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 Steve Ozonian, chief real estate officer at Carrington Holding Company, to discuss the tenuous housing recovery and the growing role of nonbanks.
Q: As a leader in the single-family residential real estate transactions space, what is the state of the housing market from your perspective?
A: The U.S. housing market, one of the main drivers of the economic recovery, has been on the mend and showing increasing signs of improvement and stabilization in many markets throughout the nation, but the state of the housing market is still fragile.
Overall, there is plenty of fresh evidence to suggest that the housing market is steadily coming back to life. For example, prices are slowly rising, construction crews are finally starting to build more new housing again, and distressed sales are falling.
However, in many markets real estate brokers are struggling due to a lack of inventory, which is putting pressure on them to scale back marketing and new business development. And, the reduction in refinance volume, along with new regulatory hurdles, are threatening the existence of traditional mortgage and title providers.
Q: What’s driving the recovery?
A. First, mortgage interest rates are historically low. The Federal Reserve’s aggressive and highly accommodative monetary policy, including the purchases of mortgage-backed securities, has set the stage for a revival of the housing market. Lower mortgage rates have increased both purchase loans and refinancing, reducing monthly payments, and therefore, supporting private consumption and encouraging purchases. Rock-bottom borrowing rates are at all-time lows, with a 30-year fixed-rate mortgage at 4.14% for the week of August 4, according to Freddie Mac.
However, refinance activity has taken a sharp downturn, and although the purchase market has picked up, low inventory and fewer overall sales continue to put pressure on loan originators.
Second, some markets — once awash with unsold foreclosures — have morphed into normalized market activity, increasing prices along with a scarcity of inventory. Nowhere is this more evident than in the west. In Las Vegas, once the poster child of the housing boom and bust, prices are galloping upward at an amazing 16.9%, while prices in San Francisco jumped 15.4% year-over-year, according to the latest Standard & Poor’s Case-Shiller home price index, which tracks sales in 20 cities.
Q:Increasingly, institutional investors have entered the residential real estate market. Can you explain how Carrington works with institutional investors?
A: Carrington plays a leading role in providing valuable management services to residential institutional investors, including hedge funds, private equity firms, the GSEs, banks and nonbank servicers. Realizing the operational challenges in managing large portfolios of residential properties, many private equity and institutional funds are hiring Carrington to manage their real estate portfolios. Institutional investors are realizing there are huge costs associated with acquiring, repairing, leasing, qualifying, marketing, managing, and liquidating thousands of properties.
Moreover, with increased federal regulatory scrutiny — from the Consumer Financial Protection Bureau and laws like the Protecting Tenant of Foreclosure Act of 2009 — compliance issues are forcing institutional investors to hire companies with proven systems, platforms and personnel who can operate a nationwide network of professional property management experts.
Over the last three years, institutional investors have purchased over 850,000 residential properties, representing 6% of all sales. In some markets, they account for over 25% of all sales.
Q:Where do you see the consumer experience headed in a residential transaction, and what disruptions to the real estate and investing world do you see in the next few years?
A: Clearly, the lending, loan servicing and the residential real estate markets are undergoing a huge transformation, with new nonbank firms like Carrington playing a greater role in specialty “high touch” services such as asset management, residential institutional management, distressed servicing and traditional real estate brokerage. While traditional wholesale banks will continue to be big players in the residential real estate market, firms like Carrington will grow our national footprint in this arena.
The total amount of time it takes to close a residential transaction will be significantly reduced, while providing more transparency and empowerment to consumers. And, firms that focus on providing such services will be the winners.
Q: What trends do you anticipate emerging?
A. A trend we see unfolding is a growing role for non-bank lenders like Carrington. With loan application and lending volumes falling, nonbanks are making significant inroads in the mortgage business that was traditionally dominated by commercial banks. For example, four of the top 10 loan servicers are nonbanks, controlling $1 trillion of the $9.8 trillion loan servicing market. Today, there is virtually no private market for below-prime loans in the U.S. At Carrington, we plan to own this space in the near future.