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Executives and board members in financial services are increasingly held accountable for the actions of their firms. Among their many responsibilities, they are required in particular to be engaged in their company’s efforts to adhere to the letter and spirit of laws that seek to ensure consumer protection.

As the regulatory landscape facing executives in the financial services industry has grown increasingly complex – and integral to their enterprises and their firms’ reputations – so too has the need to demonstrate and document the actions taken by their firms.

Gate House Chairman and Partner Brian Montgomery recently outlined the challenges facing executives in a piece for HousingWire. As he argued, even with the best of intentions, there are often inconsistencies and conflicting interpretations of what firms need or ought to do — and what executives need or ought to in order to stay apprised of their firm’s efforts.  One thing we know it that it will require vigilance and a lot of hard work to get it right.

Recognizing the important need in C-suites and executive board rooms, Gate House Strategies has launched a new subsidiary, Gate House Compliance, LLC, to provide fair lending and compliance management services. The firm, comprised of veterans in financial services and specialists in fair lending and consumer protection law and regulation (and support from CrossCheck Compliance’s deep bench of experts), will advise and support compliance regimes across multiple asset classes, including mortgage, student loan, credit card, and other secured and unsecured credit products.

The addition of Gate House Compliance is a timely and critical expansion of the firm’s ability to serve the growing needs of the industry. After careful examination, clients can choose services that complement their current compliance program, or on a subscription basis, they may utilize Gate House Compliance 365, a comprehensive system of ongoing support of fundamental services and a coordinated, dynamic approach to the management of regulatory risk.

The important policy goals our country require executives to be engaged. They need experience, perspective, and insight in order to do what is right and, and – when the path is made unclear by conflicting policies or interpretations – what is prudent for business.

The goal for Gate House Compliance is to put executives and firms ahead of the curve and ahead of the scrutiny that characterizes the current environment and road ahead. Vigilance and a team of experts with a steady hand will be a must.

The inflation picture in the U.S. has improved quite significantly, so much so that the Fed has appeared to have pivoted quickly from a pause to being done with rate increases, to what is currently expected rate cuts this year.  They see economic weakness, consumers who are stretched and a shift in consumption patterns, and business spending on equipment beginning to wane. The Fed moving the fed funds rate lower will depend on whether things weaken and how quickly, but the market is now expecting 2-3 cuts this year, some saying as early as March.

The jobs number Friday (216k added) was higher than the low expectations set (160k), with unemployment holding steady at 3.7%.  The story now seems ot be slower growth and weakening jobs market. As Morningstar put it, “under the surface, the trend still points toward a gradual slowdown, suggesting an economic soft landing remains very much in play,” and indicating 2024 Fed rate cuts remain on the table. Their chief U.S. economist Preston Caldwell: “Markets may be focusing too much on the solid job gains in December and not enough on the downward revisions in October and November.” Caldwell said he expects more downward revisions next month.

JPMorgan’s Michael Cembalest and team look at over 20 leading indicators each week and while coincident indicators are looking good at the moment, they see the leading indicators signaling economic decline, not a large decline, but “a run of the mill decline in U.S. economic activity which is consistent with a recession,” Cembalest said, including a decline in corporate profits this year.

What does this all mean for housing in 2024?

We were saying late last year we see the potential for the tale of two cities this year, particularly in the first 2-3 quarters, where low unemployment, decent wage gains, and lower mortgage rates mean the housing market picks up in the spring for higher earning households who have been waiting to find a new home, while affordability lags for LMI buyers — the softening jobs market, a hangover of higher debt service burdens, and the higher cost of living means they continue struggle until rates fall significantly further or deflation vs disinflation.

While mortgage rates ticked up this week, they are down from near 8% to near 6-and-a-half — likely enough to get many buyers on the sidelines to move soon. That’s good for volume, and it may both improve homebuilder confidence and free up some stock of existing homes.  But again, not enough in the short term to fill the real need in many markets around the country — the lack of inventory means affordability remains a problems for first time homebuyers.

The difficulties facing the commercial real estate market continue as we begin 2024, but the Fed’s posture change has turned sentiment, leading experts to believe transactions will pick up sooner rather than later. Lower rates have helped close the financing gaps that prevented deals, but differences in opinion as to the underlying value of these assets will continue to be a hurdle, as the Commercial Observer reported last week.

Also of note: George Sheetz v. County of El Dorado, to be heard by the Supreme Court on Tuesday, challenges the use of permit “impact” fees for single family homes that increase development costs and which significantly affect the provision of affordable housing. A ruling in favor of Mr. Sheetz could have wide implications, including on local jurisdiction low-income housing mandates for multifamily developers.

