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Monthly Archives: January 2017

That Darn Supply

Whenever talk turns to home sales, you can be sure it will also turn to home supply, and for good reason. 

Existing home sales dropped 2.8% to a lower-than-expected 5.49 million on an annualized rate. Most market watchers were expecting better (including us). One positive in the sales data was November sales, which were revised up to 5.65 million on an annualized rate. 

December sales had trouble gaining traction for the same reason they’ve had trouble gaining traction in most down months -- supply.  The NAR reports the number of homes for sales fell 11% for the month to 1.65 million. At the current sales pace, supply, at 3.6 months, is at the lowest level since 1999. If you don’t have a lot to sell, it’s hard to sell a lot. 

Interestingly, many sellers were unable to exploit their advantage. The median price of an existing home was down 0.9% to $232,200 in December. If demand holds steady and supply drops, prices should rise. (It’s possible demand also dropped on higher interest rates, though purchase-mortgage activity suggests otherwise.) Of course, we all know that housing markets are local markets, and what holds for the national market won’t necessarily (and likely won’t) hold for any particular local market.

Investment is another variable impacting home supply. Over the past five years, a record number of homes, most notably single-family homes, have been converted to rentals. We’ve seen this conversion occur on an unprecedented institutionalized scale, with large investment firms buying hundreds of thousands of homes. What’s more, most of these conversions have occurred at the lower end of the market, thus driving up prices for what would be starter homes for first-time buyers. 

Increased construction activity helps, but it’s not helping enough. Housing starts were up 11.3% to 1.226 million on an annualized rate last month. But the surge was confined to multi-family starts, which jumped 57%. The more important single-family category actually declined 4%.

Though home constitution has trended higher in recent years, it hasn’t trended high enough. The historical annual average for starts is around 1.5 million. NAR economist Lawrence Yun has mentioned that excess regulation -- concerning land use in particular -- has held construction in check. 

Love him or hate him (because there is no middle ground), but President Trump has vowed to reduce  business regulation across the board. Should Trump follow through, we should see a pick-up in new-home construction. 

January Could Be a Great Month to Refinance

Homeowners thinking about refinancing might want to pull the trigger. 

January might be a perfect time for homeowners to get the most for their dollar for a home refinance for a variety of factors. For one, experts project that home values will continue to rise throughout 2017. Higher home values impact refinancing in a number of ways. Owners whose homes have appreciated in value can perform what is called a cash-out refinance, which allows homeowners to use some of their home's value to make improvements and additions to a house, according to The Christian Science Monitor. This will help add value to a home in the long run, the source noted.

Individuals with a Federal Housing Administration-backed loan might also be able to remove their mortgage insurance as the value of their home continues to rise. Borrowers who have 20 percent home equity or more typically don't need to pay for mortgage insurance, The Christian Science Monitor reported. Mortgage insurance adds anywhere between 0.85 percent and 1.35 percent to a borrower's monthly payment, so individuals who can get rid of insurance will likely see their monthly mortgage payments drop as well.

There are other options to refinance as well. Until September, homeowners also have the opportunity to take advantage of the Home Affordable Refinance Program, which allows people with high loan-to-value ratios to refinance without paying for mortgage insurance.

To qualify for HARP, homeowners must have a mortgage backed by Fannie Mae or Freddie Mac, and they must also have a loan-to-value ratio greater than 80 percent. Borrowers cannot have had a late payment within the last six months, and they may only have one delinquency within the past year when applying for HARP. Lastly, applicants must have a mortgage that originated before May 31, 2009, to be eligible for the program.

Borrowers should carefully consider their options and determine the best way for them to refinance in the coming months.


Skepticism On Interest Rates Is Rising

Last week, we forwarded an argument on why we shouldn’t be so sure that multiple interest-rate increases are forthcoming. Our argument is based on considerable hemming and hawing on the Federal Reserve’s part when the subject turns to interest rates, as it invariably does.

To cut to the chase, Fed officials recently raised a number of risks that, if realized, could cause the Fed to change direction. That’s hedging 101. 

