Mortgage Rates Rise Sharply

Mortgage Rates Rise Sharply to 7-Year Highs

Bajak and Associates

Freddie Mac Projected 30 Year Fixed Rate Back in Feb. 2018

Mortgage rates had a bad week and an especially bad day following a much stronger-than-expected jobs report.  The Employment Situation (the most important piece of labor market data and arguably the most important economic report as far as interest rates are concerned) showed the highest pace of wage growth since before the recession and a surprisingly robust addition of new jobs in October. Strong jobs data is the nemesis of low interest rates and today was no exception.

Mortgage rates were already operating fairly close to long-term highs, but today's move easily took them to new highs.  The average lender is now quoting conventional 30-year fixed rates of 5% for relatively ideal scenarios.  Those without a big down payment or without perfect credit/income can expect to see even higher rates.  Most lenders ended up recalling the morning's initial rate sheets and reissuing higher rates at least once today. 

There's really no silver lining apart from the fact that the higher rates go, and the quicker they get there, the closer we get to the point that the economy slows down as a result.  When that happens, rates will begin to fall before just about anything else.  Unfortunately, the expected time frame for such things is incredibly wide (not the sort of thing you hope for if you need to buy/refi).  And yes... it's also unfortunate that our one source of solace at the moment involves an economic downturn, but if you want low interest rates, that tends to come with the territory.

Loan Originator Perspective

October's NFP jobs report beat market expectations today, and bonds sold off as a result. Treasury yields are near early October's multi-year high, and MBS are following their lead. There's little/no motivation for rates to drop, and plenty for them to rise.  Lock early, ideally as soon as you have the opportunity. -Ted Rood, Senior Originator

Vast majority of clients continue to favor locking in once within 30 days of funding.  I do not believe floaters have enough to gain to justify the risk as higher rates continue to be the trend. -Victor Burek, Churchill Mortgage

Lock/Float Considerations 

Rates continue coping with several big-picture headwinds, including: the Fed's rate hike outlook (and general policy tightening), the increased amount of Treasury issuance to pay for the tax bill (higher bond issuance = higher rates), and the possibility that fiscal stimulus results in higher growth/inflation (which certainly seems to be the case so far in 2018).

While rates were able to recover and stay sideways in the summer months, September and October have seen a surge up to the highest levels in more than 7 years. 


Upward pressure can continue as long as economic growth and inflation continue running near long-term highs.  Stay defensive (i.e. generally more lock-biased).  It will take a big change in economic fundamentals or geopolitical risk for the big picture to change. Such things tend to not happen as quickly as we'd like.

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Source: Matthew Graham, Mortgage News Daily

Fannie and Freddie End Funding of Single-Family Rentals

Fannie and Freddie End Funding of Single-Family Rentals

Bajak and Associates

The Federal Housing Finance Agency (FHFA) has pulled the plug on pilot programs run by both Fannie Mae and Freddie Mac (the GSEs) to finance institutional investment in single-family home rentals.  The programs began in February 2017 with a $1 billion loan from Fannie Mae to the Blackstone Group. The loan was originated by Wells Fargo with a Fannie Mae guarantee and secured by some of the 48,000 single-family homes Blackstone's Invitation Homes subsidiary had purchased during the recession, often from portfolios of lender-owned real estate, and turned into rentals.

At the time, the Urban Institute wrote that the transaction "marks the first time a government-sponsored enterprise has facilitated financing for a large institutional operator of single-family rental properties," and Fannie Mae pronounced the transaction the first in a pilot program.

In ending the program FHFA said, "In the last two years, both Enterprises have participated in the single-family rental market on a larger scale than previously through pilots designed to 'test and learn' more about the market and best practices.  In June 2017 FHFA convened a Single-Family Rental Workshop to solicit feedback, identify market challenges and opportunities, and gain perspective on the overall market.  It also conducted an impact analysis and reached out to a wide array of industry stakeholders.    

When the pilot began it provoked immediate blowback, especially from the National Association of Realtors® (NAR).  NAR's president at the time, William E. Brown, wrote a letter to FHFA director Mel Watt which said in part, "Rather than focusing on allowing well-qualified Americans to build wealth through affordable mortgage options, Fannie Mae is actively financing large institutions to compete with them. These investors do not expand the affordable housing stock. Rather, in this limited market they drive up the price of rents and remove affordable inventory from the hands of American homeowners."

