Mortgage

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Fewer applications show borrowers’ demand for mortgage loans fell this week, despite a decline in rates due to concerns of an economic recession, according to the Mortgage Bankers Association (MBA). 

The survey, which includes adjustments to account for the long Fourth of July weekend, shows mortgage applications down 5.4% for the week ending July 1, compared to a week earlier. 

“Mortgage rates decreased for the second week in a row, as growing concerns over an economic slowdown and increased recessionary risks kept Treasury yields lower,” Joel Kan, MBA’s associate vice president of economic and industry forecasting, said in a statement. But he added: “Rates are still significantly higher than they were a year ago, which is why applications for home purchases and refinances remain depressed.”   

The Refinance Index decreased 7.7% from the previous week and was 76% lower than the same week one year ago, as homeowners still have reduced incentive to apply for the product. 

The seasonally adjusted Purchase Index fell 4.3% from the previous week and 7.8% compared to the same week in the previous year because borrowers face an ongoing affordability challenge and a low inventory problem.  

The trade group estimates the average contract 30-year fixed-rate mortgage for conforming loans ($647,200 or less) decreased to 5.74%, from 5.84% the previous week, falling 24 basis points during the past two weeks. Jumbo mortgage loans (greater than $647,200) went from 5.42% to 5.28%.

Another index, the Freddie Mac PMMS, showed purchase mortgage rates dropped 11 basis points last week to 5.70%, ending a two-week climb. 

Refis were 29.6% of total applications last week, decreasing from 30.3% the previous week, the survey shows. 

The adjustable-rate mortgages (ARM) share of applications declined from 10.1% to 9.5%, still demonstrating continued popularity among borrowers. According to the MBA, the average interest rate for a 5/1 ARM fell to 4.62% from 4.64% a week prior.

The FHA share of total applications remained unchanged at 12%. Meanwhile, the V.A. share went from 11.2% to 11.1%. The USDA share of total applications remained at 0.6%. 

The survey, conducted weekly since 1990, covers 75% of all U.S. retail residential mortgage applications. 

Source: housingwire.com

Apache is functioning normally

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Source: housingwire.com

Apache is functioning normally

The mortgage industry has its own language, and in order to understand it, homebuyers need to learn different acronyms and jargon when shopping for a home loan. A typical home loan payment or mortgage payment involves a single payment, which is the sum of four different line items: the loan principal, interest, taxes, and insurance – also referred to as PITI. 

Before you set your sights on a home, know if you can afford the costs by learning what PITI is and how it impacts your monthly mortgage payments.

Grey craftsman home with garage and white accents

What does PITI stand for? 

PITI stands for the loan principal, interest amount, taxes, and insurance on your home – the four major elements that make up mortgage payments. 

Homebuyers often underestimate the true cost of homeownership by failing to take into account property taxes and homeowners insurance. It’s crucial that you budget for all the components of your mortgage payment before purchasing a home.

What is PITI? The four components

Now that we know what PITI stands for, let’s break down each of the four components and analyze the individual elements that make up your monthly mortgage payment.

1) Principal

The mortgage principal is the loan amount before any interest is calculated. This is the base amount of your home purchase price minus any down payment you make. 

We’ll use a hypothetical home purchase for reference; if you buy a home for $450,000 with a 20% down payment ($90,000), your mortgage principal amount will be $360,000.

Over your mortgage term, you pay substantially more than the original $360,000 to the lender in the form of loan interest. The principal is the base amount used for loan calculations to determine if they will extend a loan to you. 

2) Interest

Your mortgage interest rate is what you pay the lender as part of your monthly mortgage payment to borrow the funds to purchase your home. The mortgage lender calculates interest as a percentage of your outstanding principal. If your principal loan is for $360,000 and your lender charges you an interest rate of 6%, this means that you will pay $21,600 (6% of $360,000) in interest for the first year of your mortgage.

Your mortgage interest and principal payments are itemized on a mortgage amortization table. The amortization charts show how much each mortgage payment pays down your principal and interest. When you first start making mortgage payments, most of your monthly payment goes toward interest instead of the principal. 

This split shifts over time, and eventually, the amount you pay toward interest decreases, and more is paid toward the principal. As the principal amount of your loan decreases, you start to earn equity on your home. Equity is the portion of your home that you own outright. Your interest decreases as well, as you only pay interest on the principal amount you have not paid off.

For our example, you will pay $21,600 in interest over the first year of your $360,000 mortgage. By the time you have paid down $260,000 of that principal, your principal amount will be $100,000; at that point, you’ll pay interest of $6,000 annually (6% of $100,000).

