 DALLAS--Mortgage Bankers Association Chief Economist Jay Brinkmann said the U.S. economy continues to improve, albeit not at a rate to make anyone happy.
“Our projection is that, all things being equal, we’ll see some degree of economic growth, no downturn, no double-dip, no recession, with steady growth building,” Brinkmann said here yesterday at the MBA National Mortgage Servicing Conference & Expo. “Consumers are spending money--that is what drives the economy. Additionally, business spending is picking up, thanks to stable tax rates, inventories higher profits and increased profitability. We’re also seeing modest increases in construction spending even as we see excess of office space and housing.”
Threats to economic growth continue, Brinkmann said, not the least in higher energy prices due in part to continued turmoil in Middle East countries. However, he said the energy price spike is likely temporary and will stabilize as protests in these countries ease and changes in government take place.
“We have to acknowledge that what is happening in Europe, Egypt and other Middle East countries are going to pose risks that could hurt imports and exports,” Brinkmann said.
Back in the U.S., other factors that could impact recovery include state economies, which face huge deficits and pressure to balance budgets. “The elections brought into power a lot of governors who have said they are going to cut spending, but many will have to raise taxes, which in turn will limit growth,” Brinkmann said.
Interest rates did not go where they were generally predicted last year, Brinkmann noted; rates dropped well below 5 percent before moving back above 5 percent at the beginning of the year. He predicted an increase in mortgage interest rates, although he said he did not expect the Federal Open Market Committee to raise the federal funds rate above the current 0-0.25 percent floor this year.
“We have an expected scenario, in which borrowing demands in Europe drive up rates in the U.S.,” Brinkmann said. “Inflation fears, stoked by energy costs, could drive that increase. The other scenario could result in a repeat of flight to quality, which could lower interest rates. If continued turmoil in Europe, the Middle East, even North Korea, it could trigger the same flight to quality that we saw last year.”
In the U.S., jobs and unemployment continues to be the primary factor in U.S. economic recovery and the speed in which it recovers. Brinkmann noted that job numbers are improving, “though not at the pace we’d like to see.” During the recent recession, many jobs were lost in manufacturing and construction; he said, while some manufacturing jobs have returned, construction job recovery has yet to happen.
“Where we see recovery is in business and professional services, leisure and hospitality,” Brinkmann said. “For other professional services, such as information provision and financial services, growth has been less so.”
Jobs will also dictate housing recovery, Brinkmann said, noting that the recent recession caused a sharp drop in household formation and an increase in rentals. The homeownership rate fell by nearly three percentage points since 2007. “We’re starting to see some more household formation, but it’s still going to take a while to sponge up the excess housing inventory,” Brinkmann said. He said while new home inventories have dropped--mostly because home builders have dramatically cut back on construction--the “shadow” inventory of homes remain high. Florida, for example, has 24 percent of its homes in the foreclosure process.
Part of the problem, Brinkmann said, is “sand in the gears,” such as roadblocks set up by states such as Florida in which foreclosures go through the judicial process, and changes in policy for repurchase demands by the government-sponsored enterprises, including extensive documentation requirements, increased appraisal requirements and multiple fraud check requirements that have “dramatically slowed up loan closings, increased costs and reduced the willingness of lenders to assume any risk.”
Additionally, the Dodd-Frank Act’s new risk retention requirements, which require originators to retain 5 percent of the risk of mortgages that are not considered to be “qualified residential mortgages,” will likely lead to fewer borrowers being able to qualify. “It will also lead to higher costs that could leave lenders vulnerable to lawsuits alleging racial and geographical discrimination,” Brinkmann said.
From a servicing standpoint, Brinkmann noted that most servicing costs are not a function of loan size, but revenue is. He said over the past 10 years, direct costs to largest servicers have dropped, but so has servicer productivity as more employees have taken on loan modification and other loss mitigation functions.
“When you end up having to play one-on-one with borrowers, there’s not a lot of efficiency gained from that process,” Brinkmann said.
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