This year’s down market has shifted what mortgage lenders are seeking from their technology partners, because the spare dollars for nice-to-haves are no longer around. The booming housing market the past few years brought with it a surge in mortgage tech adoption, and while this movement towards innovation has been welcomed by mortgage parties, now more than ever lenders are looking at the data behind these mortgage tech claims. Return on investment and cost savings around must-haves are now the focus in a lot of tech partnerships.
To learn more about this shift in mortgage tech needs and the changing dynamic in vendor-lender partnerships, HousingWire interviewed John Hedlund, California Mortgage Bankers Association (CMBA) chairman and chief operating officer at AmeriHome Mortgage Company and Wes Iseley, CMBA board president of residential and senior managing director of Carrington Holding Company.
California is home to some of the largest lenders which allows the association to keep a very strong pulse on the needs and trends in housing. The associations’ annual Mortgage Innovators Conference in Anaheim, California in June is designed to explore the revolutionary world of mortgage technology and helps attendees gain valuable insights from experienced industry professionals.
“The Mortgage Innovators Conference is unique in our space because there’s more of a conversation and interaction with lenders and technology companies, or innovators. It was part of our goal to not just have a bunch of booths where people are pushing products and instead where they’re solving problems that lenders have today,” said Hedlund.
“The beauty of the Mortgage Innovators Conference, and what we’re trying to build there, is really more of that two-way dialogue. The companies that are coming are listening and trying to enhance, improve and develop their products, and will reposition what they’ve already built or are in the process of building,” he said.
This collaborative mindset is what will define the lenders and tech providers that grow. In the following Q&A, Hedlund and Iseley discuss what innovation looks like today, the current table stakes in mortgage tech, what tech companies should keep in mind when talking to lenders and more.
HousingWire: What are some of the biggest areas that lenders are looking at technology to solve?
John Hedlund: In 2021, business was crazy good, and lenders had more money. You had a lot of vendors and startups selling, for lack of a better term, bells and whistles. They were, in my opinion, nice-to-haves and didn’t really move the needle. You’d have an LO come over to your company, saying that they need a certain software because they’re comfortable with it, so lenders would buy it because they could afford it. We’re in a different world now. Most lenders lost money last year.
So when I think of technology today, I talk to our providers about how they need to show their economic value add more than ever. How do you take costs out of my business? How have you proven that, factually?
When I talk to clients and ourselves, I focus on “what do we really need that moves the needle?” And, “What is just nice to have?” I’m getting rid of the nice-to-haves, and we’re finding other vendors that want to come in.
For most of the guys today, it’s all bottom-line driven. They need to be liquid, and they don’t know what’s next with rates.
Wes Iseley: There are some real issues that are still out there with speed to close. The first thing with speed to close, anything we can do to income verifications, which we have come a long way in bringing that in. There are different models out there trying to bring in income verification quickly.
The second one would be from a compliance standpoint — wire fraud. Everybody has to have that compliance and quality in place because that will drive costs up.
So the whole time we’re speeding things up, and at the same time, we need to have our protections in place so we don’t have surprise losses. There’s a lot of work going on the front and the back end from a compliance perspective.
HW: What are the new table stakes when it comes to technology?
JH: There’s always way more ideas than are actually going to ever catch on. It’s hard to carve out a new niche where there’s really a value add, but ultimately, that’s where I would start. What is my value proposition? And, it has to be somewhat hard today; it can’t be soft. By soft, I mean that it’s a nice-to-have. I think of an economic value-add. If followed all the way through the process, does it move the needle somewhere?
WI: Right now, if you can’t make it easy for the customer, that customer is going to get frustrated and go away. It’s tough out there right now. This includes the ease of use for the customer and the communication in keeping all people involved in that transaction informed as it goes along. Especially in a purchase money close, you can’t mess up the close when the moving truck is outside. Keeping everybody informed as the process goes is a must.
HW: What should mortgage tech companies keep in mind when talking to lenders?
JH: There’s a lot of value in talking to a variety of different lenders in different markets, and testing, tweaking and revising your business model when it needs change. If you want to have something that isn’t a niche product, it has to ring true with the masses.