3) Taxes

When you own your house, you pay taxes on the property to your local government to maintain roads, emergency services, police, firefighters, schools, and more. Buyers often overlook property taxes when estimating homeownership costs, but it is important to consider this recurring annual cost when you’re searching for your new home. Property taxes vary by location and are the most expensive tax homeowners pay. Taxes may be higher in a newer neighborhood or an area coveted by many homeowners. They are often less if you live just outside coveted neighborhoods and in rural areas. 

The amount of property tax you pay is determined by the local property tax rate and the value of your home. A general guideline to estimate property taxes is to allocate approximately $1 for every $1,000 of your home’s value, paid on a monthly basis.For example, if your home is worth $450,000, you can expect to pay around $450 per month in property taxes or $5,400 per year. 

As part of the home purchase process, most states require that you get an unbiased, official appraisal to estimate your taxes accurately. Your lender usually orders the home appraisal and includes the cost in their list of closing costs. After you close on your home purchase, keep in mind that your local government will regularly reassess properties every few years for tax purposes, which could lead to a change in your tax bill.

4) Insurance

The “insurance” component of PITI refers to homeowner’s insurance and, when it’s required, private mortgage insurance (PMI). Let’s discuss each of these concepts in more detail. 

Private mortgage insurance (PMI)

Your PMI rates depend on how much of a down payment you made and your credit score. If you’re putting down less than 20% on a conventional loan, you’re required to pay for private mortgage insurance (PMI), which protects the lender if you default on your mortgage payments. Once you build at least 20% equity in your home — and your loan-to-value (LTV) ratio is 80% or less — you can get rid of PMI. For FHA loans, a similar mortgage insurance premium has to be paid throughout the life of the loan on any FHA-backed mortgage loan.

If your PMI comes in at a rate of 1%, here’s how you’d calculate a mortgage of $360,000: $360,000 x 1% = $3,600 per year; $3,600 ÷ 12 monthly payments = $300 per month.

living room with fireplace

Homeowners insurance

Most mortgage lenders require a homebuyer to purchase and maintain homeowners insurance over the entire loan term. Homeowners insurance covers you and the lender if something catastrophic happens to the home, and you need to rebuild or move. Most homeowners insurance policies cover your home in the event of a break-in, fire, or storm damage. 

Most insurance companies require you to buy additional coverage for damage from earthquakes or flooding. You can also purchase insurance riders to cover items of significant value, such as an expensive musical instrument, art, or jewelry. If you buy a condominium, you’ll also pay a homeowners association fee. Your lender may consider your HOA fee your insurance as the HOA carries its own insurance that covers the building, and thus you may not need another policy. 

Property insurance amounts can vary among different insurances. It’s wise to shop around after the seller accepts your purchase contract, and before you close on the property, to get a good idea of reasonable rates. Insurance companies consider these factors when calculating an insurance premium:

  • The home’s value
  • Whether you live in an urban area or a rural area
  • Whether you live in an area with high climate risk
  • How close your home is near a fire department or fire hydrant 
  • Whether you have an insurance risk on your property, i.e., something could injure children, such as a trampoline, pool, or specific dog breed 
  • How many insurance claims you make each year for other types of insurance

When estimating your homeowner’s insurance costs, it’s helpful to keep a general rule of thumb in mind. On average, you can anticipate paying approximately $3.50 per every $1,000 of your home’s value in annual homeowner’s insurance premiums. For instance, if your property is valued at $450,000, you can expect to pay around $1,575 per year for insurance coverage, which translates to roughly $131 per month.

How to calculate PITI

Before you start your search for a house, it’s a good idea to calculate PITI to determine your price range and help you find a mortgage option that will fit your budget. The exercise will make you a more rational home buyer and keep you from falling in love with a house outside your price range. 

The simplest way to calculate PITI is by using an online monthly mortgage calculator. Redfin’s mortgage calculator includes the principal and interest, taxes, insurance, HOA, and PMI. You can also add in your location for more accurate estimates.

PITI and the 28% Rule

Your PITI gives you a rough idea of what purchase price range you can afford. One way to identify a purchase price within manageable limits is to use the housing expense ratio. To ensure your ongoing ability to make your mortgage payments, home finance experts typically recommend that your housing costs should be equal to or below 28% of your monthly household budget. If your PITI is more than 28% of your monthly budget, your lender may require you to pay for additional mortgage insurance.

