Cheers to the new year! 2024 looks to be off to a positive start. In this issue, dive into the favorable news about lower interest rates and increases in mortgage application and refinance application volume; gain insights into new maximum financial penalties imposed for violations under the Dodd-Frank Act; and learn what is happening with Accessory Dwelling Units and their potential impact to the housing inventory shortage.
Starting 2024 Strong: Positive Signs Out of the Gate
It looks like the new year is off to a positive start. Mortgage applications surged 9.9% (on a seasonally adjusted basis) in the first week of 2024, according to the Mortgage Bankers Association. Refinance activity increased 19% (on a seasonally adjusted basis) for the same time period, representing a 30% year-over-year increase. Interestingly, the refinance share of mortgage activity also increased, coming in at 38.3% of total applications, compared with 36.3% the week prior.
Another positive sign: Fannie Mae’s new Home Purchase Sentiment Index® (HPSI) shows that 31% of consumers indicated in December that they expect mortgage rates to go down in 2024, and 17% say now is a good time to buy a home compared with 14% a month ago. While the 31% represents a survey-high and good news that buyers are feeling better about 2024, still, 31% expect rates to go up, and a majority 36% expect rates to remain the same.
"Mortgage rate optimism increased dramatically this month, with a survey-high share of consumers anticipating mortgage rate declines over the next year," said Mark Palim, Vice President and Deputy Chief Economist at Fannie Mae. “Notably, homeowners and higher-income groups reported greater rate optimism than renters; in fact, for the first time in our National Housing Survey's history, more homeowners, on net, believe mortgage rates will go down than go up."
Interest Rates Drop Back to May 2023 Levels, but Industry Forecasts Still Expect Only Slight Improvements in 2024
Increasingly higher mortgage rates in 2023 hit a 23-year high of 7.79% in October before declining to 6.61% during the final week of the year, according to the Freddie Mac Primary Mortgage Market Survey®. As of January 18, the average 30-year fixed rate was 6.6% – the lowest level since May 2023 – and the average 15-year fixed rate was 5.76%. No doubt this steady 6% range is helping fuel increased buyer activity.
While the Fed has indicated it doesn’t plan to continue its interest rate increases, and inflation is easing which will help bring more buyers off the sidelines, most industry observers don’t expect huge gains in 2024 mortgage activity. Fannie Mae expects an uptick in originations in 2024, albeit modest due to continuing affordability challenges, the lock-in rate effect and stagnant housing inventory. According to its 2024 forecast, Fannie Mae expects total single-family mortgage originations to grow from $1.5 trillion in 2023 to $1.9 trillion in 2024, and then increase to $2.3 trillion in 2025. Likewise, Fannie Mae has said it doesn’t expect home sales to see significant growth until 2025. The forecast shows 2023 total sales finishing at 4.8 million, followed by a similar 4.8 million pace in 2024 with an expected 5.4 million in 2025.
Freddie Mac also expects low transaction volume and a continuing lack of inventory to keep 2024 from seeing significant growth. According to its December Economic, Housing, and Mortgage Market Outlook, a weaker economy and slower labor market will reduce demand, but tight inventory will nudge prices higher with the GSE forecasting national house prices to increase 2.7% in 2024. While the low level of home sales will keep origination volume down, the expected uptick in house prices will result in an increase in the overall dollar volume of purchase originations.
Our very own Mark Fleming, Chief Economist for First American, explains how he sees the continuing challenges of 2024. “The housing market pulled forward several years’ worth of demand in just a two-year period from mid-2020 through mid-2022. Now, with affordability and inventory constraints, some demand is being pushed back. It’s likely that 2024 will present many of the same challenges the housing market faced in 2023. If the 2020-2021 housing market was ‘too hot,’ then the 2023 market was probably ‘too cold,’ but 2024 won’t yet be ‘just right.’”
