Executive Conversations is a HousingWire web series that profiles powerful people in the financial industry, highlighting the operations and the people that make this sector tick. In the latest installment, we sit down with Ray Brousseau, executive vice president of Carrington Mortgage Services Mortgage Lending Division.
Q: The market has seen several consecutive years of growth in single-family home prices, as well as a strong investor share in home purchases. Will these trends continue?
A: How these two factors intersect will really affect the market this year. According to RealtyTrac, more than 32% of single-family home purchases through October 2014 were non-owner-occupied sales — which is a huge share of the market. Over the past few months, however, we’ve started to see investor activity decline. This past October, investors represented 15% of home sales, a decline from the 19% seen in October 2013, according to figures from the National Association of Realtors. At the same time, sales prices have been going up, and this may be cooling investor interest. This past October, the median sales price of U.S. single-family homes and condos was $193,000. That represented a 15% bump from the previous year and the highest mark the industry has seen since September 2008. It’s still lower than at the peak of the boom in 2006, but it’s significant progress for the still-fragile housing recovery. We’ve seen an increase in purchase activity as recent housing price growth has restored some confidence in the housing market.
Q: Do you anticipate more traditional homebuyers entering the market?
A: Over the past several years, we’ve been seeing a decline in household formation and in the number of first-time homebuyers, and that’s something we’d like to see change. According to the Census Bureau, homeownership rates were at 64.7% this past second quarter, a 19-year low, and new household formations dropped below 500,000 in the 2013-2014 year. In each of the previous two years, household formation averaged 1.3 million — that is a significant difference. In addition, first-time homebuyers typically represent around 40% of buyers, but that dropped to only 33% of the overall market last November, according to the annual survey from the National Association of Realtors. That 33% represents a 5 percentage-point decrease from the previous year, and marks the lowest share since 1987. So, in many ways, these numbers are discouraging, but at the same time, it’s an area that has a lot of room for improvement, and we see additional growth opportunity in the next few years from the first time homebuyer segment.
Q: What will bring these buyers to the table? Do they need incentives or specialized programs?
A: Many prospective first-time homebuyers and millennials are lacking specific education and understanding about the home-buying process. Many aren’t taking action because they hear credit is tight, down-payment requirements are heavy and closing costs are burdensome. These fears cause inaction. At Carrington, we have a commitment to serving first-time homebuyers and the underserved market. And by that we mean people with FICO credit scores below 640 and those who might struggle to come up with a significant down payment. We’ve developed several initiatives and programs to help better serve these customers, and it really starts with increasing our consumers’ financial literacy.
Q: What is Carrington doing to help first-time and underserved homebuyers?
A: The whole process really starts with prequalification. We want to make sure that first-time homebuyers and the underserved market understand their financial footing before they get their heart set on a particular home. That said, we don’t want to discourage them from entering the market if there are options that work for them, so we’ve lowered our minimum credit-score requirement to 550. In addition, we’ve expanded our guidelines and reduced overlays on a number of popular programs with first-time homebuyers, like FHA, VA, and USDA loan programs.
On top of that, we’ve just rolled out The Carrington Loan, which gives borrowers a simplified and more transparent mortgage option. Many underserved borrowers still see a mortgage as something unattainable, complex and cumbersome. The Carrington Loan is unique in the marketplace because it offers a mortgage with no closing costs, appraisal fees, or lender financing fees. Carrington covers all eligible loan costs, and if any unanticipated lender costs come up, Carrington issues a credit to cover them. This greatly simplifies the process and helps remove some of the anxiety related to attaining a mortgage, especially for those who don’t have a lot of cash on hand for closing costs. With The Carrington Loan, there is no need to modify the rate after it is presented to the borrower to offset loan costs and loan closing fees, and unexpected increases to estimated closing costs are not an issue. Removing these barriers eases the minds of borrowers who want to fulfill their dreams of homeownership but may have run into some obstacles in the past.
Q: With lowered credit requirements, are you concerned about a repeat of the problems we saw with boom-era mortgages?
A: It’s important to point out that we’re not just lowering our credit requirements. We believe that serving the underserved community means not only offering loan products that work with their financial realities, but also offering increased information and education to make sure that today’s homebuyers understand their financial position. That’s why we’ve developed MyLoanDetail, a proprietary online educational tool for our customers. MyLoanDetail improves the financial literacy of our borrowers by walking them through all the details of their loan. Consumers can go step by step through their loan to be sure that they understand loan terms and responsibilities. And it goes beyond the basics of transaction costs, principal amount, term, interest rate and monthly payment, to address what happens in the case of missed or late payments. Unlike some other online tools, this information is tailored to the consumer’s specific situation, and Carrington requires all of its customers to complete MyLoanDetail education before funding. We believe that by offering simplified loan products and superior educational tools, Carrington can best serve the underserved and first-time homebuyer market, and really pioneer some of the trends that will be emerging this year.