This week, we were presented with another consideration to back our argument: President Trump said that he thought the dollar is too strong, suggesting that government officials could drop a two-decade policy of supporting a strong dollar. When Trump speaks on international trade, it’s not difficult to understand why he would favor a weaker dollar. (A strong dollar makes U.S. exports cheaper in foreign markets. Concurrently, it makes imports more expensive here.) 

Rising U.S. interest rates lead to a stronger dollar. The dollar will rise vis-à-vis other currencies if the countries backing those currencies refuse to raise interest rates too. So far, no major Western country has followed the United States’ lead. Since Trump’s comment, the dollar has lost value against the euro, the pound, and the yen. (Though as we write, the dollar has regained some lost ground.) 

Perhaps we babble too much on international finance, but international finance impacts lending here.  Unlike real estate, which is mostly local, finance (which includes interest rates) is played on an international stage. 

Since the start of the new year, we have seen mortgage rates drift lower. This past week, they reversed course bit. The average quote on a prime conventional 30-year loan falls between 4.125% and 4.25% as we write.

So, the question is, higher or lower? 

After the Fed raised the fed funds rate in December and then chatted up the prospect of additional increases immediately after, we thought that a 4% (or higher) quote on a prime 30-year loan would hold for the relevant future (at least through the first quarter of 2017).  Today, we are less sure.

You could say that our hemming and hawing makes us antithetical to Harry Truman’s coveted one-armed economist. (Truman quipped that he’d like to meet a one-armed economist because economists will give advice, but then dilute that advice by saying, “on the other hand.”) Economists and Fed officials aren’t the only ones to hedge. We still think a 4%-plus quote on a prime 30-year will hold through the first quarter, but if it doesn’t, we wouldn’t be surprised. 

So, our skepticism grows concerning the Fed and the prospect of multiple interest-rate increases.  Yes, if the other central banks start raising interest rates, then it’s game on.  At this point, though, two rate increases would more than suffice. Possibly one would suffice. Don’t be surprised if 2017 plays out like 2015 and 2016: one fed funds rate increase at the end of the year. 

How Will President-elect Trump Affect the Mortgage Industry?

The mortgage industry might be seeing a lot less regulation in 2017. 

As President-elect Donald Trump prepares to enter the White House in January, mortgage experts are beginning to prepare for changes in the industry.

Many pundits are certain that Trump will deregulate the mortgage industry and possibly repeal the Dodd-Frank Wall Street Reform and Consumer Protection Act, according to The Wall Street Journal. The legislation was approved in response to the recession that took hold of the economy in 2008 and placed several financial regulations of mortgage lenders.

"One of the reasons we want to roll it back is because we think it has had a very negative impact on small community banks," Stephen Moore, one of Trump's economic advisers, told American Banker. "The regulatory costs and the compliance costs have contributed to a big consolidation of the industry..."

Advocates say if the president-elect implements measures that deregulate the mortgage lending industry, it could incentivize more lenders - specifically smaller community banks - to start approving mortgages again, according to The Wall Street Journal. There is speculation that Trump might also look to reduce the impact of a powerful financial regulatory agency.

Experts believe the incoming president will also roll back the influence of the Consumer Financial Protection Bureau, which has been investigating instances of mortgage malpractice, including problems with redlining at record-high rate in recent years, the source reported. Deregulation would be focused in areas of the industry where new rules have made the cost of compliance too high for some competitors, The Wall Street Journal reported.

Some also think that Trump will raise the threshold for stricter bank regulations above its current $50 billion limit, according to American Banker.

Although it is unclear exactly what the president-elect will do once he assumes office, mortgage lenders should most likely expect fewer regulations in their future.

Rates in 2017 Are Looking A Bit Like Rates in 2016

A popular pithy quote, attributed to Mark Twain, goes, “History doesn't repeat itself, but it often rhymes.”  Whether Twain actually uttered this observation is debatable; the truth behind it isn’t. We frequently see current patterns that resemble patterns in history. 

The year 2016 is now history, but what we see today resembles what we saw a year ago: We refer specifically to patterns in interest rates. 

Fifteen months ago, we saw the yield on the 10-year U.S. Treasury note and most mortgage rates rise into the December 2015 meeting of Federal Reserve officials. At that meeting, Fed officials raised the target range on the federal funds rate 25 basis points. Soon after the fed funds rate was raised, the yield on the 10-year Treasury note drifted lower, and so did most mortgage rates.