Gate House Partner and Chairman Brian Montgomery shared his perspective on the regulatory landscape facing executives in the financial service industry — the need to act responsibly with respect to fair lending laws and to understand the complexity of it all – in a piece for Housing Wire.

“[M]ultiple agencies pursuing the same general goals sometimes creates inconsistencies or conflicting interpretations of policy, making it difficult for financial institutions to navigate uncharted waters, even with the best of intentions.” Montgomery wrote.

Montgomery, who served as Deputy Secretary of HUD and FHA Commissioner twice, emphasized the risks, particularly in the areas of lending and loan servicing: “Recent regulatory actions have targeted marketing practices, credit allocation and product offerings,” he said, with top executives more often being held accountable for their “company policies, procedures, operations, and culture.”

With risk to the firm not only financially but reputationally, the need to “identify gaps that may exist in their knowledge and experience and structure management teams accordingly” is paramount if they are to demonstrate to overseers that they possess a comprehensive approach to their compliance obligations.

Private industry participants have their work cut out for them as they go about the critical work of upholding the letter and spirit of our country’s fair lending laws, Montgomery said. Both private firms and government must work together at times, with private industry willing to serve as partners to government and the government for their part providing “transparency, open dialogue and technology improvements” to make our system work.

As anticipated, Chairman Powell maintained a rather hawkish tone Friday afternoon, citing unexpected economic strength in the third quarter as reason to stay vigilant on inflation. “We are attentive to signs that the economy may not be cooling as expected.” Powell said.  The Fed, Powell said, is “prepared to raise rates further if appropriate and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”

JPMorgan Asset Management’s chief global strategist David Kelly said Powell wants to keep expectations open as they approach the September meeting. Kelly, however, says from his point of view the bigger risk for the Fed at this point is hiking again, as we don’t yet know the full, lagged effects of the Fed’s aggressive rate rises yet, and there is every reason to believe, Kelly argues, inflation is on its way down, citing recent global PMI numbers, new car prices falling this year, and rents stabilizing. JPMorgan expects we will be in the low 3s by the end of this year and 2% by end of next year. Kelly also said he believes it is nearly impossible to go into recession with 9.5 million job openings, a lingering effect of the pandemic that is helping to keep inflation lower.

Morgan Stanley’s Global Head of Corporate Credit Research Andrew Sheets said much the same on inflation: “Two key measures of underlying inflation, core PCE and core CPI, slowed sharply in the most recent reading.” Sheets said. He says car prices and rent—big drivers of high inflation last year—are now pointing in the opposite direction. Sheets also sights tightening bank credit and a moderation in job growth as a sign rates are restrictive enough for Morgan Stanley economists to believe the Fed is done this year.

On the bond market, Sheets also noted: “Since 1984, there have been five times where the Fed has ended interest rate hiking cycles after multiple increases. Each time the yield on the U.S. aggregate bond index peaked within a month of this last hike. In short, the Fed being done has been good for the U.S. Agg Bond Index.”

Perhaps in line, 30 year mortgage rates ticked further upward over the 7% level on tight housing supply, as Mortgage Bankers Association (MBA) data indicated mortgage application activity drifted further downward to levels not seen in nearly three decades. Lawrence Yun, chief economist at the National Association of Realtors, said the future path of rates depends on 10-year Treasury yields and on what the Fed does at its Sept. 20 meeting. “We are at this critical juncture,” Yun said. “[Mortgage rates] can either break higher, up to 8 percent, or lower, to 6.5 percent.”

Meanwhile, Auction.com reported more than nine in 10 default servicing industry leaders expect completed foreclosure auction volume to increase this year compared to 2022, with 85 percent of those surveyed expecting home prices to decline in 2023 compared to 2022.

With FHFA indicating 5.5% home price appreciation year-over-year on limited supply, the blessing and the curse continues: homeowners gain equity while affordability for first-time buyers wanes.

Though mortgage rates made a decisive move off the near 8% mark, they are still relatively high and spreads over Treasuries remain larger than normal, exacerbated by government fiscal woes and international crises. Supply of existing homes is being constrained as homeowners with low rates stay where they are, perhaps a good scenario for builders of new homes which are making up more of that supply, but a challenge overall to supply and sales volumes.

With student loans restarting October 1, and mortgage payments restarting as COVID-era forbearances end—a great number of consumers are exhausting savings and resorting to higher credit card use, and their debts are rising. With the possibility the Fed is done raising rates (the conventional wisdom of the day) we can see the home market pick up in the spring for higher earning households while LMI borrowers struggle, at least until rates fall.

