Throughout the past 7 years, even as the stock market hit new all time highs, the biggest missing link of the overhyped US recovery (starting in August 2010 with Tim Geithner's infamous NYT Op-ed), was the failure of housing to participate. Sure, Chinese oligarchs were happy to launder their illicit funds in NYC triplexes and Wall Street Private Equity firms took advantage of zero-cost Fed money to buy distressed properties in bulk and convert them to rental units, but for the average American consumer there has simply been no recovery as the "Old Normal" housing dream is now forgotten and an entire generation is forced to rent the roof over their heads.
Whether this is due to lack of demand, or far stricter mortgage supply remains a topic debate, but one thing is undisputed: after a terrible 2014, mortgage applications in early 2015 saw a modest rebound. Alas, it has since proven to be merely the latest headfake in a long series of false starts.
The evidence: earlier today the largest U.S. mortgage lender Wells Fargo reported results that beat expectations by the smallest possible increment. What caught our attention, however, was the fuel that keeps Wells Fargo's engine humming: mortgage applications. Unfortunately for the housing bulls, there was no good news here because after rushing higher in early 2015 on the latest false hope of an economic recovery or due to fears rates are rising, Wells' mortgage applications and the associated pipeline have declined ever since.
As a reminder, without a strong pipeline of mortgages entering the Wells Fargo Net Interest Income engine, the future for the one bank that is most reliant on the recovery of the US housing market, is rather bleak.
But it wasn't just Wells Fargo's slowing mortgage application pipeline. Earlier today, the Mortgage Brokers Association reported that mortgage application activity plunged over 27% in one week following a comparable 25% surge the week prior sent them to an eight-month high. The drop was the steepest percentage drop since the week of Jan. 25, 2009 when it tumbled 38.8%.
The sharp drop, however, unlike the gradual decline in Wells mortgage applications was not due to fundamentals, but as a result of a rule change on loan disclosures which slowed the processing of loan requests.
The reason for the surge, and then plunge: a rule change from the federal Consumer Financial Protection Bureau, which entails replacement of two mortgage disclosure documents with two new forms. The rule is known as the TILA-RESPA Integrated Disclosures rule also known as TRID.
As Reuters notes, "application volume plummeted last week in the wake of the implementation of the new TILA-RESPA integrated disclosures, which caused lenders to significantly revamp their business processes, and as a result dramatically slowed the pace of activity," MBA's chief economist Mike Fratantoni said in a statement.
Some more details on TILA-RESPA from MarketWatch:
The federal government requires that as of Oct. 3 loan disclosure documents must combine the information required in the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). Under the new rule change, known as the “Know Before You Owe” rule, or the TILA-RESPA Integrated Disclosure (TRID) regulation, consumers must be given the new combined Loan Estimate (LE) with all the charges, fees and line items three days before the closing, rather than at the closing on the HUD-1 form, which itself will disappear.
Closings may take a week more than usual, which could hurt home buyers who are depending on financing to come through quickly to have a chance against all-cash buyers, said Benjamin Niernberg, executive vice president of business development with Proper Title LLC, a title insurance company in Northbrook, Ill. “It can push the closing six days out, but we’re talking about business days, so if it falls on a weekend, it could be even longer,” he said.The new rules have been in the works since November 2013.
Worse, the new rule sets up a bottleneck in the process: "Joe Parsons, a senior loan officer at mortgage lender PFS Funding in Dublin, Calif., is even more pessimistic, saying TRID will likely delay closings as much as two weeks initially, and the delays will continue for the rest of the year. “It’s going to take about three months before everybody gets comfortable with this,” he said.
So call it the New Year before banks normalize the pipeline, or just around the time a foot or more of snow "crushes" the US economy once again, and resets the housing cycle to square one.
It also means that far from rising rates - a gambit which was meant to spoof potential homebuyers into rushing out to get a mortgage ahead of rising mortgage rates, a gambit which has since failed - the Fed will have to come up with a way to lower interest rates even further just in time for the US to finally decouple with the Emerging Market debt crisis and the Quantitative Tightening courtesy of the collapse in commodity prices.