NPLA Meeting Recap: For Sale Market Update

Recap and Insights provided by Zach Wallin, Senior Director of Legal Operations at GoDocs

Over the past few years, we have seen a large upward swing in mortgage rates, higher-than-expected inflation, low inventory in most of America’s top markets, and delays of anticipated rate cuts by the Federal Reserve. Despite all this, there were reports of a strong for-sale housing market at the most recent NPLA meeting, especially with new home builders.

Danielle Nguyen from John Burns Research and Consulting gave a very thorough presentation of the current housing market data and trends. She shared that from an economic perspective, we are seeing an uncertain path to future rate cuts by the Federal Reserve and that rate cuts in 2024 appear less likely to happen. In the housing market, with rates at or above 7%, new home builders rely on builder incentives in the form of rate buydowns to maintain sale consistency and strong profit margins. On the resale side of the housing market, these high interest rates are having a stalling effect on market recovery.

One of the main takeaways from this presentation was that 2024 looks to be a very promising year for homebuilders despite the high mortgage rates. Many builders enjoy operating in this environment where they have: a competitive advantage with less competition from resale homes, enough supply, the ability to incentivize buyers with rate buydowns, and where there are a lot of equity-rich homeowners willing to pass on their generational wealth to younger home buyers. As a result of these advantages, builder gross profit margins nationwide are close to 25%, and new home prices are appreciating at about 4% year over year.

The Haves vs. The Have-Nots

During the meeting, Danielle Nguyen explained that, according to recent research statistics, there is a widening gap in America between the haves and the have-nots. This is, in large part, a result of home ownership. According to the data, two-thirds of Americans own their home. This homeownership has led to a major surge in net worth and disposable income for these individuals compared to non-homeowners. Home builders are seeing these homeowners transfer this generational wealth to younger family members so they can also enjoy home ownership.

Home Builders Taking Advantage

Adam Chaudhary, President at FundingShield, delved deeper into the intricacies of managing risk in the lending industry, particularly in the context of wire and title fraud. Chaudhary highlighted the increasing prevalence of cyber fraud schemes and the challenges posed by disparate parties involved in real estate transactions.

Historically, low resale inventory has resulted in less competition for builders. Homeowners do not want to trade in their sub 3% mortgage rate for a rate over 7%, which means there is less resale inventory for home builders to compete with. As a result, builders are drawing buyers to new home markets by adding communities and providing buyers with incentives like buying down their interest rates and move-in-ready inventory.

In a survey conducted by John Burns Research and Consulting of ninety-two homebuilders, it was discovered that:

1. Incentives and quick move-in homes support steady sales rates.

2. There has been lower traffic volume compared to seasonal norms. The quality of the traffic, paired with incentives and quick move-in-ready homes, is supporting sales. Some builders are seeing more qualification challenges.

3. Sales volume relies on incentives or price reductions, particularly for entry buyers. Rate buydowns and other incentives are notably higher in the Florida, Texas, and Southwest markets.

4. Hazard Insurance concerns are acute in California and Florida. 31% of Southeast builders reported issues with hazard insurance, concentrated in Charlotte and Nashville. Where this is an issue, most builders contribute to HOA fees or buyers’ insurance premiums, as well as shifting density/product mix.

It was reported that builders anticipate we will continue to see these buyer incentives in the near term due to 7%+ mortgage rates. Rate buydowns of 1 to 1.5 points below the market rate are expected to continue. Builders also state they will add more buyer incentives to keep sales consistent. If rates increase, we can expect buyer incentives to increase as well, to keep pace. This way, builders will maintain their competitive edge over the resale market. Homebuilders are monitoring market trends, prices, and the use of incentives so they can increase prices and cut back on incentives if they can do so while maintaining sale consistency.

At the nationwide level, public builders are poised to grow their market share. These public builders have growing community counts, lower cost of debt, and access to capital to buy more land. The size and scale of these public builders continue to grow, with DR Horton at 13% market share and Lennar at 10% market share.

Delinquency and Foreclosure Member Discussion

The second portion of the meeting was dedicated to a panel discussion on delinquency and foreclosure trends in the marketplace. Mike Ramin from Sharestates, Ruben Izgelov from We Lend, Eric Abramovich from ROC Capital, and Josh Woodward from Lima One Capital participated. The following is a summary of the discussion:

Inflows from borrowers: Are you seeing them disrupted at all, and is it more difficult for them to make their monthly interest payments?

Sharestates: For DSCR, you are not seeing those types of issues, and with the use of AI, they can now verify that the bank statements are legitimate. With underwriting restrictions as high as they are, you are seeing fewer issues with DSCR and more with 1-4 families.

Lima One: They are seeing a slowdown in the completion of products and days to sell. It takes around 30-60 days, so it stretches out the builders and flippers. They are seeing more stress with operators who have flipped five or less houses. The ones doing well are those staying steady with their historic levels. Overall, it is 10-20% harder on the collection front than what they have experienced in the past. They are checking personal bank statement validity to avoid fraud and thinking long and hard about increasing liquidity requirements.

Roc Capital: No one has pristine delinquencies. At best, it is in the mid-single digits, and at worst it is in the mid-teens. Delinquencies have ticked up for everyone, and we are all trying to figure out how to deal with them. But there have been practically no principal losses in their 1-4 single-family products. Any losses have been made up with late fees, default fees, etc. In multifamily, you see very sophisticated borrowers working with appraisers and title companies, and they wonder if their systems are good enough to protect them from these relationships. Roc has decided to pause originations in multifamily. Multifamily is more prone to value inflation than 1-4 single-family units are.

We Lend: They are mostly on the 1-4 unit bridge financing. As a result, they are seeing payments being made on time, and they call on those rare payment defaults. They have the occasional payment bounce, but once a call is made, it is usually rectified in a week.

For that service directly, with your philosophy on late payments and delinquencies, how quickly do you turn it over to loss mitigation and foreclosure, or are you more inclined to amend and extend it to give more time? 

Lima One: 60 days (about 2 months) after they miss the second payment, they refer them to foreclosure, and they get a notice of default. No one wants to sign an extension unless needed. Once they start getting close to maturity default, they will default the loan for maturity if it is not cured through signing an extension.

Roc Capital: Their philosophy is always use maximum pressure, but you have to be reasonable on the extension side based on the project status. If it’s moving in the wrong direction, max pressure. The amount of skin in the game will determine how quickly they pay. Reporting to credit agencies is a useful tool as well.

Sharestates: They look at where the project is and whether it makes sense to give the extension. They don’t want to put good money after bad money. They look at extensions three months before maturity. Sixty days in will be referred to foreclosure. If an autopay doesn’t hit, they call the borrower and discuss default fees, late fees, etc., and help them see it’s not a good road to go down.

This panel discussion highlighted more delinquency and nervousness in the market with multifamily loans vs. 1-4 single-family fix and flip loans. That said, delinquencies have increased slightly for everyone. It is being handled by first making a call to the borrower to see if there was a payment mistake or banking error and then helping the borrower understand that the foreclosure road is not one they want to head down. If extensions are not signed, lenders are using maximum pressure to force either payment or the signing of the extension.  

Author Bio:

GoDocs is an innovative leader in automated loan document generation, transforming the commercial lending process. With a fully cloud-based platform, GoDocs provides a flexible digital solution that makes commercial loans more cost-effective to document and faster to close, all while maintaining compliance in all 50 states. GoDocs is a Corporate Member of the NPLA.

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