As mortgage rates hit a 22-year high and existing homeowners continue to stay in their homes, new single family home sales hit a 17-month high in July, according to HUD and U.S. Census Bureau data.

Last month’s data recorded a seasonally adjusted annual rate of 714,000 new single-family home sales, up 4.4% from the revised June rate of 684,000 and is 31.5% above the July 2022 estimate of 543,000. The median sales price of new houses sold in July 2023 was $436,700 and the average sales price was $513,000. First-time buyers now make up 50% of all buyers, up from 45% in 2022 and 37% in 2021.

Chief economist at the National Association of Realtors, Lawrence Yun, said he expects rates will begin decreasing by the end of the year, citing the Fed’s slowing of its interest rate increases. The Mortgage Bankers Association, said they expect the average 30-year mortgage rate to decrease to 5% by the fourth quarter of next year.

Meanwhile, Morgan Stanley reiterated concerns for regional banks. Vishy Tirupattur, its Chief Fixed Income Strategist, said the firm does not accept a growing narrative that “the issues in the sector that erupted in March are largely behind us.” “The ratings downgrades by both Moody’s and Standard & Poor’s,” Tirupattur said, “provide a reminder that the headwinds of increasing capital requirements, higher cost of funding and rising loan losses continue to challenge the business models of the regional banking sector.”  While acknowledging that comment periods are open and changes could occur, on the heels of proposed rules around capital requirements, the Fed’s proposed capital rule on implementing capital surcharge for the eight U.S. global systemically important banks, and proposed regulations on new long term debt requirements for banks with assets of $100-700 billion, Tirupattur said “suffice to say that the documents envisage significantly higher capital requirement for much of the U.S. banking sector, and extends several large bank requirements to much smaller banks.”

In short, Morgan Stanley argues the result — supported by the latest Senior Loan Officer Opinion survey and a paper by the San Francisco Fed evaluating regulatory impacts on the real economy — is tighter credit going forward. “The bottom line is that more tightening lies ahead for the broader economy,” . …[and] “the evolution of regulatory policy can weigh on credit formation and overall economic growth.”

A report by Newmark in the Commercial Observer said debt origination volumes in the sector fell 52 percent year-over-year in the second quarter.  They said there are also 32 percent fewer lenders than a year ago and lenders have grown “more selective in recent months, demanding lower loan-to-value ratios amid the Federal Reserve’s interest rate hikes.”

Additionally, the Washington Post ran a story this week about what is being referred to as the “urban doom loop” affecting midsized cities if commercial real estate headwinds persist. “The fear is that a commercial real estate apocalypse could spiral out and slow commerce, wrecking local tax revenue in the process. Midsize cities have some of the highest rates of office delinquency, where loan payments on buildings are behind schedule, and the lowest rates of office occupancy,” the Post reported. “The average delinquency rate across the 50 largest metro areas in the country is about 5 percent. But in places like Charlotte in North Carolina or Hartford in Connecticut, it is almost 30 percent, according to data from the real estate analytics company Trepp. Likewise, occupancy rates average about 87 percent. But in Oklahoma City, it is just 71 percent, and 76 percent in both Memphis and St. Louis.”

As anticipated, Chairman Powell maintained a rather hawkish tone Friday afternoon, citing unexpected economic strength in the third quarter as reason to stay vigilant on inflation. “We are attentive to signs that the economy may not be cooling as expected.” Powell said.  The Fed, Powell said, is “prepared to raise rates further if appropriate and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”

JPMorgan Asset Management’s chief global strategist David Kelly said Powell wants to keep expectations open as they approach the September meeting. Kelly, however, says from his point of view the bigger risk for the Fed at this point is hiking again, as we don’t yet know the full, lagged effects of the Fed’s aggressive rate rises yet, and there is every reason to believe, Kelly argues, inflation is on its way down, citing recent global PMI numbers, new car prices falling this year, and rents stabilizing. JPMorgan expects we will be in the low 3s by the end of this year and 2% by end of next year. Kelly also said he believes it is nearly impossible to go into recession with 9.5 million job openings, a lingering effect of the pandemic that is helping to keep inflation lower.

Morgan Stanley’s Global Head of Corporate Credit Research Andrew Sheets said much the same on inflation: “Two key measures of underlying inflation, core PCE and core CPI, slowed sharply in the most recent reading.” Sheets said. He says car prices and rent—big drivers of high inflation last year—are now pointing in the opposite direction. Sheets also sights tightening bank credit and a moderation in job growth as a sign rates are restrictive enough for Morgan Stanley economists to believe the Fed is done this year.

