India Economy

‘There is a disconnect between Wall Street and Main Street’

Lokeshwarri SK | Updated on January 20, 2018 Published on May 15, 2016

The private mortgage market is gone. But things are still good for the US consumer

Nationstar Mortgage Services is one of the largest mortgage servicers in the US with a servicing portfolio in excess of $402 billion and more than 2.5 million customers. In this exclusive interaction with BusinessLine, Jay Bray, President, Chief Executive Officer and Director of Nationstar Mortgage Services, and Sridhar Sharma, CIO, share their views on the US mortgage market and the opportunities that exist in India.

Mortgage origination in the US is coming down. If rates start moving higher there, how will it affect the market?

For 2016, it is projected that mortgage origination will come down. But it is also projected that interest rates will move up. Mortgage finance has two categories, when people buy new homes and when people refinance their existing mortgages. When interest rates go up, refinance market will move down because the only reason why people refinance their mortgages is to lower their interest rates.

In the last three to four years, the refinance market has been big, making 60 per cent of the entire market. This market will come down and the overall market will also shrink.

But if you watch the mortgage rates closely, despite the hike in the Fed funds rate, they have remained flat or have even declined slightly. So, the 2016 projection for the mortgage market can turn out to be wrong.

What is your view on consumption in the US? You think it is buoyant?

I do. Because there is a big disconnect between Wall Street and Main Street. In Wall Street, the private mortgage market is gone, some of the debt market is much smaller than it used to be. Because of regulation, some of these products have vanished. But things are still good for the US consumer — savings rates are higher, debt levels are lower, unemployment is lower. Fundamentally, consumers are in a good place. Their balance sheets are better and delinquency levels are lower.

In many of the local real estate markets, prices are back to the levels they were at before the 2008 crisis. I think it is relatively healthy. The increase in home prices is 25 per cent since 2011 — overall.

Has the mortgage-based security segment in the US vanished completely?

The large government-backed mortgage investors, Freddie Mac, Fannie Mae and Ginnie Mae are still alive. Since the crisis they have taken over the mortgage business and hold around 95 per cent of loan mortgages. The private label market has pretty much gone away. A lot of people will say that they caused the housing crisis because there were loans that should not have been made, borrowers who should not have qualified, the loans were securitised into asset-backed securities, there were lots of defaults, etc. That market has vanished since the crisis. There are pockets of little activity, but not much.

How is the Indian mortgage market different from the US?

There are two predominant differences from a model perspective. The concept of fixed rate mortgage is not popular in India; it is very much a floating rates market. The second difference is the regulatory involvement. Since the 2008 crisis, the extent of government involvement has increased manifold in the US. That degree of involvement does not seem to exist here. Having a separate servicer is also not popular in India; the banks originate the loans and service these loans themselves.

What is Nationstar going to do in India?

The product development centre in Chennai will help us develop products and tools for our customers. I believe that the mortgage market in the US is still very complicated and the customer has not really been the focus there. We’d like to change that. Make the customer experience better, more transparent, provide better service; and the Centre here will be a big part of that.

Building in technology that helps us track behaviour is a critical component. For instance, you have been making your payment on time for the last five years but you were five days late over the last three months. Last month, you came to our website and were looking at what happens if you miss a payment. That is a signal we can look into, to help a customer. The day you call to say you need help, I can solve your problem in a much more comprehensive manner.

How long does the mortgage origination process take in the US; how long does it take for the customer to get the money?

It takes an average 60 days for a customer to get his money. That is not fast. But it is not unusual because post-crisis, the banks have become very conservative, wanting to dot all the ‘i’s and cross the ‘t’s. Some new regulations have also made it more difficult to get loans.

The documents they have to provide are pay stubs, W2 (which is an year-end summary of your earnings), your tax returns if you are self-employed; there is a department that verifies the employment of the person taking the loan, in some cases they need bank statement.

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