When we started AmeriHome, our mindset wasn’t to chase shiny objects. From the start, our goal was to be a top-five correspondent lender, and so we built the company with scale in mind and our value prop very simplistically became, “How are we going to add value to our clients?”
I see a lot of tech vendors that have great ideas in isolation that aren’t ever going to necessarily be at scale because it’s a niche-type model. In most cases, I wonder if they’ve vetted that and spent, not an hour, but weeks or months finding out what their clients really need and solving a problem versus creating a product to try and find a problem.
HW:What does housing innovation look like in today’s market?
WI: The big issue out there is affordable housing. While there are modular homes, manufactured homes and factory-built homes, there are so many restrictions. In California for example, there’s a fee to transport the manufactured house, which adds $25,000 to $30,000.
You need to get down state by state and say what are the restrictions? I think factory-built housing and the precision of the building itself is of a higher quality and that’s a way to solve for affordable housing. You’re not going to affect land price, so it’s the build. This is a big solution that everybody should be working on.
Mortgage rates are rising, refinances are trending, and older news is looming. Let’s cover all of it in this week’s Mortgage Monday update!
Rates Update
Last week, mortgage rates hit their highest since October 2019 – but let’s rewind a bit. For the week ending February 3, Freddie Mac actually reported generally stable rates from the average lender. Like many experts, they believe our economic recovery following Omicron will result in rate increases; what their weekly survey didn’t account for, however, was last Friday’s market changes.
On February 4, the US Bureau of Labor Statistics released their monthly jobs report for January. In short, things are looking up – there were significant job increases last month even in the face of Omicron – and markets were forced to respond. A return to a better economy will also inevitably mean a return to higher rates, and last week’s mortgage rate increases are already reflecting that.
We’ll likely see Freddie’s PMMS catch up with last week’s rate spike on Thursday. But for now, get in touch with your Total Mortgage loan officer if you’ve been considering a home purchase or refinance. Rates are rising faster than ever and are projected to continue doing so, especially after the Fed’s recent hinting at further increases in March.
Refinances are Trending as Rates Rise
Because rates are rising, refinance numbers are up and trending. In late January, mortgage refinancing accounted for 57.3 percent of applications in The Mortgage Bankers Association’s Refinance Index. As rates rise, the window to refinance at something lower naturally closes; we predict that refi numbers will continue along this trend through February until mortgage rates hit pre-pandemic levels.
In the meantime, our door is always open if you’re looking to refinance. The opportunity to do so is certainly dwindling, so be sure to act fast and get in touch with us. Find your mortgage banker today!
Older, But Still Important News
The Federal Housing Finance Agency (FHFA) announced upcoming fee increases for certain Fannie Mae and Freddie Mac home loans. Effective April 1, 2022, upfront fees for these options will have the following increases:
Upfront fees for high-balance loans will increase between 0.25 and 0.75 percent.
Upfront costs for second home loans (non-primary residence) will increase between 1.125 and 3.875 percent.
These increases will ultimately depend on each product’s loan-to-value ratio. “High-balance” loans qualify as any that go above the conforming baseline limit introduced on January 1 – more information on that below.
Last month, the borrowing limits for Conventional and Federal Housing Administration (FHA) loan options saw significant increases to help buyers combat rising market prices. The conforming limit for single-unit home loans is now $647,200 – an 18.05 percent increase from last year’s limit. To learn more about these changes and your new borrowing options, get in touch with your Total Mortgage loan officer.
In Closing
So far, 2022 has shown us just how reactive the markets (and mortgage rates) can be. In just a couple of months, rates have gradually shifted to their highest in years – meaning that the historic lows we’ve been used to seeing are now behind us. If homeownership is one of your goals for the year, it would be best to act sooner than later. Contact us at any time to get started!
As always, we’ll continue to monitor mortgage rates, industry news, and more to keep you informed. Enjoy the rest of your week!
Depending on which rate tracker you look at, mortgage rates decreased, moved sideways or increased on a week-over-week basis.
Since June 1, the yield on the benchmark 10-year Treasury moved up 18 basis points to close at 3.78% on Wednesday.