We see a similar pattern occurring today. Interest rates and mortgage rates rose into the December 2016 Fed meeting. Fed officials again raised the range on the fed funds rate 25 basis points. Since the Fed raised the fed funds rate on Dec. 14, the yield on the 10-year Treasury note has drifted, and so have most mortgage rates. 

The 10-year Treasury note holds considerable sway over mortgage rates. As the yield on the 10-year note goes, so go quotes on 30-year fixed-rate loans. Not surprisingly, quotes on the 30-year mortgage loan have drifted lower. 

A couple weeks, we surmised that mortgage rates would develop a lower range and stick with that range at least until the Jan. 20 presidential inauguration. So far, we’ve been fairly accurate.

We also surmised that it would be a while before we saw a sub-4% quote on a 30-year loan. We might have to retract our supposition. Fed officials appear to be getting cold feet on rate increases

The recently released minutes from the December 2016 Federal Reserve meeting suggest that even one increase this year might be pushing it. CNBC reports the minutes show that a gradual “three-step” increase is in doubt. Many Fed officials raised a number of risks that, if realized, could cause the Fed to change direction.  

Could we see a 3.5% quote on a 30-year loan by July? We can no longer discount the possibility. If we do see it, history will not only have rhymed, it will have repeated. 

HUD Lowers FHA Premiums, Combatting Higher Rates

Housing and Urban Development (HUD) Secretary Julian Castro announced on Monday that the Federal Housing Administration (FHA) will reduce annual insurance premiums by 25 basis points. The move affects most new mortgages with a closing or disbursement date on or after 1/27. The HUD expects these new rates to save FHA insured homeowners an average of $500 this year.

The reductions can be made because the FHA Mutual Mortgage Insurance Fund has gained $44 billion in value since 2012.

"After four straight years of growth and with sufficient reserves on hand to meet future claims, it's time for FHA to pass along some modest savings to working families," said Castro.

"This is a fiscally responsible measure to price our mortgage insurance in a way that protects our insurance fund while preserving the dream of homeownership for credit-qualified borrowers."

This is not be the first time that the FHA has altered mortgage premiums. At the beginning of 2015, the agency lowered insurance premiums from 1.35 percent to .85 percent, which resulted in nearly 330,000 new loans, according to The Mortgage Reports. More than 1.25 million people applied for FHA loans in 2016, according to the HUD’s annual report for 2016.

FHA loans are different from traditional loans because the federal government will cover any losses a lender incurs from an FHA-backed loan. This improves the likelihood that lenders will approve applicants for mortgages who might not otherwise be able to get a loan. The tradeoff is that mortgage insurance premiums add an extra amount to a borrower's monthly mortgage payment - approximately $70 for every $100,000 borrowed, according to The Mortgage Reports.

FHA loans are helpful to applicants with lower credit scores because any applicant with a credit score of 580 or higher is eligible. Traditional loans often have a much higher credit score threshold, which bars some people from getting approval for a mortgage.

Prices Still Up

The major housing-data providers’ data continue to show rising home prices. CoreLogic is the latest data provider to confirm what most of us already know: Home prices around the country show few signs of backsliding. 

CoreLogic’s Home Price Index showed that home prices increased 7.1% year over year in November.  Month over month, prices were up 1.1%.  This is an impressive advance when you consider that mortgage rates were up as much as 50 basis points in November. The housing market continues to show resiliency, and perhaps under-appreciated resiliency. 

As for the future, CoreLogic’s chief economist expects the rate of home-price appreciation to abate.  His logic is similar to the logic we’ve offered since mortgage rates took flight in November: Higher interest rates will lead to slower price appreciation. 

Because interest rates are a discounting mechanism, they tend to correlate negatively with asset prices. When interest rates rise, asset prices tend to fall, and vice versa. Of course, this is a tendency; it’s no guarantee for any particular market. A home, unlike a stock or a bond, is heterogeneous -- no two homes are alike. In any particular market, home prices could continue to rise with rising mortgage rates.  That said, when the numbers from around the country are aggregated, chances are good that the average rate of home-price appreciation will fall if mortgage rates continue to rise. 

