If you bought or refinanced a home in 2021, you might look back some day and remember it as the year when mortgage rates touched record lows, and more lenders started offering innovative “power buyer” services enabling homebuyers to win bidding wars with cash offers.
But as the Fed tapered its support for mortgage markets and the refinancing business withered, the challenge for lenders was how to cut costs, streamline processes, and reach enough homebuyers in order to make the big pivot to originating less profitable purchase loans.
Even as competition drove lenders to experiment with new business models, there were regulatory issues brewing in Washington, D.C., where ambitious plans were hatching to make housing finance more equitable and less vulnerable to the risks posed by climate change.
An army of innovative companies mobilized to help lenders harness technology and AI to cut costs and streamline their business processes in the cloud.
Innovation fueled by venture funding drove IPOs and SPAC mergers, while the drive for economies of scale and vertical integration in lending and title insurance spurred a wave of mergers and acquisitions that looks likely to continue into 2022.
To help you get your bearings before stepping into that future, here’s a recap of the biggest stories of 2021 in housing finance.
Having spent much of the year downplaying the risks of inflation but telegraphing its intention to begin gradually withdrawing the support it had provided to mortgage markets during the pandemic, the Federal Reserve finally announced that tapering would begin in November.
As an emergency measure initiated at the outset of the pandemic, the Fed started buying $80 billion in Treasurys and $40 billion in mortgages every month. The Fed’s $120 billion in monthly asset purchases helped push mortgage rates to record lows.
But as concerns about inflation heated up, the Fed started what was expected to be a gradual tapering, reducing its purchases by $15 billion a month. On the original timetable the Fed was to start tapering in November and be done by June.
Critics worried that the Fed was acting too slowly, with Louisiana Republican Sen. John N. Kennedy, admonishing Fed Chairman Jerome Powell at a hearing in November when he said, “it’s fair to say that the experts who have been advising you about the future rate of inflation have pretty much the same credibility as those late night psychic hotlines you see on TV.”
As inflation numbers continued to come in hotter than many expected, the Fed switched gears in December at its final meeting of the year, when policymakers decided to double the pace of tapering to $30 billion a month. The new, accelerated timetable put the Fed on schedule to end its asset-building purchases in March. While the Fed can change its mind if the Omicron variant slows the economy down, forecasters expect mortgage rates to rise in 2022.
Even before the Fed began tapering, the writing was on the wall that the mortgage refinancing boom was fading, and that lenders would have to start doing more business with homebuyers.
Lenders that had lured homeowners to their websites with promises that they could refinance at lower rates with a few mouse clicks looked to build ties with real estate agents, builders, banks, and mortgage brokers — anyone who could put them in touch with homebuyers.
LoanDepot, for example, launched new joint ventures with homebuilders and Farm Bureau Bank. Rocket Mortgage built ties not only to real estate agents, but independent mortgage brokers with deep roots in their local markets. Rocket also offered its mortgage origination technology to banks and credit unions, and targeted homebuyers more aggressively in marketing campaigns designed to bring consumers directly to its website.
The nation’s biggest wholesale mortgage lender, United Wholesale Mortgage, focused on providing better technology and services to the mortgage brokers it works with.
“As the mortgage market shifts from heavy refinance to more purchase, UWM and the wholesale channel are uniquely positioned to best serve the needs of the American consumer as a team,” UWM CEO Mat Ishbia said in announcing record third-quarter purchase loan volume. “Brokers, by nature, are embedded in their local housing markets and UWM provides them elite technology, speed and service, especially on purchase loans.”
But even when lenders succeeded in boosting their purchase loan volume, many saw profits sag as their more profitable refinancing originations dwindled. If that trend continues, layoffs could follow.
At the end of the year, Better Mortgage parent company Better HoldCo Inc. laid off 9 percent of its workforce, or roughly 900 employees in the U.S. and India, to adapt to “a radically evolving homeownership market.” Better CEO Vishal Garg took a leave of absence after his Zoom video presentation to workers who were being laid off went viral.
With Joe Biden defeating Donald Trump in the 2020 presidential election, there was little doubt that there would be big changes in the regulatory landscape. Although many Republicans would like to continue the Trump administration’s push to reprivatize mortgage giants Fannie Mae and Freddie Mac, the Biden administration has enlisted them in a campaign to help more low-income Americans become homebuyers, and to address racial or ethnic homeownership gaps over the next three years.
