Mortgage Biz Growing Like a Weed

By rchrisman@robchrisman.com

From Michigan Kevin C. writes, "Hi Rob - I'm sure you saw the stock market news yesterday. The WSJ reports that this is the first time the three major indexes on the U.S. investment markets all closed at record highs on the same day since DECEMBER 31, 1999.

Do you realize what this means?

In the immortal words of Prince:

'Today the markets parlayed like its 1999.'"

 

Loan officers are very interested in guidance on things like Disparate Treatment and Disparate Impact. What would happen if an originator offered a discounted commission structure to one person and not another - is that a violation? What if real estate agents did that? If a lender can't do that but a real estate can do it, is that a "double standard?" Are consumers impacted?

I am not a sales coach, but I hear from plenty of LOs who seem to be looking for a little extra "oomph." A book recently crossed my desk titled, "Reset" that they might be interested in which is for sale on Amazon. Written by a "real-live" licensed originator who has moved into management at his company, Michael Jones with Georgetown Mortgage penned an easy read dealing with some simple ways to increase motivation and production. Check it out.

This November Californians will vote on Proposition 64, basically legalizing marijuana use. (California already allows medical marijuana.) Will other states be "under the influence" of California? It is worth thinking about since California has the largest mortgage market, and at nearly 40 million people has over 10% of the nation's population.

 Although marijuana is legal with several states at the state level, it is not legal at the Federal level. Which of course leads to the issue that any bank, or government agency like Freddie, Fannie, or Ginnie, not being able to accept marijuana-related income on loans in their programs. But what about banking the marijuana industry. Same thing - many banks that report up to federal regulators can't accept that income, and won't handle those deposits. But banking marijuana businesses is not illegal. It's a permissible activity but banks need to be very thorough in their review of all the risks involved. A recent American Banker article noted that there are 301 banks providing banking services to marijuana-related businesses.

 What about someone who owns a rental house, and the tenant's income comes from a marijuana-related business? What about problems caused by marijuana cultivation in and around residences? The Institute of Real Estate Management (IREM) issued a white paper that warned of problems. "The growing of marijuana requires significant amounts of water, heat, and humidity," the IREM white paper stated. "These conditions can create mold issues in properties. These requirements can also increase utility costs for the landlord, and if tenants don't pay individual electric and water bills. Further, the property could be subject to civil asset forfeiture if you permit growing."

 California law on medical marijuana starts with a determination of whether a person qualifies as a "Qualified Patient" under Prop 215. As long as the person is in compliance with the provisions of this law, they have limited immunity from criminal prosecution (at the State level). Subsequent related laws extended this limited immunity to Collectives and incorporated entities that cultivate and/or distribute medical marijuana.

 But a landlord is not required to rent to a person that is a Qualified Patient under Prop 215. Nothing in California can compel a landlord to rent their property for a use which includes the use, growing, cultivation, or distribution of medical marijuana. Legally any marijuana use is illegal under Federal law and no property owner can be compelled to allow an illegal action on their property.

 What about smoking medical marijuana? The Federal Government says "no" but plenty of states are okay with it. California, for example, considers the denial of a request to smoke medical marijuana a fair housing violation under state law. But what if the housing complex has its loan with Fannie Mae, or receives subsidies from the Federal Government? Things can become complicated, and conflicting in a hurry. The Agencies and investors' contractual agreements with lenders place the burden on the lender to assure that they are conforming to existing rules, regulations, and laws.

 Sacramento law firm BPE did a fine three-part write-up on marijuana and current laws in California - a must read for owners of property, especially non-owner occupied properties in that state. (Thanks to Scott S. for passing this along.)

 The Colorado Association of Realtors wrote a blog posting entitled "Recreational Sales and Property Values," which assured its membership that home values would not suffer due to the changes in law. "For homeowners or buyers concerned about the possibility of a marijuana business springing up next door, the impact may not be as prevalent as some expect...Although state law allows pot shops to exist, amendment 64 gives local governments the authority to regulate commercial activities associated with the recreational use of marijuana. The majority of counties in Colorado have either already passed bans on recreational marijuana retailers or have delayed making a decision and placed a moratorium on pot business..."