In our example, you can estimate your housing expense ratio by dividing your PITI by your total monthly income. If your household income is $10,000 a month, your PITI will make up about 28% of your monthly budget, well within recommended guidelines. ($2,800/$10,000 = 28%.)

Keep in mind that PITI may just account for just some of your monthly expenses when owning a home. Depending on where you live and how you are paying for your home, there may be additional costs to consider. Additionally, the components that make up PITI are broadly defined here; there is often more complexity that goes into each part of PITI.

How PITI impacts loan approval

During the home buying process, it can be easy to trick yourself into thinking you can afford a more expensive home if you only look at your mortgage’s principal and interest cost without considering the total PITI with taxes and insurance. 

For instance, let’s take a 30-year mortgage on a $450,000 property, assuming a property tax rate of 1.25% ($5,625 per year) and an annual homeowners insurance premium of $3,600. In this scenario, your monthly financial commitment would go beyond just the principal and interest amount, as you would need to allocate an additional $581 to cover taxes and insurance. Understanding and accounting for these factors will provide you with a comprehensive understanding of the actual costs involved in homeownership.

Here is a breakdown of the example discussed above. 

Principal and Interest PITI
Interest rate 7% 7%
20% down payment $90,000 $90,000
Property taxes N/A $450
Homeowners insurance N/A $131
Private mortgage insurance N/A N/A
Monthly payment $1,800 $2,381

How DTI factors in

The principal balance will factor into your debt-to-income (DTI) ratio. Your DTI ratio gives lenders an idea of how capable you are of managing money and the likelihood that you will consistently make your monthly payments. To determine your DTI, the lender uses your total minimum monthly debt obligation and divides it by your gross monthly income to arrive at a percentage. This calculation also includes payments on credit card accounts, auto loans, student loans, and other recurring debt payments. Lenders consider you a higher risk if your DTI ratio exceeds 43%, some lenders will allow a DTI as high as 50%. 

Don’t overlook other housing costs

PITI is just one fundamental concept to understand before applying for a mortgage. As you consider how much house you can afford, you’ll also need to plan for additional costs typically associated with homeownership. These include HOA or condo fees, which can range from $100 to $1,000 per month, with an average of $200 to $300. Additionally, budgeting for repairs and maintenance is crucial, with a general guideline of saving 1% to 5% of your home’s value annually. For a newer $450,000 home, this would mean setting aside $4,500 to $22,500 per year. Utility bills for electricity, water, gas, sewer, cable, trash, and internet should also be factored in, and contacting the utility company or asking the seller or neighbors can help estimate these costs.

The bottom line on PITI

Buying a home is very exciting, but before signing your mortgage contract, know what payment amount you can afford based on PITI and other monthly costs. The more you understand the home buying and mortgage process and the total cost of homeownership, the easier it will be to finalize your purchase decision. Your home purchase represents an important milestone in your life – avoid confusion and uncertainty by gaining a solid understanding of PITI and the cost of homeownership. 

Source: redfin.com

Apache is functioning normally

<img data-lazy-fallback="1" data-attachment-id="263090" data-permalink="https://www.housingwire.com/articles/more-proof-that-rent-is-getting-cheaper-across-the-u-s/the-concept-of-falling-real-estate-market-reduced-interest-in-the-mortgage-a-decline-in-property-prices-and-apartments-low-interest-rates-on-mortgage-loans-reduced-demand-for-home-purchase/" data-orig-file="https://www.housingwire.com/wp-content/uploads/2020/07/rent-falling.jpeg" data-orig-size="1200,675" data-comments-opened="1" data-image-meta=""aperture":"0","credit":"u0410u043du0434u0440u0435u0439 u042fu043bu0430u043du0441u043au0438u0439 – stock.adobe.com","camera":"","caption":"The concept of falling real estate market. Reduced interest in the mortgage. A decline in property prices and apartments. Low interest rates on mortgage loans. Reduced demand for home purchase.","created_timestamp":"1548806718","copyright":"u00a9u0410u043du0434u0440u0435u0439 u042fu043bu0430u043du0441u043au0438u0439 – stock.adobe.com","focal_length":"0","iso":"0","shutter_speed":"0","title":"The concept of falling real estate market. Reduced interest in the mortgage. A decline in property prices and apartments. Low interest rates on mortgage loans. Reduced demand for home purchase.","orientation":"0"" data-image-title="The concept of falling real estate market. Reduced interest in the mortgage. A decline in property prices and apartments. Low interest rates on mortgage loans. Reduced demand for home purchase." data-image-description data-image-caption="

The real estate market is cooling down, observers say.

