The mortgage industry might be ill-equipped to finance the number of new homes the marketplace actually requires

According to the U.S. Census Bureau, sales of new single‐family homes in December 2021 - i.e.: new construction - reached an adjusted annual rate of 811,000 homes.? According to the National Association of Realtors, in 2021, sales of existing homes totaled 6.12 million. So, sales of new residential homes - i.e.: new construction - in 2021, made up a total of only 8.5% of the overall U.S. residential sales market, as per total sales of single-family homes - new construction, and resales.

Arguably, relatively speaking, that 8.5% total within the overall marketplace is an annual percentage which, it can be implied, is simply not adequately aligned with today's demand for homes, taking into account the limited supply of available homes, accentuated by the continual ever-increasing demand for single-family homes in the United States. Be they newly built homes - i.e.: new construction - or be they resales.

With 6.12 million home sales having taken place in 2021 - and 91% of those 6-million plus residential home sales in the U.S. consisting of sales of existing homes, i.e.: resales - it is logical, from a market-perspective, for mortgage executives to build their mortgage businesses in a way which caters to, and which services, what the market actually yields. In this case, in terms of mortgage lending, the market yields an opportunity for mortgage lenders to earn the majority of their mortgage revenue by financing sales of existing homes. I.e.: resales. Not, new home-builds.?

In terms of profit centers, and in terms of potential market share for mortgage lenders, the market simply does not warrant focusing the energy, the personnel, nor the resources of mortgage lenders towards financing new construction single-family homes. Since the financing of new construction single-family homes makes up less than 9% of the overall mortgage market, taking into account sales of new construction homes, as compared to the sale of existing homes - i.e.: resales. This, in a 6-million strong annual home sales marketplace.

It goes without saying, the vast majority of home loans obtained today by homebuyers - i.e.: borrowers - are going to home buyers who utilize the mortgages they obtain to finance the purchase of an existing home. These home sales are classified as resales. Resales being, existing homes sold by home sellers, which buyers decide to buy. These are existing homes in the marketplace, listed by a Realtor, sold to home buyers.??

Let’s look at the home loan finance market for the majority of home buyers today. Since the majority of home buyers in 2021 use mortgages to finance…resales.

In financing the purchase of a resale, once the home buyer - i.e.: the borrower - decides to purchase their home - i.e.: the resale - the borrower obtains a home loan to finance that purchase. The mortgage lender the borrower ultimately selects has a few options. The mortgage lender can either keep that home loan in their portfolio, or the mortgage lender can sell that home loan off in the secondary market. For home loans that are held by the mortgage lender, the interest the borrower pays each month, through their monthly mortgage payment, is how the mortgage lender profits from the home loan they originated. Financing the acquisition of resales by home buyers is a huge market today, for mortgage lenders. Since resales - and not new home-builds - make up the majority of the present-day mortgage market.??

Furthermore, in terms of financing the resale of a home, if, on the other hand, the mortgage lender decides to sell the home loan they originated in the secondary market, the lender is then able to replenish its funds through the sale of that home loan. A lender replenishing its funds - done so by selling off the home loan in the secondary market - thus enables the mortgage lender to free up more capital for use that can be deployed to additional home loans used by buyers to finance other home purchases. These are homebuyers, who are, for the most part, buying existing homes that are now listed for sale, in the market - i.e.: resales. Resales, which make up 91% of the market in terms of sales of residential single-family homes.

Let's look at how the mortgage market functions...

In today’s marketplace, the majority of home mortgages in the United States are typically sold to investors through Fannie Mae, Freddie Mac or through the FHA. The government-sponsored enterprises - i.e.: Fannie Mae and Freddie Mac - can either package the home loans they originate as mortgage-backed securities, or the government-sponsored enterprises can hold home loans within their own portfolios.?

Let’s look at home loans retained by the GSE’s...

When the GSE’s decide to hold home loans in their portfolios, GSE’s earn revenue the traditional way - by collecting interest from borrowers when the borrowers make their monthly mortgage payments.?