On the bond market, Sheets also noted: “Since 1984, there have been five times where the Fed has ended interest rate hiking cycles after multiple increases. Each time the yield on the U.S. aggregate bond index peaked within a month of this last hike. In short, the Fed being done has been good for the U.S. Agg Bond Index.”

Perhaps in line, 30 year mortgage rates ticked further upward over the 7% level on tight housing supply, as Mortgage Bankers Association (MBA) data indicated mortgage application activity drifted further downward to levels not seen in nearly three decades. Lawrence Yun, chief economist at the National Association of Realtors, said the future path of rates depends on 10-year Treasury yields and on what the Fed does at its Sept. 20 meeting. “We are at this critical juncture,” Yun said. “[Mortgage rates] can either break higher, up to 8 percent, or lower, to 6.5 percent.”

Meanwhile, Auction.com reported more than nine in 10 default servicing industry leaders expect completed foreclosure auction volume to increase this year compared to 2022, with 85 percent of those surveyed expecting home prices to decline in 2023 compared to 2022.

The Fed will be in Jackson Hole next week, where Chairman Jay Powell is expected to speak following the inflation read last week: CPI registered 3.2% through July, and was up a modest .2% from last month, though core inflation is still elevated in the high 4s. Many believe the moderation has validated the Fed’s posture. Continued U.S. economic strength extending into Q3, however, adds further uncertainty to their future course. While the surprising resilience of the U.S. economy, with low unemployment and consumer confidence holding up, has many believing there is room for a soft landing, it has also complicated the Fed’s job. The Fed has made it clear they need to see wage and price pressures subsiding, which could translate into keeping rates higher for longer. Nevertheless, there are cracks in the consumer story beginning to materialize, as we’ve discussed here.

Deutsche Bank’s Chief US Economist, Matthew Luzzetti, says he still expects a mild recession, despite a Q3 re-acceleration, which he says could be above 3% despite tighter bank lending standards. Luzzetti believes the Fed lag, credit tightening, and rising delinquency rates will take its toll, and expects a hawkish message out of Jackson Hole. Rising credit card balances, rising delinquencies, and slowing student loan repayments — down $7 billion — are also on his radar. As excess savings is being drawn down by consumers, there are also signs they are making trade-offs (services v. durable goods currently). So far, however, the U.S. consumer is hanging there.

We thought we’d mention two ratings downgrades that occurred recently. The first was by Fitch, which moved US Treasury debt lower by one level earlier this month. Fitch downgraded US sovereign rating from the top-ranked AAA to AA+ as a result of the government’s fiscal deterioration, following up one day later with a downgrade to the credit ratings of Fannie Mae and Freddie Mac.

Fitch cited as an example a “marked increase in general government debt …due to a failure to address medium-term public spending and revenue challenges” “Over the next decade,” the Fitch report said, “higher interest rates and the rising debt stock will increase the interest service burden, while an aging population and rising healthcare costs will raise spending on the elderly absent fiscal policy reforms.”

This is only the second time U.S. debt has been downgraded, the first occurring in 2011 by Standard and Poor’s also after a debt ceiling negotiation. Republican Budget Committee members have been highly critical of Democrats on this score — saying they have only occurred under Presidents Obama and Biden — and arguing that this is a wake up call to address fiscal issues that have been glossed over in the debt-ceiling debates.  In a statement, the Majority said if not addressed, the downgrades will affect the U.S.’s ability to “absorb a major financial shock in the future; and if we don’t change course, the U.S. will not only incur another credit downgrade, we will undermine the dollar as the global reserve currency.”

Alexandra Wilson-Elizondo of Goldman Sachs said this week she did not believe, at this point, the Fitch downgrades would have long term effects but in the nearer term it could cause an elevated debt burden to crowd out private investment and that’s that’s not good for long-term productivity of the economy.

In a move that brings regional banks and CRE back into focus, Moody’s cut the credit ratings of several small to mid-sized U.S. banks Monday and said it may downgrade some of the nation’s biggest lenders. They downgraded 10 banks by one level and placed six large banks, including Bank of New York Mellon, US Bancorp, State Street, and Truist Financial on review for potential downgrades. Moody’s said the sector’s credit strength is likely be tested by funding risks and weaker profitability.

Goldman Sach’s Ashish Shah said the Moody’s downgrade is “reflective of the information we learned in March… the challenges to regional banks business model” and the fact that the commercial real estate (CRE) stress is at a real issue. CRE “continues to be a real thing that is playing out,”  Shah agued.  Shah added, however, that he does not believe the issue of asset valuation in CRE  necessarily bleeds into the real economy, though it creates risk.