Mortgage Delinquency Down 26 Consecutive Quarters/What to do When Delinquent

For homeowners who are behind on mortgage payments, foreclosure is not the only option.

Overall, the outlook for the delinquent mortgage rate in the U.S. is quite promising. The percentage of people behind on their real estate loan payments was 2.69 percent in the third quarter of 2016, which is the 26th-consecutive quarter where that number has declined, according to the Federal Reserve. That number is nearly 1 percentage point lower than the third quarter of 2015, according to the data.

The definition of what is considered a delinquent mortgage will vary from lender to lender, but the most common definition is that any mortgage payment more than 30 days overdue is considered delinquent, and homes are not eligible for foreclosure until a mortgage is 120 days delinquent, in accordance with Consumer Financial Protection Bureau guidelines.

Several pundits are optimistic about the mortgage industry going into the new year.

"The mortgage market has seen steady improvements over the last several years, and we believe lower unemployment rates, growth in median household income, and rising home values will be the primary drivers for continued strong performance in this sector," Joe Mellman, vice president and mortgage business leader for TransUnion, told DS News.

Some experts attribute the low delinquency rates to a decline in the number of people who have subprime mortgages, which are some of the riskier mortgages lenders can approve. According to the TransUnion 2017 Consumer Credit Market Forecast, of the 66.9 million borrowers with a mortgage balance, only 8.5 percent of them were subprime loan holders. This indicates a two-tenths of a percent drop from 2015, the report noted.

For those falling behind on their mortgage, there is hope of refinancing. Although there are several options and individual cases will vary, the most important thing is for borrowers to talk to their lenders about why they are having trouble with their payments. From there, homeowners and lenders can work together to design a plan that will get individuals back on track with their payments.

Home Sales Still Rising

Since mortgage rates moved sharply higher, we’ve counseled on the need to retain equanimity: Stay level and focus on the big picture, which includes an improving economic outlook and steady employment prospects. Mortgage rates are an important variable, to be sure, but they’re not the be-all and end-all of everything housing related. 

Recent sales data support our contention. Home sales -- new and existing -- improved in November, a month when mortgage rates surged.

Existing-home sales surprised most market watchers by rising 0.7% to a 5.61 annualized rate last month. This is the high in the recovery cycle and exceeds the previous high set in October by over 100,000. Looking at the particulars, single-family sales were “flattish,” declining 0.4%. Condo sales, on the other hand, surged ahead 10%. The median price of an existing home rose to $234,900, which puts the year-over-year gain at 6.8%. 

As for new-home sales, they didn’t miss a beat. Sales jumped 5.2% to a 592,000 annualized rate. New-homes sales are up 16.5% compared to November 2015. Some discounting has helped keep sales on an upward trajectory. The median price -- at $305,400 -- is 3.7% lower than the median price a year ago.  If you want to move more inventory, lower the price, as the trend in new-home sales and new-home median price proves. 

Looking to the future, the pending home sales index points to sales growth taking a breather over the next month or two. The index fell 2.5% in November. Because the index focuses on existing home sales, we wouldn’t be surprised if existing-home sales are flat in December.

Flat purchase-application activity since early November also points to a flat month or two for existing-home sales. That said, the Mortgage Banker Association’s latest survey showed that purchase applications were up 3% the week before Christmas. This suggests that the market is adjusting to the new normal of 4%-plus on the 30-year fixed-rate mortgage. 

As for the new normal, it has held steady over the past two weeks  We’ve seen the yield on the 10-year U.S. Treasury  note actually decline a few basis points since Christmas.  We’ve seen a similar decline in mortgage rates. Quotes had been as high as 4.5% on a top-tier 30-year loan. A quote closer to 4.375% is a regular occurrence, with quotes of 4.25% happening more often. 

We won’t be surprised to see a range of 4.125%-to-4.25% develop and hold on the 30-year loan until the Jan. 20 presidential inauguration, if not beyond. All the perceived positives and negatives associated with a new incoming president are baked into the market. Barring an outlier event, things should hold steady over the next few weeks.