The National Community Stabilization Trust (NCST) also denounced the program saying it would lower borrowing costs to the institutions, allowing them to buy up more housing stock. NCST president Robert Grossinger said, "I am perplexed to see Fannie Mae place a taxpayer guarantee behind the same private interests whose risky practices led to the millions of foreclosed homes they are now buying up. These investors so far have had no trouble financing the purchase of tens of thousands of homes without government support."

With this week's announcement FHFA appears to agree with Grossinger.  Watt said, "What we learned as a result of the pilots is that the larger single-family rental investor market continues to perform successfully without the liquidity provided by the Enterprises."

This will mark the end, FHFA said of the GSE's participation in the single-family rental market except through their previously existing investor programs. The GSEs are not precluded however from proposing changes to their existing programs to meet the needs of the single-family rental market. They are also free to develop proposals calculated to utilize single-family rentals as a pathway to homeownership.

Not surprisingly NAR applauded FHFA's decision. NAR president, Elizabeth Mendenhall, issued a statement that said in part, "With inventory shortages facing housing markets across the country, the National Association of Realtors® has long advocated for the Federal Housing Finance Agency to end its expansion into the single-family rental market and return its focus to promoting a liquid and efficient housing market, as Congress intended. By financing the purchase of thousands of single-family homes for institutional investors to use as rentals, Fannie Mae and Freddie Mac compounded on inventory shortages and affordability concerns, which are holding back prospective homebuyers across the country.

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Article Source: Jann Swanson, Mortgage News Daily

Fannie Sees Growth Slowing, Turns Bearish on Housing

Fannie Sees Growth Slowing, Turns Bearish on Housing

Bajak and Associates

Fannie Mae's economists have upgraded their second quarter economic forecast but say that may be about it for the year. In their July forecast, the company's Economic & Strategic Research (ESR) Group, headed by Doug Duncan, noted that the expansion just celebrated its ninth anniversary "with a bang."  Economic growth in the second quarter may have approached the high in that expansion that occurred almost three years ago.

The outlook for housing has turned bearish. Single-family construction starts were up in May for the fourth time in five months but still lagged the post-crash high of last November.  (Fannie Mae's economists prepared this report before the June data was released wherein housing starts plummeted by more than 12 percent.)  Multifamily starts rebounded in May, reversing about half of the prior month's drop but permits dropped for both single and multifamily construction.

Home sales were mixed.  New home sales rose in May, but the increase was driven by sales in the South which were at a decade long high.  Homebuyers are increasingly buying homes still in the planning stage, which suggests that building activity has not kept pace with demand.  Builders continued to face challenges from shortages of labor and rising building material costs.

Existing home sales fell for the second month and were lower year-over-year for the fourth time in five months.  The inventory of available homes has been down year-over-year for three years, impeding sales and driving price increases.  Typical marketing time is now 26 days, the shortest since the National Association of Realtors started tracking the number in 2011.  Pending home sales, a forward-looking indicator of existing home sales, also dropped for the second month in a row.

Even though interest rates stopped rising and even dipped a bit in May, purchase mortgage application activity was flat and refinance applications continued their decline, falling for the fifth straight month and the eighth time in nine months.  May volume was the lowest since December 2000.

The overall bearish activity in housing prompted Fannie Mae to lower its forecast for existing home sales from a slight increase over 2017 to a slight drop and downgrade purchase mortgage originations by $20 billion. They left their forecast for refinancing unchanged at a 26 percent decrease from last year, with an 8 point drop in the refinancing share to 28 percent.  Mortgage originations in 2018 are forecast to total $1.69 trillion, an 8 percent decline.

As to the overall economy, the ESR group estimate that GDP growth shot up to 4.2 percent during the second quarter from 2.0 percent in the first.  This was due to spending by consumers and the government, inventory investment and more favorable trade. Residential investment, which was a drag on growth in the first quarter appears to have made a modest contribution in the second.

Enjoy it while it lasts.  The economists say this growth will not be sustainable and that the GDP will finish out 2018 with 2.8 percent growth, one tenth-point higher than they predicted last month.  It will then slow to 2.2 percent in 2019 as fiscal impacts fade.

Trade will be a factor in the slowdown.  Canada has already implemented tariffs on $12.5 billion in U.S. goods and there is a back and forth with China involving tariffs on $34 billion in goods on each side.  The U.S. has proposed a 10 percent tariff on a list of another $200 billion in Chinese imports. The impact of these actions so far, Fannie Mae's economists say, have been small but potential retaliation from China "could be devastating for some local economies."

