Flash Survey Q4 2017

48 Peer Groups: Overall Net Production Income (bps) Large Banks Large Independents Mid-Size Banks Mid-Size Independents (29) (50.0) H2017 Source: PGR: MBA and STRATMOR Peer Group Roundtables: 48

49 Peer Groups: Weighted Avg. Purchase Channel Mix (% based on $) Consumer Direct Avg. Purchase Production Volume $22.5B $12.9B $1.3B $1.9B 1% 1% 12% 4% 5% 1% 6% 15% Correspondent 50% 56% Broker Wholesale 2% 12% 89% 77% Retail 35% 32% Large Banks Large Independents Mid-Size Banks Mid-Size Independents Source: PGR (2016): MBA and STRATMOR Peer Group Roundtables: 49

50 Peer Groups: Fully-Loaded Retail Channel Production Expenses as % of Total Retail Production Revenue Sales Expense Fulfillment Expense Production Support + Corporate Administration Expense 109% 34% 91% 13% 82% 88% 16% 26% 20% 17% 19% 22% 50% 58% 43% 53% Large Banks Large Independents Mid-Size Banks Mid-Size Independents Source: PGR (2016): MBA and STRATMOR Peer Group Roundtables: 50

51 Mortgage Delinquency Rates Seasonally adjusted, excludes loans in foreclosure Percent Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Days Delinquent 60 Days Delinquent 90+ Days Delinquent Source: NDS: National Delinquency Survey: 51

52 16.00 Mortgage Delinquency Rates by Loan Type Seasonally adjusted, based on loan count, excludes loans in foreclosure Percent Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q All Loans Conventional Loans FHA Loans VA Loans Source: NDS: National Delinquency Survey:

53 Source: PGR: MBA and STRATMOR Peer Group Roundtables: Peer Groups: Servicing Retention (% of $ originations volume) Large Banks Large Independents 120% Mid-Size Banks Mid-Size Independents 100% 99% 99% 80% 71% 60% 58% 40% 37% 20% 0% H2017

54 Will IMBs Continue to Gain Servicing Share? Share of Servicing Count by Institution Type % 86% 78% 71% 69% 67% 22% 29% 31% 33% 11% 14% Depositories IMBs Source: NDS: National Delinquency Survey:

55 Servicer Profitability ($ per loan) In-House Servicers Net Financial Income Net Operating Income $650 $550 $450 $350 $250 $150 $50 ($50) ($150) ($250) Source: MBA s Servicing Operations Study and Forum (Prime Servicers): PGR 1H2017

56 Fully-Loaded Servicing Operating Costs ($ per loan) Fully-Loaded Servicing Expense - Prime ($ per loan) Corporate Administration Expense Unreimbursed FC and REO Expense Direct Servicing Expense - Default Direct Servicing Expense - Non-Default H2017 Source: MBA s Servicing Operations Study and Forum (Prime Servicers): PGR 1H2017

57 Direct Servicing Expenses ($ per loan) Direct Servicing Expense - Prime ($ per loan) Direct Servicing Expense 4.46% NDS 90+ day Delinquency Rate (% based on #, annualized) 4.11% 4.11% 5.00% 4.50% 3.46% 3.03% 4.00% 3.50% 2.63% 2.30% 3.00% 2.50% 1.82% 1.51% 1.31% 2.00% 1.50% 1.00% 0.50% H % Source: MBA s Servicing Operations Study and Forum (Prime Servicers): PGR 1H2017

58 $3,500 $3,000 Chart of the Week - July 21, 2017 Servicing Costs per Loan (Single-Family): Performing vs. Non-Performing Cost of Performing Loans Cost of Non-Performing Loans 2,884 $2,500 $2,000 2,304 2,414 2,000 2,386 2,113 1,826 $1,500 1,369 $1,000 $500 $ Source: MBA s Servicing Operations Study and Forum (Prime Servicers): 58

59 Direct Servicing Costs by Function = $170 per loan (2016) Quality Assurance, $5 Records, $6 Other, $18 Customer Service, $27 Bankruptcy, REO & Other Default, $13 Setups, Transfers & Payoffs, $10 Escrow, $12 Foreclosure, $11 Loss Mitigation, $17 Cashiering & Investor Accounting, $13 Collections, $11 Servicing Systems, $26 Source: MBA s Servicing Operations Study and Forum (Prime Servicers):

60 Servicer Productivity (Loans Serviced per FTE) Productivity Ratio of Non-Mgmt & Temps to Management FTEs 2,000 1, , , , , ,119 1,162 1,034 1,051 1,043 1,315 1,589 1,788 1,863 1,638 1,101 1, Source: MBA s Servicing Operations Study and Forum (Prime Servicers): PGR 1H2017

61 Corporate Load Factor - Prime ($ per Servicing FTE) Servicing Recapture % (Production from Existing Servicing Customers/Payoffs) 16% 28% 32% 33% 36% 28% 17% 20% 20% 15% H2017 Source: MBA s Servicing Operations Study and Forum (Prime Servicers): PGR 1H2017

62 Servicer Issues 1. Natural Disasters and Recovery Operational and Fnancial Issues 2. Servicing FHA Loans, particularly in Disaster Recovery Areas 3. CFPB Changes - Successor in Interest 4. CFPB Changes - Periodic Statements/Bankruptcy Implementation 5. Modernizing Customer Contact Call Centers, Web, Other Communications 6. MSR Sales and Transfers 7. Language Proficiency/Preference 8. Complaints Management 9. State Foreclosure Hurdles 10. Controlling Costs 11. Technology Innovation and Automation 12. IMB Servicer Liquidity and Advance Management 13. Federal and State Exams 14. Use of Subservicer vs. In-House 15. Regulatory Reform and Key Servicer Priorities Source: 2018 MBA Servicer-Only Roundtables

63 What Do You Perceive is the Biggest Benefit from Offering a Digital Mortgage? 50% 47% 45% 40% 35% 30% 32% 25% 20% 15% 16% 10% 5% 5% 0% Internal Cost Reduction Improved Loan Quality Consumer Satisfaction Other MBA s 2018 Digital Mortgage Technology Profile; 63

64 What is the Biggest Inhibitor to Your Ability to Offer a Fully Digital Experience? Lack of vendor options to meet our vision 32% Business leaders need to determine what they want first Other Limited Funding to build it 26% 26% 11% Not knowing how to accomplish it 5% MBA s 2018 Digital Mortgage Technology Profile; 64

65 MBA Research Sign-Ups and Services 65

66 Contact Information and MBA Resources Mike Fratantoni, Ph.D. Chief Economist & Senior Vice President Research and Industry Technology MBA Research: RIHA: 66

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