Eight years ago we went through the worst financial crisis since the Great Depression. In its wake, banking practices were reformed to prevent a similar recession in the future. However, according to some experts, these reform efforts have not changed the US housing market in a sustainable way.

Although it has been almost a decade and the economy has all but recovered, many are calling for legislators to push aside differences, analyze successes and failures since 2008, and chart a new plan for the future of US housing. Here are the keys to the debate.

Why do We Need Reform?

The housing market makes up about 20% of the economy. An accessible pathway to homeownership is, therefore, crucial to a stable economy. Reform is a complicated but necessary process. Whenever it does occur, it won?t be pretty, but the long-term viability of our economy may depend on it.

Today there are two government-sponsored enterprises (GSEs) that serve as conservators for America?s housing market. They were appointed to these positions during the worst of the financial crisis as a temporary life support. Legislators have yet to decide upon a way to replace this conservatorship with something more permanent, but they are taking steps. The most important place for them to focus their attention is the secondary mortgage market.

Secondary Mortgage Market

In today?s housing economy, individual mortgages are grouped together, sold in pools to investors, and structured into mortgage-backed securities (MBS). This process is called securitization. There are three different segments responsible for securitizing mortgage pools.

First, investors can go through government intermediaries. Through this segment, they are given a seal of approval through Ginnie Mae, the Government National Mortgage Association, that their payments will arrive on time, ensuring that this is a solid investment.

Private financial institutions also bundle mortgages together, but much more risk falls on the investors in this case. Because of a lack of anti-fraud controls, this market spiked before the financial crisis and then crashed when over 1 million Americans defaulted on their mortgages. For this reason, since 2008, the private sector of MBSs has not risen over 10%.

Finally, we have the GSE market segment, controlled by Fannie Mae and Freddie Mac, the two government agencies currently serving as conservators. They have by far the largest share of the market, which means that right now there are almost no options for an MBS through a non-government agency. For this reason, lawmakers are slowly, but surely, taking steps to reform the secondary mortgage marketplace to be independent of GSEs.

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With ever-tightening TRID regulations ? all the way from organizations down to the individual ? and an increasing supply/demand mismatch, many mortgage professionals are getting nervous about what servicing rights will look like in 2016 and beyond.

Issue Background ? Basel III

2009?s Basel III reform measures set a three-year plan in place to tighten banking security, risk management and oversight strategy. Crafted specifically in response to the credit and housing bubble of 2008, the rulings codified capital requirements and leverage ratios for banks that up until that point had gone unspecified.

Ultimately, Basel III is intended to heighten the financial and banking landscape?s resilience, reducing the threat of system-wide impact and stabilizing it against economic stress. A side effect of these regulations is increased transparency ? and reduced overall servicing capacity.

Consumer Impacts

The capital requirements leveled by Basel III are uniformly capped, but different kinds of loans (within and without the mortgage sector) are differently weighted. This has led major banking conglomerates like Wells Fargo and Chase to examine their long-term prospects for servicing: given the new requirements and increased human capital necessitated by compliance efforts, will it actually be worth the time?

An acceptable return on investment may necessitate higher pricing, which in turn reduces the available customer base ? even in the face of ever-heightening demand as the economy recovers from the 2008 bubble. The Fed?s end-of-year mortgage rate hike has been widely seen as a vote of confidence in the market?s recovery, but have since dropped a quarter-percent. Lenders who spent the first quarter of 2016 in the black have since reported massive markdowns, further dampening service pricing and increasing demand pressure.

A Situation in Development

While the situation may be concerning on its face, there are some factors at play whose as-of-yet unseen effects may tip the scales. In anticipation of rising rates, non-bank investors paid a premium for loan servicing throughout 2015 ? but have scaled back in the new year. Additionally, lenders have begun to shy away from co-issue bidding (selling assets directly to mortgage loan companies and outsourcing servicing to specialized organizations), which up until recently accounted for over half of all servicing sales. This demand drop will have an unavoidable impact on servicing valuation (and, thus, consumer price) which is still playing out in the market.

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What does a recent Supreme Court decision on Spokeo.com, an online personal information aggregator, have to do with TILA-RESPA Integrated Disclosure? Not much, on its face, but a recent Inman article about a California class-action lawsuit leveled against Spokeo argues that the suit may have big implications for TRID-affected industries.

The Suit

Spokeo.com?s purpose is to collect and display information like age, employment, marital status and education on individuals. In 2011, Thomas Robins filed a class action suit against the site, alleging that the information displayed was inaccurate. Spokeo?s rebuttal stipulated that the information was indeed inaccurate, but that Robins suffered no actual harm from its display.