Even though wages remained flat - up another 0.2 percent - in the June employment report, inflation did increase.  The Fed's preferred indicator, the personal consumption expenditures (PCE) deflator, moved up, also by 0.2 percent, in May for the second straight month.  That brings annual growth to 2.3 percent, above the Fed's target measure of 2.0 percent.  The Fed has indicated it would tolerate inflation overshooting its target and there are also concerns about the flattening yield curve, the spread between  2-year and 10-year yields was at about 30 basis points at the time the forecast was written.  Despite these contra-indications, the ESR group says it expects the Fed to stay on its monetary normalization track and they changed their rate hike call to two increases in the second half of this year, in September and December, compared with the one hike they anticipated in their June forecast.


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Source: Jann Swanson, Mortgage News Daily, July 20, 2018

Fannie Mae To Ease Financial Standards

Fannie Mae Will Ease Financial Standards for Mortgage Applicants

LenderVolt

It’s the No. 1 reason that mortgage applicants nationwide get rejected: They’re carrying too much debt relative to their monthly incomes. It’s especially a deal-killer for millennials early in their careers who have to stretch every month to pay the rent and other bills.

But here’s some good news: The country’s largest source of mortgage money, Fannie Mae, soon plans to ease its debt-to-income (DTI) requirements, potentially opening the door to home-purchase mortgages for large numbers of new buyers. Fannie will be raising its DTI ceiling from the current 45 percent to 50 percent as of July 29.

DTI is essentially a ratio that compares your gross monthly income with your monthly payment on all debt accounts — credit cards, auto loans, student loans, etc., plus the projected payments on the new mortgage you are seeking. If you’ve got $7,000 in household monthly income and $3,000 in monthly debt payments, your DTI is 43 percent. If you’ve got the same income but $4,000 in debt payments, your DTI is 57 percent.

In the mortgage arena, the lower your DTI ratio, the better. The federal “qualified mortgage” rule sets the safe maximum at 43 percent, though Fannie Mae, Freddie Mac and the Federal Housing Administration all have exemptions allowing them to buy or insure loans with higher ratios.

Studies by the Federal Reserve and FICO, the credit-scoring company, have documented that high DTIs doom more mortgage applications — and are viewed more critically by lenders — than any other factor. And for good reason: If you are loaded down with monthly debts, you’re at a higher statistical risk of falling behind on your mortgage payments.

Using data spanning nearly a decade and a half, Fannie’s researchers analyzed borrowers with DTIs in the 45 percent to 50 percent range and found that a significant number of them actually have good credit and are not prone to default.

“We feel very comfortable” with the increased DTI ceiling, Steve Holden, Fannie’s vice president of single family analytics, said in an interview. “What we’re seeing is that a lot of borrowers have other factors” in their credit profiles that reduce the risks associated with slightly higher DTIs. They make significant down payments, for example, or they’ve got reserves of 12 months or more set aside to handle a financial emergency without missing a mortgage payment. As a result, analysts concluded that there’s some room to treat these applicants differently than before.

Lenders are welcoming the change. “It’s a big deal,” says Joe Petrowsky, owner of Right Trac Financial Group in the Hartford, Conn., area. “There are so many clients that end up above the 45 percent debt ratio threshold” who get rejected, he said. Now they’ve got a shot.

That doesn’t mean everybody with a DTI higher than 45 percent is going to get approved under the new policy. As an applicant, you’ll still need to be vetted by Fannie’s automated underwriting system, which examines the totality of your application, including the down payment, your income, credit scores, loan-to-value ratio and a slew of other indexes. The system weighs the good and the not-so-good in your application, and then decides whether you meet the company’s standards.

Fannie’s change may be most important to home buyers whose DTIs now limit them to just one option in the marketplace: an FHA loan. FHA traditionally has been generous when it comes to debt burdens: It allows DTIs well in excess of 50 percent for some borrowers.

But FHA has a major drawback, in Petrowsky’s view. It requires most borrowers to keep paying mortgage insurance premiums for the life of the loan — long after any real risk of financial loss to FHA has disappeared. Fannie Mae, on the other hand, uses private mortgage insurance on its low-down-payment loans, the premiums on which are canceled automatically when the principal balance drops to 78 percent of the original property value. Freddie Mac, another major player in the market, also uses private mortgage insurance and sometimes will accept loan applications with DTIs above 45 percent.

The big downside with both Fannie and Freddie: Their credit-score requirements tend to be more restrictive than FHA’s. So if you have a FICO score in the mid-600s and high debt burdens, FHA may still be your main mortgage option, even with Fannie’s new, friendlier approach on DTI.

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Source: Kenneth R. Harney, Washington Post