 An article written by Phil Hall notes, "'Private institutional lenders have overwhelmingly refused to do business with legal marijuana sellers,' observed Les R. Kramsky of the Marlboro, N.J.-based Law Offices of Les R. Kramsky LLC. 'These businesses are finding it difficult to obtain credit lines, loans or even bank accounts. While marijuana has been legalized in some states, the Controlled Substances Act of 1970 still has cannabis listed as a Schedule I narcotic, meaning its classified as most harmful with no medical use. And therein lies the problem: Marijuana's drug classification has banks nervous about working with legal business owners and the lenders are fearing a backlash like massive fines and perceived instances of money laundering from federal regulators and law enforcement if they conducted business with legalized marijuana sellers.'"

 In terms of criminal justice, the Democratic platform calls for reforms allowing legal marijuana companies to operate which appears supportive of efforts to increase industry banking services.

 Are credit unions growing like a...weed? Yes: TransUnion research has found that credit unions continue to grow at a faster rate than other financial institutions, and millennials are both a key driver and target market for sustained loan growth. TransUnion found that in the first quarter of 2016, credit union membership grew at more than three times the rate of credit activity among consumers across other lender types, such as regional banks or finance companies.

 According to TransUnion data, 25% of credit union members in Q1 2016 were millennials. In Q1 2013, millennials made up only 20% of credit union membership. Millennial growth for non-credit unions grew at a slower pace, up to 25% in Q1 2016 from 23% in the first quarter of 2013. This is indicative of credit unions' strategic focus on millennial growth.

 Credit unions are actively building their millennial membership, and have experienced growth in this segment every quarter since 2010. Millennials are likely candidates for new mortgages and other credit products as they age, offering credit unions a way to further their market share.

 Credit union memberships via mortgage origination have increased in recent years. In Q1 2016, credit unions had 3.8 million mortgage members, an increase of 4% from 3.67 million in Q1 2015. Compared to five years ago, credit union mortgage memberships have grown 13% from 3.29 million in the first quarter of 2011. Credit union executives are strategically focused on gaining membership growth through mortgage originations, as well as offering products such as credit cards to their existing member base.

 A spike in first mortgages, along with increases in new and used auto loans, helped to push credit union loan balances up to a record high in the second quarter, according to Q2 data from Callahan & Associates from 5,959 credit unions. Mortgages and car loans accounted for 82% of loan growth at credit unions last year - which continued into this year. In Q2 2016, a 10.7 percent over-the-year increase resulted in credit union loan balances topping $834.3 billion and surpassing the 1^st quarter's $809 billion. In Q2, first mortgages accounted for 38% of total loan growth at credit unions after a spike of 10% over-the-year. The substantial increase resulted in an aggregate loan balance of more than $340.7 billion in first mortgage loans for credit unions, the highest balance ever reported for any one quarter.

 Rates: up some, down some. Yes, there's been some intra-day volatility but end-of-day numbers show how flat things have been. Let's use the yield on the 10-year as a proxy for the general interest rate environment. These are the closing yields over the last week: 1.58% (Friday), 1.59% (Monday), 1.55% (Tuesday), 1.51% (Wednesday), and 1.57% (Thursday). Just as there wasn't much behind the gradual move down earlier in the week, there wasn't much news driving the move higher yesterday - so I won't waste your time trying to rationalize it.

 But during yesterday's sell-off agency MBS prices were champs. The 10-year worsened .625, the 5-year price was down .375, and mortgages, which usually follow the 5-year, were "only" worse about .250. Hey, we'll take what we can, right? And if you're thinking about what the Fed might do for the rest of the year, even though we're not even halfway done with August, the Fed rate hike odds are currently at 18% for September and 45% for December.

 This morning we've already had the Producer Price Index and Retail Sales, both for July: -.4%, core -.3%, and unchanged - both dramatically weaker than expected. And that about does it for market-moving numbers although later are Business Inventories for June, and preliminary August Consumer Sentiment. What is probably more important is what the Federal Reserve thinks about U.S. economic growth, and both the Federal Reserve Banks of New York and Atlanta release their respective GDP updates on Q3 in the late morning.

 As mentioned above the 10-year closed Thursday yielding 1.57%. After the covey of numbers this morning it is down to 1.50% with agency MBS prices better .250.