A second profit center - aside from holding loans in their own portfolios while retaining interest income received as borrowers make their monthly payments - for GSE’s exists through the secondary market. By utilizing the secondary market, Fannie Mae and Freddie Mac can purchase home loans, then bundle together the mortgages they purchase, selling off the bundled home loans as mortgage-backed securities - i.e.: "MBS" - in the secondary market.

So, the vast majority of home loans originated today go through the GSE’s, and the vast majority of home loans originated today are being used to finance resales. There is a huge amount of mortgage revenue available to mortgage lenders today, by financing resales. Resales - i.e.: sales of existing homes - consist of 91% of total home sales marketplace.?

This being said, What about the subject of “supply”? There is no question that a firmly established supply of mortgage money is available today in the marketplace for homebuyers to use to finance the purchase of their homes - these homes being, for the most part, resales. This ample supply of mortgage capital available to mortgage lenders is attributed to the hyper-efficient mortgage lender origination model, the secondary market, and the GSE’s. So there is a noted abundance - or arguably, an overabundance - of supply in terms of available mortgage money. Yet this solid supply of mortgage money available today is being used, for the most part, to finance homes, which are selected by buyers, from a quite-limited supply of available homes. Supply, in terms of available mortgage financing options, is very strong today. Yet supply in terms of homes available to purchase…that supply simply has not adequately kept up with the comparable ample supply of mortgage capital available in the marketplace, relatively speaking.

According to the U.S. Census, 12.3 million American households were formed between January 2012 and June 2021. Yet, during this same time, only 7 million new single-family homes were built in the United States. So, in terms of available homes to purchase, demand continues to outpace supply. Yet this demand could adequately be financed…if there was an adequate supply of homes to purchase. Arguably, home mortgage providers would substantially increase their profits, if and when the supply of homes in the marketplace catches up with the demand for homes...coupled to the available supply of mortgage money available to finance home purchases.

This being said, new home construction lending has tended to not be a primary focal point, nor a focus, for most nonbank mortgage lenders. Construction lending, used to finance new home-builds, continues to be an area of expertise best-managed by local, traditional banks. And that market dynamic makes sense for nonbank mortgage lenders, when one takes into account that 91% of home sales in 2021 consisted of sales of existing homes - i.e.: resales. In other words, Why build a home loan origination model as a mortgage lender to service only a small fraction of the market? This small fraction being, only 9% of the marketplace, as per sales of residential homes, comparing sales of new homes - i.e.: new home construction - to sales of existing homes - i.e.: resales

Within the marketplace today, a segment of mortgage lending provided by traditional banks - primarily local community banks - continues to be the making of home loans the traditional way. This traditional way being, through the process of the bank first taking in deposits from bank clients, then second, making home loans to other borrowers. These loans made by traditional banks are loans, as are loans made by nonbank mortgage lenders, that are used to purchase, in most cases, existing homes - i.e.: resales. Loans made by traditional banks are also loans that can be used by borrowers to finance new construction homes. And local community banks continue to play an important, preeminent role in terms of financing new home-builds. Ie.: new construction. It’s a market segment that local community banks tend to do very well in. While also being market segment which is not adequately focused upon, arguably speaking, by nontraditional mortgage lenders.

The largest American banks today are making fewer and fewer residential mortgage loans in general, and the largest American banks today are certainly making fewer and fewer home loans the traditional way. I.e.: despots…then the issuance of a home loan. And the largest American banks are also holding fewer and fewer loans they originate in their portfolios as well. In fact, GSE’s Fannie Mae and Freddie Mac own or guarantee just about 90% of all home loans originated in the United States today. So the mortgage market is dominated by lenders who lend, the non-traditional way. And resales - not new home construction - makes up the significant majority of this home loan origination profit center.