Consumer Financial Protection Bureau Announces Penalty Increases
Citing the need to adjust for inflation, the CFPB has increased the maximum financial penalties that can be imposed for violations of consumer financial protection laws under the Dodd-Frank Act. Under the newly announced rule, these three civil financial penalties have increased, among others: For any violation of a law, rule, or final order or condition imposed in writing by the CFPB, the penalty increased from $6,813 to $7,034 per day; for any person that recklessly engages in a violation of a federal consumer financial law, the penalty increased from $34,065 to $35,169 per day; and for any person that knowingly violates a federal consumer financial law, the penalty increased from $1,362,567 to $1,406,728 per day.
Research Shows Homes Under Appraised by as Much as 15%
New research from FHFA shows that there continues to be a gap between contract prices and appraised values, but that this is narrowing. In 2021, for example, 15% of appraisals came in under contract prices, though this share declined to 12% in 2022 before returning in 2023 to more normal seen between 2013-2020 when rates averaged 7% to 9%. Underappraisals can complicate or even prevent a home sale from occurring, requiring the buyer to put more down at closing or renegotiate the purchase price. The primary driver of the uptick in under-valuation in 2021, FHFA said, was in the rapid home price growth that started in late 2020, which skewed the recent comp sales that appraisers use to value properties. As a solution to this imbalance, the agency noted that appraisers can consider price changes that occurred after the comparable properties sold and make what are referred to as “market conditions adjustments” or “time adjustments.”
The GSEs require these adjustments to be made when there is market fluctuation, but FHFA’s research shows appraisers made time adjustments in only 13% of appraisals, rather than the estimated 64% that should have occurred. The FHFA acknowledges that while the data shows appraisers are underutilizing time adjustments, it’s not clear why. However, they’ve promised more information to come that should shed light on the factors that determine when appraisers choose to time adjust and whether they are doing so equitably across neighborhoods.
Supreme Court Considers Whether Banks Should Pay Interest on Escrow Accounts
This year will see the U.S. Supreme Court tackling a case that could impact whether borrowers should be paid interest on funds in mortgage escrow accounts. In Cantero v. Bank of America, the high court will decide if national banks can be required to follow state requirements to pay interest on escrow accounts. In addition to the existing New York law, which Bank of America is challenging, 13 states have similar borrower-protection laws in place. In New York, banks are required to pay at least 2% interest on escrow accounts, and the case will determine if the National Bank Act can supersede state laws dictating these interest payments. State regulators argue this could lead to inequitable practices and an unlevel playing field across states. This is one to watch for sure.
Can Accessory Dwelling Units Help Solve the Housing Inventory Shortage, and Will Lenders Finance Them?
There’s been an uptick in the creation and designation of Accessory Dwelling Units (ADUs) – think granny flats, converted garages, and even unused portions of houses – especially given the current constraints on housing inventory. ADUs have traditionally been rental only, but, increasingly, states and cities are considering whether they can be sold – and financed – as separate units. Oregon, Texas and Seattle have allowed these ADUs to be sold as condominiums although the practice heretofore has been mostly limited to friends or family members. Now California is leading the way with a law that allows homeowners to sell ADUs that are on their properties, in some cases, under the same roof. California Assembly Bill 1033 removes a state prohibition on the conversion of ADUs to condominiums. This obviously opens up many issues that must be addressed including lienholder consent, how separate property taxes are assessed, how utilities, water and sewage are billed, and how HOA fees are structured. The law has the backing of the California MBA, and the FHFA has said it fits with their goal of increasing affordable housing. The FHFA clarified the new law doesn’t represent a conflict for the GSEs: “The FHFA asked the Enterprises to review AB 1033 in the form passed by the California Assembly on May 31, 2023. Specifically, the bill’s proposed language related to the separation of an ADU, and lienholder consent (Section 2) does not appear to conflict with the current Selling Guides of either Enterprise.”
The big question we’ll need answered: how do lenders feel about lending money for someone to buy what may have once been a backyard shed?
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.