A June Supreme Court ruling helped the Biden administration’s cause, expanding the president’s power to remove the head of Fannie and Freddie’s regulator, the Federal Housing Finance Agency, without cause. Biden promptly appointed Sandra Thompson, a veteran regulator with a long track record, as FHFA’s acting director, before nominating her for a full five-year term in December.
Under Thompson’s leadership, the FHFA in September reversed controversial limits the Trump administration had imposed on Fannie and Freddie’s purchases of mortgages with “multiple higher risk characteristics,” as well as loans secured by second homes and investment properties.
Some conservatives, like Peter J. Wallison, a senior fellow emeritus at the conservative-leaning American Enterprise Institute, are alarmed at Fannie and Freddie’s new marching orders.
“The only difference between what the administration is proposing, and what brought about the 2008 financial crisis is that the economy is already in an inflationary period, induced by the administration’s other policies,” Wallison wrote in an op-ed.
With Fannie and Freddie’s baseline conforming loan limits going up by 18 percent next year, to $647,200 in most areas of the country, it will be interesting to see how the mortgage giants also pursue their mission of supporting housing affordability in 2022. In about 100 counties where home prices are particularly elevated, the conforming loan limit will be close to $1 million.
Fannie and Freddie — and the mortgage industry as a whole — are also likely to be under pressure to make housing finance more equitable, and less vulnerable to the risks posed by climate change.
The Markup, a nonprofit newsroom that’s “watching big tech,” published an analysis of 2019 loan data that found Black applicants were 80 percent more likely to be denied conventional mortgages eligible for backing by Fannie Mae and Freddie Mac compared to similarly qualified white applicants.
That analysis suggested credit scores and algorithms used by Fannie Mae and Freddie Mac could be to blame. The Department of Housing and Urban Development began revising rules addressing “disparate impact” — discriminatory practices that are unintentional, but nevertheless unjustified — which could pose challenges for lenders that employ artificial intelligence and algorithms to evaluate borrowers.
Researchers at Freddie Mac also confirmed the existence of an “appraisal gap” for homeowners in predominantly Latino and Black neighborhoods, with appraisals more likely to come in below the contract price than in majority white census tracts.
A report funded by the Mortgage Bankers Association warned that the housing industry will not be spared by climate change, with increasingly devastating storms, excessive heat and wildfires, and drought likely to stretch the National Flood Insurance Program to the breaking point, undermine home prices in vulnerable communities, and drive more homeowners to default on their mortgages.
The Department of Housing and Urban Development in September published a climate adaptation and resilience plan, which outlines objectives that include reducing climate-related financial risks to FHA and VA mortgage programs.
With the FHA having rebuilt its capital reserves from the 2007-09 housing crash and recession, some housing industry groups pushed for a reduction in FHA mortgage insurance premiums to help make homes more affordable.
With listings in short supply and multiple bids on many properties, homebuyers depending on traditional financing in 2021 could find themselves losing out in bidding wars to investors making cash offers.
A new breed of lenders like Better, Knock, Orchard, UpEquity and Flyhomes gained traction by turning homebuyers into “power buyers” — allowing them to make cash or non-contingent offers, or use the equity in their existing home to “buy before you sell.”
Often, power buyers are vertically integrated, providing end-to-end services like real estate brokerage, title, and closing as loss leaders, while still making a profit originating mortgages. Better HoldCo Inc.’s best-known subsidiary is probably Better Mortgage Corp., for example, but the Better family of companies also includes Better’s real estate brokerage subsidiary, Better Real Estate LLC, and Better Settlement Services.
As established power buyers enter new markets and new companies arrive on the scene, it’s looking like power buying is here to stay. But it may only be a matter of time before traditional lenders join the party. Evergreen Home Loans, a regional independent mortgage bank that’s licensed in 10 western states, has launched a cash offer program, buying homes on behalf of clients and providing permanent financing when it transfers ownership to them.
If providing power buying services and partnering with real estate agents, mortgage brokers and builders are critical to bringing homebuyers in the door, another crucial aspect to making the pivot to purchase loans is utilizing technology to provide better service and cut costs.
A staggering number of tech companies are vying to provide lenders with tools to improve their business processes, from document processing and underwriting to closing.