In their recent article for Reverse Mortgage Daily, Gate House Founding Partners Brian Montgomery, Keith Becker and Dror Oppenheimer discuss the implications of the first positive capital ratio for the HECM program in six years.

The Gate House team, who worked together at the Federal Housing Administration managing the HECM program, provided their unique perspective and explained that important policy changes, and most certainly strong home price appreciation, have contributed to the substantial improvement in the HECM capital ratio.

Nevertheless, they argued, the results do not “provide a reason for complacency or assurance of future (positive) results” and therefore continued vigilance to ensure the program “is not continuously subsidized by the premiums … in the forward book, will be vital for the HECM program to continue to serve its mission.”

Montgomery is the only person to have served as FHA Commissioner twice under three presidents. Becker served as the Deputy Assistant Secretary and Chief Risk Officer for FHA. Oppenheimer served as a Senior Advisor to the Commissioner of FHA.

Eyes will be on inflation data coming out this week. The news on that front has been trending positive and suggests the Fed is nearing the end of the rate hiking cycle.

As we’ve been discussing here, the second quarter was strong and the third quarter appears to be holding up on the consumer front as well, as the jobs market softens slightly and corporate earnings weaken (as firms lose pricing power with supply chains are repaired). Unemployment remains at 3.5%, good for consumers but possibly also a source of wage pressure that keeps the Fed inclined to hold rates higher for longer. Though commodity declines in recent months have also been a boon, a recent pop in oil prices complicates the picture.

Joel Kahn of the Mortgage Bankers Association (MBA) summarizes it well: “The incoming economic data continue to convey conflicting signals about the strength of the economy. Indicators of manufacturing and service sector health remain lackluster, measures of inflation have moved lower, while GDP growth in the second quarter was stronger than expected and consumer spending remains resilient.”

Meanwhile, Morgan Stanley’s Michelle Weaver says no less than 1% of mortgages are in the money for refinance after millions jumped on the opportunity of low rates during the pandemic. The effect [of homeowners remaining in homes with lower rates and reducing existing supply] has made it tough for first time homebuyers who have had to remain renters, and has put upward pressure on rents, Waiver said on the Morgan Stanley podcast “Thoughts on the Market.” Her colleague Jim Egan noted that existing single family housing inventories are at 40 years lows and “We say ’40 year lows’ because that’s just as far back as the data goes, this is the lowest we’ve seen that,” Egan said.

Egan also argued that “while affordability is bad, it’s not getting worse” and is likely to improve, and “while supply is tight, it’s not getting tighter”—he believes we are stuck in a range for a while. Egan said while the Case-Shiller index turned negative this year for the first time since 2012, Morgan Stanley forecasts prices will be unchanged over the coming year. And as JPMorgan’s Michael Cembalest pointed out in his recent “Eye on the Market” podcast, the tight supply of existing homes has made the market more resilient to to rising rates. Consumers, however, are continuing to burn off savings, which might run out in 2024, Cembalest said. JPMorgan sees weakness possible for Q4/Q1, with economic growth down to 1%.

On that consumer front, credit card balances continue to climb, the Fed reported, with total indebtedness rising $45 billion in the April-through-June period, an increase of more than 4% — and taking the total amount owed to over $1 trillion, the highest gross value in Fed data going back to 2003. Total household debt rose $16 billion to $17.06 trillion, also a record. Fed researchers said the rise in balances reflects both inflationary pressures as well as higher levels of consumption. The Fed said its measure of credit card debt 30 or more days late rose to 7.2% in the second quarter, up from 6.5% in Q1, which is the highest rate since the first quarter of 2012 (though close to the long-run average). Total debt delinquency rose slightly 3.18% from 3%.

We’ve talked about commercial office challenges facing the market in the many months ahead. A report in the Wall Street Journal is also sounding an alarm on multifamily apartment owners. While vacancy rates are low and rents are high, some owners saddled themselves with too much debt as rents rose, often borrowing more than 80% of the building value from bond markets, the Journal reported. Though most apartment loans are fixed-rate, long-term mortgages, more investors took shorter-term, floating-rate loans during the pandemic. The surge in debt costs last year “threatens multifamily owners across the country,” the Journal said.

CoStar said apartment-building values fell 14% for the year ended in June after rising 25% the previous year, roughly the same as the fall in office values. And although mortgage delinquencies in the multifamily category are low, they are increasing, the Journal reports: “Borrowing costs have doubled, rent growth is slowing and building expenses are rising…Outstanding multifamily mortgages more than doubled over the past decade to about $2 trillion, according to the Mortgage Bankers Association. That is nearly twice the amount of office debt, according to Trepp. The data provider adds that $980.7 billion in multifamily debt is set to come due between 2023 and 2027.”