While the nontraditional mortgage lender/mortgage banker loan origination channel continues to dominate the home mortgage market today, the largest American banks are shying away from reliance upon obtaining bank revenue through this type of loan origination channel altogether. The result being, the largest American banks today continue to make fewer and fewer home loans, each year, as measured by a percentage of the overall home mortgage market. Yet traditional banks - large U.S. banks, and local community banks - are arguably the real finance solution that could step up, earn mortgage revenue, and fill a void in the marketplace today. That void being, a shortage of homes available to home buyers, and a void which is being exacerbated, by, arguably, too few new homes being originated, and used to build new residential homes.

In 2020, nonbank mortgage lenders - these lenders being, not traditional banks - accounted for 68.1% of all home mortgages originated in the United States. Furthermore, in 2021, nonbank mortgage lenders originated over 90% of all VA loans for veterans. In 2021, nonbank mortgage lenders originated just about 90% of all FHA loans. And in 2021, nonbank mortgage lenders originated 70% of all GSE loans. Over the past ten years, nonbank mortgage lender share of Ginnie Mae issuance increased from 12% - ten years ago - to a staggering 87% today.

So let’s look at the overall residential mortgage market in 2020.

Out of the top ten mortgage lenders in the United States in 2020 - as measured by residential mortgage origination volume -?only four out of the top ten mortgage lenders were traditional banks.

Looking at the top ten U.S. mortgage lenders, U.S. Bank came in at #10, with 180,649 mortgages originated in 2020. Bank of America came in at #9, with 184,118 mortgages originated in 2020...and Bank of America originated fewer home loans in 2020 than they originated in 2019. JPMorgan Chase ranked 6th in 2020, with 229,061 home loans originated. And the top-ranking traditional bank, as measured by home loans originated in 2020, was Wells Fargo. Wells Fargo originated 320,026 home loans in 2020.

The #1 home loan provider in the United States in 2020 was not a traditional bank…the #1 mortgage lender in the United States in 2020 was indeed a nonbank mortgage lender. That lender being, Quicken Loans.?

In fact, Quicken Loans originated more home loans in 2020 than U.S. Bank, Bank of America, JPMorgan Chase, and Wells Fargo combined. Quicken Loans originated 1.1 million loans in 2020. Combined, Wells Fargo, Bank of America, U.S Bank, and JP Morgan Chase originated 913,854 total residential mortgages in 2020. The residential mortgage market today is dominated by nonbank mortgage lenders. Yet traditional banks, arguably, have a comparative advantage over nonbank mortgage lenders, when it comes to financing new home-builds.

In 2021, we continue to have a genuine challenge in the housing market...a challenge linked to a notable limited supply of available homes for home buyers to purchase. This is especially true for first-time homebuyers. I.e.: Inventory is simply too low. Yet while traditional home loan lending continues to be dominated by nonbank mortgage lenders who provide traditional home loans to homebuyers - used to finance, in most cases, resales - an interesting, welcomed, positive footnote. A footnote which speaks to “supply” is quietly taking hold in the market.

In December 2021, privately‐owned housing units authorized by building permits hit an adjusted annual rate of 1,873,000. This represented a 9.1% increase over November’s permit totals. The December total for building permits also represented a 6.5% increase over December 2020 totals. In terms of a trend, new home-builds are on the rise. And more home loan financing, as a percentage of the overall mortgage market, will (or should) likely in turn be deployed to...new home-builds.

In January 2021, new privately‐owned housing units authorized through permit issuances totaled 1.7 million new housing starts. And in December of 2021, that aforementioned total was 1.8 million. So, new housing starts remained steady throughout the year 2021. And the forecast remains bullish, for new home builds, early on, in 2022.?

As refinances - as an origination model - may continue to recede for mortgage lenders in a rising-rates environment mortgage lenders will likely pull back in terms of business models they build-out which prioritize refinances. So, from a market perspective, local community banks, large U.S. banks, and nontraditional mortgage lenders as well, it can be argued, could be well-suited to look at directing their focus towards financing new home builds. This could be a good, fundamentally solid business model for mortgage lenders and banks to focus on in 2022.