Since these services are often provided in the cloud, Amazon Web Services (AWS), Google Cloud, and Microsoft Azure have developed proprietary AI and machine learning capabilities that can be customized for lenders.
Mortgage lenders weren’t alone in harnessing the power of the cloud. Title insurer Doma offered “instant underwriting” of title insurance for mortgage refinancing, and streamlined remote and digital closing and escrow services for all types of mortgages.
First American boasted that its automated title decision engine was also making same-day title decisions on eligible mortgage refinancings and home equity loans.
Fidelity National Financial said consumer adoption of its growing suite of end-to-end digital transaction tools was helping the company gain market share.
The rapidly evolving mortgage landscape saw venture capital flowing into the space, with companies that were able to scale up moving on to initial public offerings (IPOs), in some cases through mergers with special purpose acquisition companies (SPACs).
First American Financial Corp., the nation’s second-largest title insurer, doubled down on its digital title and settlement services subsidiary, Endpoint, providing another $150 million in funding to help the company bring its efficient closing process to more markets. First American, it emerged, has invested in 16 venture-funded companies valued at $669 million after gains on Offerpad, Orchard, Sundae and Pacaso.
While there were bumps in the road for some companies going public, they weren’t severe enough to throw the IPO train off the tracks.
After closing a $422 million deal to acquire title insurance and settlement services provider Title365 in June, cloud banking software developer Blend Labs Inc. went public in July, but then posted a $77 million third quarter loss as $54 million in stock-based compensation vested.
Genworth Financial spun off its mortgage insurance subsidiary, Enact, in a September IPO that valued the company at more than $3 billion.
Digital title insurance and closing provider Doma raised less than anticipated in a July SPAC merger, paying out $295 million to early investors who redeemed their shares before the merger was consummated.
Vertically integrated mortgage, real estate brokerage and title insurance provider Better revised the terms of its SPAC merger with Aurora Acquisition Corp. at the last minute, eliminating a $278 million backstop to cover early redemptions by public shareholders in Aurora. Better also laid off roughly 900 employees, and said the SPAC merger terms would have to be resubmitted to regulators.
UWM Holdings Corp., the parent company of United Wholesale Mortgage, saw its share price go on a rollercoaster ride after announcing a planned secondary offering of 50 million shares in November. Shares in UWM, which went public in 2020, recovered after CEO Mat Ishbia put the offering on hold.
The year ended on an optimistic note, with Ellie Mae veterans Sig Anderman, Jeb Spencer, and Cathleen Schreiner Gates forming a SPAC, Southport Acquisition Corp., to acquire mortgage and real estate startups valued at between $1 billion and $2 billion.
The quest for the economies of scale and vertical integration drove a wave of mergers and acquisitions in the mortgage lending and title insurance business in 2021.
The $2.6 billion merger in April of top 20 mortgage lender Flagstar Bancorp Inc. with New York Community Bancorp Inc., the nation’s largest thrift, was an example of “like-minded partners” combining to form a bigger company with a broader geographic reach.
Similarly, Guild Mortgage’s $197 million deal to acquire South Portland, Maine-based Residential Mortgage Services in May gave the company a foothold in the Northeast.
Ocwen Financial Corp., a nonbank lender and loan servicer, acquired the correspondent lending business of Texas Capital Bank in a bid to beef up the correspondent channel at Ocwen subsidiary PHH Mortgage.
While midsize lenders were looking to get bigger, so were the companies that provide services to them.
Software, data and analytics provider Black Knight paid $254.1 million for Top of Mind Networks, and $52.7 million for other acquisitions including NexSpring and eMBS.
After buying software developer LBA Ware in October, mortgage tech provider SimpleNexus was itself an acquisition target, reaching a deal with cloud banking solutions developer nCino Inc. to be acquired for $1.2 billion.
In a buying spree spanning 12 months, Frisco, Texas-based mortgage tech provider Evolve gained the ability to provide end-to-end loan services by acquiring three companies: appraisal platform from Veptas Technology Solutions Inc., online document notarization provider E-Notary Seal LLC, and regulatory compliance provider Brooks Systems LLC.
Rocket Cos., known for developing its tech in-house, nevertheless saw an opportunity to acquire a steady stream of homebuyer leads by acquiring personal finance app Truebill in a $1.27 billion deal announced at the end of the year.