In this month’s update: we share some news that is bringing a renewed sense of optimism to the housing market including lower rates, IMBs’ profits, and home equity market growth. We also look at what the new commission-sharing websites mean for the industry in light of the NAR settlement and Freddie Mac’s new rental income guidelines for investment loans.
Mortgage Rate Relief Brings Optimism to the Housing Market
In August, mortgage interest rates dropped to their lowest rate since May of 2023, bringing optimism to the industry and to potential buyers and sellers. That optimism only increased when Federal Reserve Chair Jerome Powell told the FED meeting in Jackson Hole that the “time has come for policy to adjust,” signaling that there will be a rate cut in September. While market challenges remain, the recent decline in mortgage rates has contributed to a modest increase in existing home sales compared to one month ago, but sales remain lower than a year ago. Although the decline is a positive step forward, 86% of all mortgage homes still have a rate of 6% or lower, meaning the majority of mortgage holders are still rate-locked. According to First American Deputy Chief Economist Odeta Kushi, “A little relief from higher mortgage rates brings some reason for optimism to the housing market. Although the recent mortgage rate decline isn’t substantial enough to trigger a tsunami of existing home sales, it may lift sales from their more than 13-year low. More gradual rate declines, particularly if accompanied by increased inventory, might finally allow the market to thaw,” she said.
IMBs Post Net Production Profit for First Time in Two Years
For the first time in two years, independent mortgage bankers (IMBs) made money on their production, according to the Mortgage Bankers Association’s Quarterly Mortgage Bankers Performance Report. IMBs and mortgage subsidiaries of banks made a net profit of $693 per loan on average during the second quarter. This is the first profitable quarter since Q2 2022 when lenders made $223 per loan. It is also a big shift from Q4 of last year when IMBs lost $2,109 per loan.
"With a pickup in quarterly volume, productivity, and closings-to-applications pull-through, production costs dropped by about $1,800 per loan," Marina Walsh, the MBA's vice president of industry analysis, said in a press release. "These developments contributed to better net results, even as production revenues decreased from the previous quarter."
Home Equity Volume Stayed Relatively Flat in 2023
According to the MBA’s 2024 Home Equity Lending Study, total originations of HELOCs and closed-end home equity loans increased in 2023 by 1.5%, while debt outstandings increased by 8.3%. “Home equity originations were relatively flat in 2023 compared to 2022,” the report said. “Even with evidence of easing credit availability, with originations activity moving to lower FICO credit scores, higher combined loan-to-value ratios, the closings to applications pull-through rate dropped, indicating that home equity lenders were doing more work for fewer loans.”
Other key findings included:
- More than 75% of total originations were subject to an Automated Valuation Model (AVM) or Desktop Valuation (DV). Only 22% of originations required a full appraisal.
- More homeowners used their home’s equity for debt consolidation – 33% in 2023 vs 25% in 2022.
- Home renovation usage decreased to 56% from 65% in 2022, and debt consolidation grew to 33% from 25%.
NAR Practice Changes Effective August 17
The August 17th deadline for the NAR settlement has come and gone, with some observers saying the revolution is coming for how to buy homes and others saying there won’t be much of a change. Realtors are figuring out ways to share sellers’ offers of buyer/broker compensation while still complying with the terms of the NAR settlement. There have been a few commission-sharing websites designed for agents and brokers to quickly find out if the seller of a property is offering to cover the buyers’ broker fees. Since the settlement agreement bans offers of compensation from the MLS, it does allow the information to be shared in other places which many feel could be the ideal solution.
Most of the NAR’s 1.5 million members will be subject to the new changes. Listing in local MLSs will no longer show whether a seller is offering to pay a buyer’s agent or how much. Buyers will be required to sign agreements specifying how much their agents will be paid as well as entering into a written touring agreement between buyer and agent before touring a property. Buyers will need to sign these documents before they begin the showing process with their agent.
Freddie Mac Rental Income Enhancement
Freddie Mac has recently made several updates to its guidelines about rental income in qualifying for an investment loan. Freddie Mac is now permitting the use of rental income to qualify when the borrower rents their primary residence, provided the rental payment is documented. Previously, rental income could only be used to qualify as long as it wasn’t the borrower’s primary residence. The updated guidelines also allow an exception to the previous requirement that all borrowers on the subject transaction were required to own their primary residence, regardless of whether they resided together. Now, only one borrower must rent or own their primary residence even if multiple borrowers share their primary residence. Also new is that the full amount of net rental income can be used to qualify as long as at least one borrower has a minimum of one year of investment property management experience. Previously, all borrowers were required to have a one-year investment property management experience.
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.