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The real estate market is cooling down

Reports released this week by several respected market observers point to less good and increased bad and ugly ahead for the housing market.

For some of the good, a U.S. Census Bureau report released late last week spurred a bout of optimism when it revealed that new-home sales jumped by nearly 11% month-over-month in May on a seasonally adjusted basis, after declining by 12% in April. 

Moody’s Investors Service, in a housing-market report released this week, puts some ugly back into the home-sales figures for May, however.

“At 696,000 units, May new home sales were around 17% below the recent peak of 839,000 units in December last year,” the Moody’s report notes. “[On June 21], the National Association of Realtors said that existing-home sales declined for the fourth consecutive month. 

“Existing-home sales fell in May by 3.4% on a seasonally adjusted basis to 5.41 million, the lowest since June of 2020 and similar to pre-pandemic levels.”

Those figures, along with “sharp recent increases in mortgage rates” and other supporting data, lead Moody’s to conclude that the “U.S. home-price boom is over.” The firm, which rates securitization offerings and provides other capital-market services, predicts “material declines” in both new- and existing-home transactions this year, compared with 2021.

Supporting the ugly outlook for the housing market is the release today, June 29, of the quarterly CFO Survey, conducted jointly by Duke University’s Fuqua School of Business and the Federal Reserve Banks of Richmond and Atlanta. The survey of more than 300 U.S. financial executives conducted between May 25 and June 10, shows optimism about the broader U.S. economy continuing to decline.

The average index score for the current survey was 50.7, compared with 54.8 in the prior quarter and 60.3 two quarters ago.

“Price pressures have increased, real revenue growth has stalled and optimism about the overall economy has fallen sharply,” said John Graham, a Fuqua finance professor and the survey’s academic director. “Monetary tightening [by the Federal Reserve] is one of several factors dampening the economic outlook.” 

The CFO Survey’s findings are echoed by a revised first-quarter 2022 gross domestic product (GDP) estimate released Wednesday by the U.S. Department of Commerce’s Bureau of Economic Analysis (BEA). It shows that a drastic economic slowdown is already underway.

“Real gross domestic product [a measure of all goods and services produced in the economy] decreased at an annual rate of 1.6 percent in the first quarter of 2022 …,” the BEA report states. “In the fourth quarter of 2021, real GDP increased 6.9 percent.”

The BEA’s first-quarter GDP estimate, it’s third to date, was revised downward from -1.4% and -1.5% in the two prior estimates. The grim data led Mortgage Capital Trading (MCT), a San Diego-based capital market software and services firm, to broach the “R“ word in its daily market-overview report.

“Concern over a slowing economy and aggressive interest rate hikes from the Fed are beginning to dominate market sentiment,” the MCT report states. “This morning’s GDP release [on June 29] came with a downward revision for the last reading, further supporting views that a recession is either in progress or coming soon.”

What does all this mean for the housing market in the months ahead? The Moody’s report attempts to frame some of the expectations.

“We expect some increases in existing-house prices over the next 18 months, though for appreciation to be well below the general rate of inflation,” the Moody’s report states. “After that, we expect home appreciation to settle in at levels somewhat lower than the rate of overall U.S. inflation.”

The report even indicates that there “is risk that existing home prices will have a minor correction over the next two years, similar to housing markets in many other developed counties facing risks after recent booms.” 

The “moderation” in the U.S. housing market is ongoing and the full effects of recent rate increases have yet to be fully realized, the Moody’s report adds, especially with respect to housing prices.

Moody’s predicts that housing demand will “dampen significantly” in the months ahead due to the doubling of rates for 30-year fixed mortgages since the start of the year, which is fueling a huge jump in monthly mortgage costs. Freddie Mac’s most recent Primary Mortgage Market Survey shows the average 30-year fixed rate mortgage at 5.81% as of June 23. 

“The monthly costs of new mortgages on existing homes sold at median transaction prices [are] more than 60% higher than a year ago,” the Moody’s report states. “Although higher mortgage rates do not always drive home prices lower, they typically affect sales activity and drive down the rate of price appreciation. 

“We also expect higher rates to restrict for-sale supply because current homeowners will be reluctant to lose low-rate fixed borrowing costs.”

So, in effect, moderating or even declining home prices could be neutralized by rising borrowing costs, leading the housing market toward stagnation — the doldrums — in the worst-case scenario.

There is some good news mixed in with all this bad and ugly, however. Moody’s points out that some “fundamental housing strengths” will likely help to mitigate the degree of any market correction, at least over the next 12 to 18 months.