But the spreads remain abnormally wide, and that likely contributed to the divergent movements among different trackers that use different methodology. The normal spread between the 10-year Treasury and the 30-year fixed-rate mortgage is between 150 and 200 basis points; no matter which tracker is used, they currently are in the 300 basis point range.
Freddie Mac’s Primary Mortgage Market Survey, which takes in rates on submissions to its Loan Product Advisor automated-underwriting system, reported an 8 basis point decline in the 30-year fixed-rate mortgage to 6.71% for June 8 from 6.79% one week prior. For the same week in 2022, the 30-year FRM averaged 5.23%.
The 15-year FRM fell to 6.07% from 6.18% week-to-week but rose from 4.38% on a year-over-year basis.
“Mortgage rates decreased after a three-week climb,” said Sam Khater, Freddie Mac’s chief economist, in a press release. “While elevated rates and other affordability challenges remain, inventory continues to be the biggest obstacle for prospective home buyers.”
Optimal Blue, a division of Black Knight, reported the 30-year conforming mortgage at 6.746% as of June 7, based on data submitted to its product and pricing engine. That compared with 6.719% on May 31; on June 1 it fell to 6.649% before tracking higher over the following days.
Zillow’s rate tracker, based on offers, was at 6.61% on Thursday morning, unchanged from the morning of June 1, and down one basis point from the previous week’s average.
“After some mild oscillations, mortgage rates are right where they were this time last week as investors await more conclusive signs of progress on inflation and monetary policy,” said Orphe Divounguy, senior macroeconomist at Zillow Home Loans, in a statement issued Wednesday night. “Last week’s stronger-than-expected employment report caused Treasury yields — and mortgage rates that follow them — to increase.”
But the services sector slowed down in May, according to the Institute for Supply Management purchasing managers’ index report. The price component had its weakest reading in two years, which is likely to be seen in the next Consumer Price Index reading.
“Cooling inflation and a general economic slowdown would put downward pressure on long-term interest rates like the 10-year Treasury yield,” Divounguy said.
On Wednesday, the Mortgage Bankers Association reported a 10 basis point decline in the 30-year FRM to 6.81%.
“The housing market has gotten off to a slow start this summer due to higher mortgage rates, low inventory and economic uncertainty,” a Thursday morning statement from MBA President and CEO Bob Broeksmit said. “The labor market continues to be exceptionally strong, which could bring more buyers back into the market once rates move away from their recent highs.”
Divounguy forecasts that mortgage rate movement should remain muted over the next seven days, “but upward bias remains as investors await next week’s CPI inflation report and Federal Open Market Committee forward guidance.”
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.
Done deal: The TJ Ribs location on Siegen Lane was sold for $2.5 million this week to SDP LA Baton Rouge 1 LLC, which shares an address with Streamline Development Partners of Oxford, Mississippi. Burke Moran, the son of founder TJ Moran, was the seller, as previously reported by Daily Report. While the restaurant still has a six-month lease, the new owner’s plans for the property have not been announced.
Homebuying trends: Mortgage rates have fallen from recent highs, but demand for home loans dropped for the fourth straight week, declining by 1.4% last week compared to the week before, according to the Mortgage Bankers Association’s seasonally adjusted index. Applications to refinance a home loan fell 1% for the week and were 42% lower than the same week a year ago. CNBC has the full story.
Plan B: Biden administration officials are quietly planning for the possibility that the Supreme Court will strike down President Joe Biden’s sweeping student loan forgiveness program. Should the court block the program, the administration would likely pursue more targeted policy options as well as measures aimed at helping borrowers who would be required to resume making payments on their loans. Read the full story from The Wall Street Journal.
With significant increases in mortgage rates and application volumes, 2022 is already showing us the effects of the Federal Reserve’s expedited tapering plan. Things are moving fast, so let’s get right into this week’s update with the latest mortgage industry news.
Rates Update
In the week ending January 13, Freddie Mac reported some of the largest average mortgage rate increases in recent months. According to Freddie’s PMMS, loan products across the board showed increases of upwards of 0.2 percent – bringing rates to their highest since early 2020. Our predictions:
Refinance opportunities could be disappearing. Should mortgage rates continue to increase, the window to refinance at a lower rate will subsequently close. Acting sooner than later will benefit you in the long run, so be sure to contact your Total Mortgage loan officer to get started.
