luishinton: Mortgage Lending Capacity Lag Restrains Housing Recovery

The housing market isn't out of the woods yet.

And it's not just that there aren't enough homes to buy.

Home equity has a way to go before more sellers come to market. That's easy to understand.

And new home builders have yet to pick up the slack left by the resale market because there aren't enough workers to fill jobs, but that's not unusual.

Refugee home building workers always flee the industry during bad times, often change careers and many never return.

That causes construction employment to lag during housing recoveries.

However, the big 19,000-job jump in home construction employment in February is a sign things are picking up, according to a recent Capital Economics report on housing.

No, a big sticking point is where mortgage money meets its maker.

"Capacity constraints in lenders' mortgage departments are one of the few remaining bottlenecks in the housing recovery and one of the factors contributing to the marginal role being played by mortgage-dependent buyers," Capital Economics reports.

The outlook isn't so good for the mortgage-lending sector.

Lending constraints

First, just like in the home building industry, it's tough finding good help.

The number of white collar real estate lending workers who process and approve purchase mortgages, refinanced mortgages, and home equity loans - 210,000 - pales by comparison to the 2.1 million blue collar workers employed in home construction.

Capital Economics said employment in the real estate credit sector fell by 45 percent between 2005 and 2009, as total mortgage applications fell by a larger 75 percent from peak to trough.

Since then, mortgage applications have nearly doubled, but real estate credit employment has grown by only 7 percent, according to Capital Economics.

Capital Economics surmises the problem for lenders stems from training costs to deal with the brave new world of heavily regulated mortgages and tough underwriting standards as well as the risk associated with hiring too many too soon for the wrong job, among other reasons.

"Buy-back (federal regulators force lenders to buy back bad loans) risk may also be dissuading lenders from expanding mortgage departments. Also, if lenders judge the refinancing boom to be temporary, they won't want to go to the expense of recruiting and training new employees," Capital reports.

Constraints' toll on the market

None of this excuses the industry for causing it's own downfall and the constraints on additional hiring are taking a toll on the consumer end of market.

The average time to process a refinance grew from 43 to 55 days over the past year ending in February. Purchase mortgage processing times grew from 45 to 51 days over the same period, according to Capital Economics.

Short staffing is, in part, why mortgage rates are at record highs relative to mortgage-backed security yields and why credit scoring rules are as strict as they've become.

The tight mortgage money conditions keep many buyers who need mortgages (as opposed to all-cash buyers) out of the mortgage market.

Capital Economics says there is a silver lining behind the cloudy mortgage market.

"Mortgages are now proving to be a very profitable area for lenders. And we envisage lenders' funding costs remaining lower for longer than many are currently expecting. Either way, the bottom line is that an easing in capacity constraints is a necessary precondition to mortgage buyers playing a fuller role in the housing recovery," Capital Economics reported.

They certainly played a role in its downfall.

Published: March 22, 2013

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