Those strengths include “favorable demographic trends, solid underwriting of outstanding mortgages and lingering housing supply constraints from a period of underbuilding,” according to the Moody’s report. Also on the bright side, according to Moody’s, is that a moderate decline in housing prices could be good for the market longer-term. That’s assuming the Federal Reserve wins the fight to tame inflation, now running at 8.6%,  without causing a major spike in unemployment, which was at 3.6% in May for the third month in a row, according to the Bureau of Labor Statistics.

In short, the housing market has reached a fork in the road, based on the Moody’s analysis — with one path leading to the doldrums, or even decline, and the other toward resurgence and a new normal.

“If U.S. home prices were to decline modestly, it would increase affordability for potential homebuyers and improve demand, including for individuals who were priced out of the market in the recent months because of rapidly rising interest rates,” Moody’s reasons in its report. “However, sustained large increases in mortgage rates or a material weakening in the labor market could lead to sharper declines in housing activity and prices.”

Source: housingwire.com

Apache is functioning normally

Homebuyers these days are facing much higher costs of ownership compared to a year ago, pushing most to the sidelines. Mortgage rates and home prices are high and inventory is paltry, resulting in a largely frozen housing market.

Nearly two-thirds of Americans say they are waiting for mortgage rates to drop before entering the market, according to a survey released this week by BMO Financial Group, the eight-largest bank in North America. Among those who plan to purchase a home soon, only 6% expect to do so this summer, which is supposed to be the high season for real estate agents. Refinancing plans are also on hold: among those planning to refinance, 81% said they are waiting until rates drop.

The survey also found that 68% of Americans plan on using loans from their financial institution and/or lines of credit to help finance their home purchase. BMO said that 46% of Americans plan on using some of their personal savings to help pay for their home purchase, such as a down payment. Nearly a quarter of people surveyed said they expect financial help from family or friends when they purchase a home.

Mortgage rates have remained stubbornly high for virtually all of 2023. On Thursday, rates were recorded at 6.94%, just below the recent high of 7.14% in late May. The Mortgage Bankers Association on Wednesday said that mortgage applications for the week ending June 2 were down about 30% from the year prior, a direct consequence of 10 consecutive rate hikes from the Federal Reserve. 

Still, there is optimism that the housing market is at the bottom and will gradually improve.

“If we can achieve a true soft landing [for the economy], which it looks like we might be able to pull off, then … rates will start to kind of slowly go down,” said John Toohig, the head of whole loan trading at Raymond James. “For the housing market, this is the bottom; we’ll get past this. But it’s not a slam dunk, don’t get me wrong. Nobody’s doing backflips here. Nobody’s doing high-fives. Nobody’s saying, “Hey, let’s break out the steaks and put away the hotdogs.” You know, it’s just incremental. … We need to see a 200 basis-points drop [in rates] before you see any meaningful refinance business.”

Source: housingwire.com

Apache is functioning normally

Purchase mortgage rates this week dropped 11 basis points to 5.70%, according to the latest Freddie Mac PMMS Index, ending a two-week climb following the Federal Reserve’s rate hike earlier this month.

A year ago at this time, 30-year fixed rate purchase rates were at 2.98%. The PMMS, a government-sponsored enterprise index, accounts solely for purchase mortgages reported by lenders during the past three days.

“The rapid rise in mortgage rates has finally paused, largely due to the countervailing forces of high inflation and the increasing possibility of an economic recession,” said Sam Khater, chief economist at Freddie Mac.

Another index showed the 30-year conforming rates also slid from last week.

Black Knight’s Optimal Blue OBMMI pricing engine, which includes some refinancing data — but excludes cash-out refis to avoid skewing averages – measured the 30-year conforming rate at 5.89% Wednesday, down slightly from last week’s 5.9%. The 30-year fixed-rate jumbo was at 5.42% Wednesday, up from 5.33% from the previous week, according to the Black Knight index.

Khater expects the dip in mortgage rates will also slow down home price growth.  

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“This pause in rate activity should help the housing market rebalance from the bottleneck growth of a seller’s market to a more normal pace of home appreciation,” Khater said. 

Mortgage application volume rose 0.7% last week led by refinancing applications and a slight uptick in conventional loans, according to the Mortgage Bankers Association. After increasing 65 basis points during the past three weeks, the 30-year fixed rate declined 14 basis points last week, the MBA said. 

Refi application rose 1.9% from the previous week and purchase application marginally increased 0.1% from a week earlier.