The Constitution?s Article III states that the plaintiff must display ?concrete harm? in order to hold the defendant responsible and receive damages. The 9th Circuit Court of Appeals ruled that there was an implicit ?private cause of action? to enforce statutory rights ? which is to say, if those statutory rights have been impinged upon, the procedural violation itself is adequate cause to level suit even if no harm has taken place. In response, Spokeo took the case all the way up to the Supreme Court, which vacated the 9th Circuit?s ruling and sent it back down the chain for further examination.

The Connection

So what does this all have to do with TRID compliance? The question of concrete harm versus procedural violation. As many of us in the mortgage industry know, TRID compliance is a tricky transition that?s still causing waves ? and will likely cause more as the grace period draws to a close.

If the court rules that inaccuracies themselves are cause for suit, even if those inaccuracies cause no harm to the client, it opens up mortgage professionals and loan officers to an enormous amount of liability and adds pressure to an already-over-boiling pot. Suddenly the industry will be faced with not just compliance demands, but also the potential need to defend themselves against meritless ? but costly ? lawsuits.

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The US House of Representatives have passed a bill that may signal big changes for how loan originators do business. Moving to the Senate this coming legislative session, the SAFE Transitional Licensing Act allows mortgage loan officers to keep originating new loans after they move from a banking entity to a nonbanking one. The switch currently puts a halt to the loan officer?s business until their new license comes through: under the new act, they would be able to continue practicing unlicensed for a period up to 120 days, allowing for a seamless transition.

Issue Background

Entity transitions for loan officers are currently governed by the SAFE Mortgage Licensing Act, which decrees that an officer who moves states or chooses to take their business to a non-federally-insured (i.e. nonbank) lending entity must ?sit on their hands? and halt business until all licensure is approved and ready. This can lead to cash flow problems for individual lenders, as well as a frustrating experience for any customers who are currently relying on that officer to help complete their mortgage transaction.

Potential Impact

The Transitional Licensing Act has garnered strong support from the Mortgage Bankers Association, which calls the move an ?important piece of bipartisan legislation? that will greatly reduce barriers for employment and mobility among loan officers. They argue that the act?s increased flexibility will directly contribute to a competitive, active mortgage marketplace. This stimulus is more important now than ever, as the once-struggling real estate landscape slowly but surely recovers from the 2008 financial crisis.

What Lenders Need to Know

The most important aspect of the policy shift for lenders will be an increased access to human capital in the form of experienced, knowledgeable loan officers who up until now may have been hesitant to change paths due to the headache of obtaining new licensure. This in turn translates to customers having more freedom when it comes to their loan origination entity: greater competition leads to a more robust set of options to choose between. Additionally, non-bank loan entities ? which are subject to more restrictive qualifications for their employees than traditional banks ? may now offer a more in-depth suite of services thanks to the influx of fresh blood in their workforce.

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The financial crisis of 2008 was nearly a decade ago, but its massive ramifications are still felt in every corner of the mortgage sector. From private buyers to federally-insured loan originators, everyone has had to alter their approach.

One of the most apparent effects has been the creation of a new variety of super-agency via the Dodd-Frank Wall Street Reform and Consumer Protection Act (often shortened to just ?Dodd-Frank?). This legislation brought about the most significant changes to the US financial service industry since the Great Recession of the 1920?s. While it initially drew heavy criticism from both sides of the aisle, the act has had several significant by-effects in its six years of existence:

Compliance

Dodd-Frank?s most prominent effect has been a comprehensive suite of regulations for lending entities, compliance with which has required a massive amount of time and effort. Bank and non-bank lenders alike have been forced to hire new staff, dedicate company time to training, and generally rearrange process structure to fall in line with what the federal government requires. While the regulations? ultimate goal is increased transparency and fairness in the loan origination process, many loan originators argue that the headaches caused by the transition far outweigh any benefit to the consumer, given that the entities themselves are spending too much time on compliance to get to the business of providing loan-seekers the best deal possible.

Competition

As the regulations took effect, many lending entities were forced to close their doors ? and the ones remaining found themselves in a significantly more challenging playing field. Adaptability has become the most crucial trait for survival as both national and state-level regulators escalate their enforcement efforts. While Dodd-Frank is the most significant piece of legislation prompting this sea change, other policy efforts such as the TILA-RESPA Integrated Disclosure Act (TRID) have also narrowed the window of business for mortgage professionals.

