US HOUSING FINANCE MARKET
Buying a home is an expensive endeavor, and a large majority of households and businesses do not have sufficient savings to independently fund such a substantial lump-sum purchase. This is where the housing finance market comes in.
The most common way of funding a home purchase in the US is a mortgage, which is a loan offered by commercial banks that covers most of, if not all of the purchase price.
Term periods for mortgages usually range between 15 to 30 years. Over that term, the buyer pays a monthly mortgage payment, which includes part of the principal amount and an added interest element.
Like most loans, a mortgage also requires collateral against which the loan is issued. In most cases the real estate property being purchased acts as the collateral, and the issuing bank is said to have “lien” over the property. This means the bank has legal possession of the property until the complete debt owed by the buyer is repaid with interest. If the homeowner misses their monthly mortgage payments, the bank then has the right to ‘foreclose’ the property and repossess the property to a new buyer.
In some cases, a customer may also be obligated to purchase mortgage insurance, which insures the lender or other beneficiaries in the event of delinquencies or problems with the property title.
There are two types of mortgage that are most popular: fixed-rate mortgage and adjustable-rate mortgage.
A fixed-rate mortgage carries a pre-determined interest rate throughout the entire life of the loan. So monthly mortgage payments remain constant, irrespective of changes in market interest rate. By contrast, an adjustable-rate mortgage sees changes in its interest element according to market interest rate fluctuations.
The mortgage is the fundamental block in the housing finance market. The fundamental entities involved are the lender and the buyer. However, the entire system itself is much more complex with several more players involved in different capacities, at different stages of a mortgage’s life.
PRIMARY MARKET VERSUS SECONDARY MARKET
Similar to stocks, where the primary market involves an IPO issued by the company to a few institutional investors, and the secondary market is made up of investors trading the stocks as securities, mortgages in the US have also been securitized giving rise to a secondary market.
The primary market involves the loan originator (lender) issuing the mortgage to a home buyer. Lenders are commonly regional or national banks. These banks then sell mortgages to government-backed investors and investment banks to monetize the mortgages, which help them issue more mortgages to customers at reasonable rates. This creates a secondary securities market for mortgages.
The most common way mortgages are securitized in the US is called Mortgage-backed Security (MBS). Essentially, a government-sponsored enterprise acquires several mortgages and pools them together to create an MBS. The MBS is then sold to investment banks, that may further sell smaller pieces of the MBS to individual investors in the form of ‘tranches’.
Owners of these tranches then have a right to receive their share of all future payments made towards those pooled mortgages. MBS is considered less risky compared to holding a whole mortgage loan because pooling different mortgages reduces the potential risk of all homeowners defaulting, and MBSs are guaranteed by the government in the event of default.
PLAYERS IN THE PRIMARY MARKET
Apart from the buyer, the primary market has three other types of players: mortgage originators, mortgage brokers and mortgage servicers. Mortgage originator is the bank/financial institution that issues the mortgage. Here are some examples of common loan originators:
2) Credit unions such as Alliant, Star Credit Union, VyStar Credit Union
3) Regional Banks such as OneWest Bank (California), Texas Capital Bank
Mortgage brokers are not lenders, but middlemen that negotiate between a buyer and a lender. They often work with well-established private banks and credit unions. Brokers take a small percentage of the loan issue as a commission for their services.
Mortgage servicers are intermediaries between the lender and homeowner that serve the function of processing the monthly mortgage payments from the customer on behalf of the lending institution. They take a small fee out of each transaction for their services.
PLAYERS IN THE SECONDARY MARKET
Mortgages that originate in the primary market are bought and pooled to create a mortgage-backed security (MBS). This pooling is carried out by three government-sponsored enterprises (GSEs):
- Federal National Mortgage Association (informally Fannie Mae)
- Federal Home Loan Mortgage Corporation (informally Freddie Mac)
- Government National Mortgage Association (informally Ginnie Mae)
Freddie Mac and Fannie Mae are government-sponsored private companies that purchase mortgages, pool them into mortgage-backed securities and then sell those MBS’s to outside investors (could be investment banks, institutional investors or individuals)
Ginnie Mae on the other hand is a government corporation that focuses on pooling mortgages that may have originated through government programs such as Rural Housing Service (RHS), Federal Housing Association (FHA) and Department of Veteran Affairs.
After GSE’s, the other biggest player in the secondary market are investment banks. They buy the MBS as securities from entities like Freddie Mac and Ginnie Mae. Since these MBS’s have a government guarantee, they further sell this as a security to their own customers in smaller pieces.
Some of the biggest investment banks in the US include:
- JP Morgan Chase
- Goldman Sachs
- Morgan Stanley
Customers of investment banks can buy smaller pieces of an MBS, and they are promised their share of all future revenue streams going towards the mortgages. GSE’s and investment banks also get a cut of the revenues.
SALIENT FACTS ABOUT THE US MORTGAGE MARKET AS OF 2020
- Size of US mortgage market (measured by outstanding mortgages) is $11.05 Trillion
- Largest mortgage originators are Wells Fargo and Quicken Loans Inc (as of late 2018)
- In 2019, Bank of America and US Bancorp gained the highest market share as a result of their new digital offerings
- Mortgage interest rates are trending ~ 3.7% for 2020
EMERGING TRENDS IN US HOUSING FINANCE MARKET-2020
- Quicken Loans Inc, the largest US mortgage lender, is said to be planning a multi-billion dollar IPO sometime in 2020. It would be the largest IPO this year
- Bankers are expecting 6.24 million home sales in 2020
- US financial regulators have warned the government about the risk of emerging “shadow banks” in the mortgage market. Shadow banks refer to non-bank entities that act as mortgage lenders who have weak financial stability. This is expected to be a serious threat in the wake of the economic destruction brought about by the coronavirus pandemic.
|2||Scope of the report|
|7||Insights from Industry stakeholders|
|8||Cost breakdown of Product by sub-components and average profit margin|
|9||Disruptive innovation in the Industry|
|10||Technology trends in the Industry|
|11||Consumer trends in the industry|
|12||Recent Production Milestones|
|13||Component Manufacturing in US, EU and China|
|14||COVID-19 impact on overall market|
|15||COVID-19 impact on Production of components|
|16||COVID-19 impact on Point of sale|
|17||Market Segmentation, Dynamics and Forecast by Geography, 2020-2025|
|18||Market Segmentation, Dynamics and Forecast by Product Type, 2020-2025|
|19||Market Segmentation, Dynamics and Forecast by Application, 2020-2025|
|20||Market Segmentation, Dynamics and Forecast by End use, 2020-2025|
|21||Product installation rate by OEM, 2020|
|22||Incline/Decline in Average B-2-B selling price in past 5 years|
|23||Competition from substitute products|
|24||Gross margin and average profitability of suppliers|
|25||New product development in past 12 months|
|26||M&A in past 12 months|
|27||Growth strategy of leading players|
|28||Market share of vendors, 2020|
|30||Unmet needs and opportunity for new suppliers|