Mortgage rates tend to move in concert with the 10-year U.S. Treasury yield, which reached 3.10% Wednesday, down from 3.16% a week before. The federal funds rate doesn’t directly dictate mortgage rates, but it does steer market activity to create higher rates and reduce demand.

Following the Federal Reserve’s interest rate hike of 75 basis points on June 15, mortgage rates have been showing an upward trend for the past two weeks.

According to Freddie Mac, the 15-year fixed-rate purchase mortgage averaged 4.83% with an average of 0.9 point, down from last week’s 4.92%. The 15-year fixed-rate mortgage averaged 2.26% a year ago. 

The 5-year ARM averaged 4.50% up from 4.41% the previous week. The product averaged 2.54% a year ago. 

Economists expect the tightening monetary policy will reduce originations in 2022 and 2023. The MBA expects loan origination volume to drop about 40% to about $2.4 trillion this year, from last year’s $4 trillion. Meanwhile, the MBA expects 6.53 million existing and new home sales in 2022, compared to 6.9 million in 2021. 

Source: housingwire.com

Apache is functioning normally

After the recent extraordinary show of force defending changes to LLPAs by federal regulators and their friends, the forest through the trees risk remains in focus to me.

One of the great concerns I have, as both a former regulator and the former head of a major industry trade association, is the downside risk of keeping the GSEs in conservatorship any longer. For me, it’s really a question about the lesser of two evils.

What’s the greater risk to housing: an endless series of FHFA directors who change seats with each political administration and then proceed to tinker with policy in pursuit of political priorities? Or, the risk of releasing Fannie and Freddie without firmly legislating some of the reforms that I and many others advocated for, going back to the early years of conservatorship?

Make no mistake about it, I sat firmly entrenched for years opposing the “recap and release” crowd, to the point where the camps on both sides of the issue were in almost pitched warfare. The Mortgage Bankers Association argued that Congressional reform should precede any effort to release the GSEs. In fact I testified in front of Congress in 2017 stating such.

But today I now see the risks of letting this drag on into perpetuity without resolve. As each succeeding FHFA director comes into the role the industry, potential homeowners, lenders and more will face the risk of a cascading series of policy initiatives being implemented by the GSEs at the behest of the FHFA, regardless of whatever protests that may come from the respective staffs at either GSE.

While the latest was this clearly manipulated LLPA pricing structure and the now failed attempt at a DTI cap, the list of fees added to 2-4 unit homes, second homes, cash-out refinances, and more appear to be focused on political objectives and not actual risk.

In fact, MBA traditionally argued that g-fees and other pricing methods at the GSEs should only reflect the actual risks of the loans and not be used for other purposes. Prior to the collapse of Fannie and Freddie, pre 2008, the GSEs would give preferred pricing to their largest sellers in what was known as “alliance” agreements. The spread in pricing between a large seller and a small one was significant.

I remember early in my career at MBA taking three CEOs of independent mortgage banks to meet with then Acting FHFA Director Ed DeMarco to argue against any price disparity based on anything but the actual risk of the loan. And DeMarco responded, almost completely eliminating the pricing differences during his tenure.

But today we have more to be concerned with. You see, the LLPA changes, while small in impact, were just part of the slippery slope of adjusting fees and policies to make the GSEs do business differently and to get them to focus more on entry-level homebuyers.

The Urban Institute puts out a monthly chart book that is chock-full of incredible data about our marketplace. In the most recent May release, they show just how hard it is for the GSEs to expand access to minorities who make up a significant share of new first-time homebuyers.

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As the chart above shows, it’s the Ginnie Mae programs, FHA in particular, that completely dwarf the efforts of the GSEs in this regard. And while these modest changes to LLPAs might help, there is far more that impedes the ability of the GSEs to be effective in this area.

But FHFA hasn’t stopped there. There is the implementation of goals focused on LIP (low income purchase loans) and VLIP (very low income purchase loans) that could result in a number of unintentional distortions to pricing and credit availability. It’s all in their affordability goals and, while complicated, we can already see distortions.

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The goals, shown in the chart above, are clear, but if you look at how the GSEs have performed historically against these numbers, the fact is that there are many years over the last decade where these goals would have been missed.

But now things are changing. The GSEs are using the cash window to buy more of these LIP and VLIP loans, reducing the effectiveness of the cash window for other purposes. We are seeing the GSEs begin to selectively reduce the volume of high-balance purchases in order to improve the percentages.

Over the course of 2022, it appears that Freddie may have begun offering selected customers pricing incentives for lower balance owner-occupied purchase loans and also allowed customers with greater numbers of these loans to increase their delivery percentages.