Concentration

The early 2000?s saw a refinancing and general real estate boom that promoted an emphasis on sales as the ultimate measure of success. With those days long gone, mortgage professionals are focusing more on profit than revenue, keeping an eye on long-term survival instead of short-term windfalls.

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The biggest barrier to entry for young, would-be homeowners is credit. Millennials find themselves in a difficult situation as the first generation to enter the post-crash housing market.

As more and more Millennials homebuyers enter the market, the mortgage industry will experience an enormous shift, explains Joe Tyrrell, executive VP of corporate strategy at Ellie Mae. There are 87 million potential homebuyers in the millennial generation. 91% of them intend to own a home someday, and lenders need to prepare to meet those needs, he says.

Cultural Shifts

A few shifts in cultural norms are also affecting the marketplace. First, Millennials are waiting longer to get married and have kids, both primary factors driving homeownership. Second, more Millennials are starting to move to the suburbs. Last year marked a turning point, according to a study by Dowell Myers, an urban planning and demography professor at the USC Price School of Public Policy. After a decade of growing millennial concentration in urban centers, the trend of downtown living has peaked and is now in decline. Myers calls it a dramatic human interest story with huge implications for real estate markets and investments.

The popularity of single-family suburban rentals is up, and availability is abundant, but since the majority of Millennials eventually want to buy, mortgages will be in demand.

Tracking Millennial Loans

According to Ellie Mae?s Millennial Tracker, over a third of home loans to Millennials since 2014 were Federal Housing Administration (FHA) loans insured by the federal government. That share is larger than the 22% overall mortgage volume market share commanded by the FHA. Cash-strapped young homebuyers enjoy the small 3.5% down payment, but it comes with a price: mortgage insurance premiums. The additional costs, along with higher credit requirements, continue to keep young buyers out of the market.

Household formation is growing, but owner-occupied units make up only one-third of new households while two-thirds are renters. According to the U.S. Census, the homeownership rate is down to 63.5, just north of its 50-year low.

Since the housing crash, government regulators have kept credit conditions tight. The current situation could cause regulators to reassess the balance between consumer protection and homeownership opportunity. The Department of Justice will likely continue to pressure loan originators, and the FHA could respond by cutting premiums.

Low Mortgage Rates vs. Home Prices

Mortgage rates hover around record lows, but high home prices, rising faster than incomes, eat away much of those savings. The 0.35% drop in interest rates at the start of 2016 would save the average buyer $44 each month, but elevated home prices have cut that down to $18, and even lower in major cities.

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Nationwide spending on construction rose to the highest number seen in 8-? years in March. According to the Commerce Department, U.S. construction jumped 0.3% to the highest level seen since October 2007. This rise followed an upwardly revised 1.0% increase in February. The revision signals sustained strength in the sector in spite of a sharp drop-off in spending by energy firms.

After the previously reported 0.5% decline in construction spending in February, a recent Reuters poll of economists forecasted a construction spending increase of 0.5% in March. Compared to a year ago, March construction expenditure was up 8.0%. Although February?s outlays were later revised higher, spending in January was revised down from a 2.1% increase to 0.3% drop.

Big Picture: Slow Economic Growth

The annualized rate of economic growth was limited to a mere 0.5% in the first quarter, due in part to a decline in nonresidential construction investment. Much of the plunge in nonresidential construction spending is attributed to harsh spending cuts within the energy sector, still reeling from 2015?s plunge in oil prices.

Private Construction

March?s figures were buoyed by a 1.1% swell in private construction spending, reaching its highest level since October 2007. Private residential spending saw 1.6% growth, while private nonresidential spending, including offices and factories, jumped 0.7%. The private nonresidential amount equals the highest seen since October 2008.

Public Construction Projects

Meanwhile, public construction spending dipped 1.9% in March. Local and state government construction projects, the largest segment of the public sector, dropped 1.4%. Federal spending tumbled 7.4% in March.

Residential Construction

Recent information from the National Association of Home Builders also points to an increase in residential construction. The annual rate of total U.S. housing starts in February 2016 was up to 1,178,000, from 1,120,000 in January. Housing starts are privately owned housing units on which construction has started within a given period. They are divided into three categories: single-family houses, townhouses or small condos, and apartment buildings with five or more units. Single-family housing starts also increased in February, up to 822,000 from 767,000 in January.

Single-family housing has seen a gradual, but steady increase in the seasonally adjusted annual rate of housing starts over the past year. In February 2015, the figure sat at 600,000. A year later, that number is 822,000, marking a jump of 37%.

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