In this update: learn about the future of interest rate hikes; the introduction of the 40-year loan modification; changes to the enhanced payment deferral program; the continued popularity of HELOCs and more!
Enhanced Payment Deferral/Forbearance is Back
The FHFA is making the COVID-era six-month deferral permanent, allowing borrowers to skip up to six monthly payments and add them to the end of the mortgage as a non-interest-bearing balance due payable at maturity’s refinance or payoff. Fannie Mae and Freddie Mac (the Enterprises) will work with servicers to implement the enhanced payment deferral policies with a voluntary adoption date of July 1, 2023 and mandatory adoption by October 1, 2023. FHFA Director Sandra Thompson said “The Enterprises completed more than one million payment deferrals during the pandemic, helping borrowers nationwide to stay in their homes. Based on the success of this deferral program we are making this solution a key part of our standard loss mitigation toolkit available to all borrowers with eligible hardships.”
The difference this time around is that the program will be available to borrowers experiencing hardships not related to COVID. Also, the borrower must be at least two months delinquent on their mortgage. The COVID forbearance program did not require borrowers to be late on their existing mortgage. Servicers have always been able to offer borrowers one of several solutions to resolve a delinquency such as a deferral, reinstatement, repayment plan or loan modification depending on the individual situation.
FHA and 40-Year Loan Modification
In March, the FHA announced its final rule to increase the term of a loan modification to 40 years. Prior to this announcement, the only option to cure a default was to recast the total unpaid loan for a term limited to 30 years. This rule permits lenders to provide an extended modification to borrowers after a default to assist in avoiding foreclosure. The new rule now aligns FHA with both Fannie Mae and Freddie Mac which both currently provide a 40-year loan modification option.
Are Rate Hikes Over?
Is there a silver lining in the recent banking turmoil? Maybe, if concern about bank stability causes the Fed to end rate hikes, which it signaled that it might do in March. The Fed released updated economic projections that showed its current interest rate increase cycle has nearly come to an end, although the March jobs report continued to show the kind of job and wage growth that could justify another rate hike. We’ll see if they hike the rate another .25 basis points in May. Did you know: The March increase was the Fed’s ninth consecutive rate increase and brings its benchmark federal funds rate to a range between 4.75% and 5%, the highest level since September 2007.
Even with the Fed’s increase, the average conforming 30-year fixed rate has moved down to the lowest levels since early February for most lenders, meaning about a .50% drop. In the first week in April, rates were again down in the 6.3% to 6.5% range on a 30-year fixed rate, certainly an improvement over the 7% rates we were seeing earlier in the year. If, as some observers are forecasting, rates go back down in the 5s later this year that will spur many more homebuyers to come off the sidelines and likely increase cash-out refinance activity.
FHFA Agency DTI Delay
The FHFA announced that it would delay the implementation of the new upfront fee on Fannie Mae and Freddie Mac borrowers with higher debt-to-income (DTI) ratios. In January, the FHFA made several changes to the loan-level pricing matrix that differentiates pricing by loan purpose with grids for purchase loans and cash-out refinance loans. Lenders had the strongest reaction to the new DTI requirements, arguing that they would not be able to accurately determine borrowers’ actual income before rates had to be locked. The upfront pricing fee on the DTI of 40% and over was slated to go into effect May 1 of this year, but instead will occur three months later on August 1 to ensure a level playing field for all lenders to have sufficient time to deploy the fee. This delay will give lenders more time to adjust to the complications created by this DTI pricing differential while the industry continues to call on FHFA to reconsider this fee hike.
Steady Growth for HELOCs and Securitization
The demand for home equity loans, and specifically home equity lines of credit, is now stronger than at any time since before the global financial crisis 15 years ago. While depository institutions can balance-sheet these loans, non-banks can’t and are left with basically two routes for these loans: the securitization channel or a partnership with a bank or credit union that agrees to buy them on a forward-flow basis. A large percentage of non-banks only have a warehouse line and do not have the ability to immediately sell HELOCs, leaving them out of the HELOC market altogether. Securitization for HELOCs, which was common until 2007, may be making a comeback as a means of ensuring liquidity for independent mortgage bankers (IMBs). After 2007, HELOC production slowed as defaults spiked and home values plummeted. Recently, a small number of issuers have again begun to securitize these types of loans in response to rising home values and market demand. What we’re hearing now however is that concern over liquidity in the banking sector is prompting smaller banks and credit unions to rethink their appetite for home equity and this concern is also trickling into the secondary market. Consumer demand for home equity is there, but is the liquidity?
Lower Down Payments and FHA
The average homebuyers’ down payment fell 10% year over year in January to $42,375, the lowest level in nearly two years, according to a report from Redfin News. The median down payment was down 35% from its peak in June but is still up more than 30% from pre-pandemic levels. The good news in this higher rate environment is that there isn’t much competition, and homeowners aren’t facing extreme bidding wars. That is a big difference from the competitive housing market of 2021 and early 2022. Buyers no longer need to offer a big down payment to prove their financial stability and stand out from the crowd. Now that buyers more frequently have the upper hand, they can offer an amount that works best for their circumstances. Lower competition is also allowing more buyers to use FHA and VA loans which typically allow for much smaller down payments.
In a sellers’ market, sellers often choose a higher down payment on a conventional loan as their best option. But as the market cools and more borrowers are opting for FHA, perhaps sellers will get less picky.
Affordability continues to be a challenge for buyers, who, thanks to higher interest rates, and high home prices, are now facing higher monthly housing payments. In many cases, it may make more sense to put cash toward a rate buydown instead of the down payment. Also, many buyers may be inclined to hold onto as much cash as possible in these uncertain times. Keep in mind, our FraudGuard solution supports an additional FHA score set to help lenders monitor additional risk due to lower down payments and credit scores.
About This Blog:
What We’re Watching is a monthly blog of industry news curated by Brian Haber, who monitors the mortgage market for First American Data & Analytics.