Fannie Mae, on the other hand, seems to have required customers to simply deliver a representative mix of VLIP and LIP loans to both GSEs. Since Fannie Mae had lower delivery percentages with selected customers that had more of the lower balance loans, they believe they did not meet some of the enterprise housing goals for 2022.

The need to hit the targets is forcing the GSEs to reduce the ability of sellers to deliver what the market will bear and instead deliver to the mix the objectives that they need. The problem here is that they are turning to negative incentives.

Facing a market that is not producing loans at the aspirational levels of the current VLIP and LIP goals, the GSEs appear to have turned a corner. They are transitioning from positive incentives that might promote greater production of housing goals loans, to now imposing disincentives, from both a pricing and volume perspective, that create an adverse impact on a significant majority of GSE owner-occupied purchase borrowers.

Said differently, the GSEs are not able to produce enough VLIP and LIP “numerator” loans, so they have no alternative but to try to reduce the non-VLIP and LIP “denominator” loans in an effort to achieve the ratios that FHFA established.

Look, the GSEs have always had affordable housing goals. What has changed is that they no longer have a retained portfolio that can be used to help meet these goals through bulk purchases. But more importantly, this new structure is forcing pricing distortions which we are already seeing blatantly though the LLPA structure, but even more so through changes to usage of the cash window, disincentives to sellers to reduce higher balance loans, and more.

All of this will lead to hurting the mainstream borrowers that the GSEs have always served.

As shown above in the chart showing the GSEs’ mix to other sources, perhaps we need to think differently here. Yes, reasonable goals make sense for the GSEs. But all the programs within Ginnie Mae still dwarf any ability the GSEs have to significantly change the market.

But the greater question we all need to ask is this: is the lesser of evils the need to release the GSEs from conservatorship and allow them to return to a more self-managed business environment? This would lessen the ability of their regulator to use these two companies for political purposes, which might distort the market in ways that are ultimately more harmful than any gains they may make along the way.

For me, I have turned this corner. The GSEs are far too important to be overly manipulated in ways that might hurt execution for the traditional homebuyer in these programs. There are other ways to explicitly support affordable housing objectives. This to me is just too slippery a slope.

As I see the forest through the trees, I am faced with a new conclusion. We need to release the GSEs from conservatorship as soon as possible. There is too much at risk to the housing finance system over time as we erode their core business models for political purposes.

Source: housingwire.com

Apache is functioning normally

High home prices and mortgage rates are continuing to constrain affordability in housing markets nationwide. As a result, consumers’ perceptions on home buying and selling have further diverged.

Fannie Mae‘s Home Purchase Sentiment Index (HPSI) —  which tracks the housing market and consumer confidence with selling or buying a home — declined by 1.2 points in May to 65.6. The index is down 2.6 points compared to the same period last year.

Four of the HPSI’s six components decreased month over month in May. Most notably, the component polling consumers’ belief that it’s a “good time to buy” neared its survey low, while the “good time to sell” component increased to its highest level since July 2022.

“As we near the end of the spring home buying season, the latest HPSI results indicate that affordability hurdles, including high home prices and mortgage rates, remain top of mind for consumers, most of whom continue to tell us that it’s a bad time to buy a home but a good time to sell one,” said Mark Palim, Fannie Mae’s vice president and deputy chief economist.

According to the survey, only 19% of consumers believe it’s a good time to buy a home, while 65% believe it’s a good time to sell.

The majority of consumers expect that both home prices and mortgages will either increase or remain the same over the next year. About 81% of renters responded that it would be difficult to get a mortgage today, another survey high, Palim noted.

Affordability struggles have been a recurring hurdle for buyers. Black Knight‘s recent monthly mortgage monitor report noted that tightening credit availability, elevated rates, inventory shortages and strengthening home prices are adding to the affordability challenge.

Since the start of 2023, inventory has deteriorated in 95% of major markets, according to the report. 

It now takes 34.2% of the median household income to make principal and interest (P&I) payments on the median-priced home purchased with 20% down and a 30-year fixed-rate mortgage. 

In addition, the price strengthening that occurred nationwide this spring has erased more than 60% of the priced declines seen late last year, according to the report.

As a result, the price strengthening at the current rate of growth would fully erase those corrections by mid-2023, Black Knight said.

Source: housingwire.com

Apache is functioning normally

A 10 basis point decline in mortgage rates last week wasn’t enough to spur consumer demand for mortgages, according to the latest figures from the Mortgage Bankers Association.