Mortgage application volume will increase. On January 12, the Mortgage Bankers Association (MBA) reported a 1.4 percent increase in mortgage applications from the week prior; this increase will likely continue in the coming weeks as buyers take advantage of the market before further rate hikes.
As always, we’ll continue to keep you updated as the market develops and mortgage rates shift. The Federal Reserve’s next meeting on January 26 will likely shed more light on the above as we close out the month. For now, contact us if you have any concerns or are ready to lock in a rate before they continue to rise.
Older, but Still Important News
Even with this recent spike in mortgage rate numbers, let’s not forget about older news that will still hold prominence in the months to come.
Earlier this month, the Federal Housing Finance Agency (FHFA) announced upcoming fee increases for certain Fannie Mae and Freddie Mac home loans. Effective April 1, 2022, upfront fees for these options will have the following increases:
Upfront fees for high-balance loans will increase between 0.25 and 0.75 percent.
Upfront costs for second home loans (non-primary residence) will increase between 1.125 and 3.875 percent.
These increases will ultimately depend on each product’s loan-to-value ratio. “High-balance” loans qualify as any that go above the conforming baseline limit introduced on January 1 – more information on that below.
At the start of the month, the borrowing limits for Conventional and Federal Housing Administration (FHA) loan options saw significant increases to help buyers combat rising market prices. The conforming limit for single-unit home loans is now $647,200 – an 18.05 percent increase from last year’s limit. To learn more about these changes and your new borrowing options, get in touch with your Total Mortgage loan officer.
In Closing
Despite everything, the market is still in a favorable place for buyers – but for how much longer? Even in the face of Omicron concerns, mortgage rates are rising and are only expected to continue doing so throughout the year. If you’ve been waiting for the perfect rate, now may be one of your last chances to lock it in; contact us to get started and stay tuned for next week’s Mortgage Monday update!
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 BMOFinancial 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.”
Purchase mortgage rates this week dropped 11 basis points to 5.70%, according to the latest Freddie MacPMMS 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. TheMBA 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.
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.
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.
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.
Mortgage-backed securities prepayment speeds increased 22% month-to-month in May, but that was largely due to seasonality related to traditional spring buying activity, a Keefe, Bruyette & Woods report stated.
The conditional prepayment rate across all issuer types was 6.2 in May, versus 5.1 in April. For May 2022, the CPR was 9.9.
“However, prepayments still remain very low, and we expect speeds to remain low for the foreseeable future as purchase activity remains subdued and the majority of the mortgage market is still 300 basis points out of the money to refinance,” Bose George, a KBW analyst, wrote.
The latest Mortgage Bankers Association Weekly Application Survey put the 30-year conforming mortgage at 6.81%, the jumbo at 6.74% and loans insured by the Federal Housing Administration with an average rate of 6.73%. Those rates are keeping many existing homeowners from seeking a new residence as well as from refinancing.
A year ago, the conforming 30-year FRM averaged 5.4% but in 2021, it was 3.15%. “It would take a significant decline in rates (which we do not expect) for transaction volumes to increase meaningfully” for mortgage originators,” George said.
George estimated just 1% of the market is in the money to refi. If rates were to fall 300 basis points, it would make financial sense for 28% of current borrowers to refinance. At a 200 basis point decline that shrinks to 12% and at 100 basis points, just 4% would be in the money.
KBW remains positive on the six mortgage insurers “given that we expect credit to hold up better than current valuations (near/below book value) suggest,” George said. “While we are neutral on most mortgage originators, gain-on-sale margins appear to have bottomed, so we are becoming more constructive.”
The CPR for Fannie Mae bonds in May was 6.3, versus 5.2 in April and 9.8 one year ago. When it comes to Freddie Mac, the CPR last month was 6.1, compared with 5.0 in April and 9.3 for May 2022.
Over the same time frame, the Ginnie Mae CPR of 7.7 was up from 6.4 but down from 14.2.