For the week that ended June 2, mortgage applications fell 1.4% from the prior week. That was despite mortgage rates dropping to 6.81% from 6.91% during roughly the same period.

“Mortgage rates declined last week from a recent high, but total application activity slipped for the fourth straight week,” said Joel Kan, MBA’s vice president and deputy chief economist. “Overall applications were more than 30% lower than a year ago, as borrowers continue to grapple with the higher rate environment.”

After more than a year of steady rate increases by the Federal Reserve, the FOMC is expected to pause hikes at its upcoming meeting next week. But that might depend on the upcoming inflation reading scheduled on June 13, the same day of the  meeting.

The MBA data showed that the average 30-year fixed rate for conforming loans ($726,200 or less) decreased to 6.81% last week from 6.91% the previous week. For jumbo loan balances (greater than $726,200), the rate decreased to 6.74% from 6.78% in the same period, according to the MBA.   

However, at Mortgage News Daily, rates were even higher on Wednesday morning, at 6.89%.

Last week, federal lawmakers reached a deal on the U.S. debt ceiling and avoided a default on June 1, which could have pushed rates up by several percentage points.

Refinancing applications declined 1% last week compared to the previous week and were 42% lower than the same week one year ago. However, the refinance share of mortgage activity increased to 27.3% of total applications from 26.7% the previous week. Meanwhile, the purchase index decreased by 2% from one week earlier and was 27% lower than last year’s level on an unadjusted seasonal basis. 

“Purchase activity is constrained by reduced purchasing power from higher rates and the ongoing lack of for-sale inventory in the market, while there continues to be very little rate incentive for refinance borrowers,” said Joel Kan.

Regarding loan types, the adjustable-rate mortgage (ARM) share of mortgage apps remained unchanged at 6.8% of total applications, the MBA data shows. 

The Federal Housing Administration loans’ share rose to 13.2% from 12.7% the week prior. The U.S. Department of Veteran Affairs loans’ share increased to 12.5% from 12.1% in the same period. And the U.S. Department of Agriculture loans’ share decreased one basis point to 0.4% of the total applications.

Source: housingwire.com

Apache is functioning normally

Four lawsuits filed in New York and California are part of the settlement, which names Sprout, its affiliated company Recovco Mortgage Management LLC, and former top executives, including its founder Michael Strauss, as defendants. 

Defunct Long Island-based Sprout, led by industry veteran Strauss, informed hundreds of workers it was closing its doors on July 6 after a sharp rise in mortgage rates saddled the company with loans it was unable to sell to investors in the secondary market at par. 

HousingWire previously reported that ex-employees alleged the company did not pay the former employees’ last paychecks and severance package. The company also canceled health insurance coverage retroactively to May 1, resulting in several lawsuits against the lender.

In the request for the settlement approval, the plaintiff’s attorneys said they do not “believe Defendants even have a defense to the allegation that the Company failed to pay its employees for several weeks of work performed once the corporate entities shut down.”

To justify the settlement, the attorneys wrote, “Our primary concern has been the limited assets left in the accounts of the Corporate Defendants (Sprout and Recovco) and our ability to collect on a judgment against the primary individual defendant, Michael Strauss.”

The negotiations started seven months ago and included two mediations, in-person and virtual meetings and dozens of phone conferences. 

In October 2022, plaintiffs demanded about $20 million in unpaid wages, liquidated damages, and damages under the federal WARN and COBRA notice violations. In turn, the company responded that it would not have the financial ability to “pay an eight-figure judgment and that the collection risk against Strauss was high.”

“We learned many potentially valuable assets were, in fact, encumbered or no longer in Defendant Strauss’ possession. This information helped us to offer principled advice to our clients regarding settlement decision making,” plaintiffs’ attorneys wrote in court filings. 

Strauss is reportedly trying to sell a property at 610 Park Avenue in New York for $22.5 million and has started a new mortgage company. However, he is facing some resistance. Strauss and his company, Smart Rate Mortgage, appealed in April a decision from an Illinois regulator to suspend their licenses to operate in the state. Meanwhile, the licenses remain active.  

Scott Simpson, one of the attorneys for the plaintiffs at Menken Simpson & Rozger LLP, said in an email to HousingWire that the timeline for former employees to receive compensation will depend on when the court rules on the motion and any further dates set by the court.  

“If the court approves the settlement, a settlement administrator will send checks out to eligible class members,” Simpson said. 

“Our clients have no comment at this time,” Marc Wenger, an attorney for the defendants at Jackson Lewis P.C., said.

Source: housingwire.com