What We’re Watching: Your Monthly Mortgage Industry Update – June 2024

In this month’s update: read about FHA’s increased focus on third-party originator (TPO) fraud; new fees with assumable loans; which borrowers are comparison-shopping for mortgages; the role of Congress in the secondary mortgage market; and credit delinquency trends.    

Rates dip below 7%

As widely expected, the Fed did not cut rates at its June meeting stating it wanted more evidence that inflation is cooling before cutting interest rates. Instead, it signaled that it expects just one rate cut later this year, most likely in December.

Two days after the meeting, the Fed got some of the evidence it was looking for on inflation: May’s jobless claims jumped to their highest level since August 2023, and wholesale prices unexpectedly dropped last month. The bond market kept the good news coming, reducing 10-year Treasury yields by 6 basis points. By mid-June, mortgage rates for a 30-year fixed loan officially dropped below 7% to 6.95%, according to Freddie Mac.

FHA Seeks to Increase Lender Liability for TPO Fraud

Last week the Federal Housing Administration (FHA) announced in a proposed Mortgagee Letter (ML) that it wants to expand the factors that could result in fraud and misrepresentation being elevated to a Tier 1 defect status.

Currently, FHA classifies the severity of defects using a defect taxonomy (basically a hierarchy of defects) that can assign a loan into one of four tiers, with the most serious being Tier 1.

According to the HUD handbook, Tier 1 status is assigned to fraudulent loans when it is determined that the originator (Mortgagee) knew or should have known based on whether:

• An employee of the Mortgagee was involved, and/or
• Red flags in the loan file that should have been questioned by the underwriting Mortgagee

FHA now wants to amend the first bullet to read:

• An employee of the Mortgagee or sponsored Third-Party Originator was involved, and/or
• Red flags in the loan file that should have been questioned by the underwriting Mortgagee

FHA will seek life-of-loan indemnification from lenders for Tier 1 defects. The proposed new interpretation makes it even more important for lenders to run fraud detection solutions — like the First American Data & Analytics FraudGuard^® solution — at multiple stages in the origination process.

Automated Valuation Model (AVM) News

The Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corp. (FDIC) announced their approval of a final rule imposing quality control standards for AVMs. The rule aims to ensure a high level of confidence in the estimates produced by AVMs and protect these models against data manipulation. The final rule also requires lenders and investors to apply random sample testing and reviews to their AVM and ensure that the models comply with applicable nondiscrimination laws. The rule still requires final approval from the FHFA, CFPB and the Federal Reserve System and will go into effect 12 months after it is published in the Federal Register, which is expected shortly. The good news: The First American Data & Analytics Procision™ AVM is designed and maintained to comply with all existing guidance.

Changes in Assumable Mortgage Fees

Homebuyers who want to take over sellers’ low first mortgage rates on FHA loans could soon be paying twice as much in up-front fees. HUD has announced that it is increasing the allowable fees and charges for FHA loan assumptions — the first time since 2016. The Community Home Lenders of America (CHLA) welcomed the increase saying it was “crucial to allowing lenders to recoup the costs of a loan assumption, which can facilitate significant mortgage savings for homebuyers by using existing lower rate FHA mortgage loans.”

Most Buyers Not Shopping Around for a Mortgage

According to a new LendingTree survey, the majority of prospective homeowners are not shopping around when it comes to their mortgages. Approximately 54% of purchasers, according to the research, accepted the first mortgage offer they were given. Only 22% of borrowers asked for a second offer, and 17% looked into three or more. Since nearly half (45%) of borrowers who did compare offers found a better deal elsewhere, this lack of comparison shopping can be expensive. It's interesting to note that generationally, 62% of Millennials shopped around, as compared to just 28% of Baby Boomers. Refinancers were also savvier with their comparison shopping: 56% actively shopped around, and 81% of them were able to secure a cheaper interest rate than what was first offered.

Increase to AMI Limits Means More Borrowers May Qualify

The FHFA recently issued updated Area Median Income (AMI) limits for 2024, with a majority of the areas showing an increase over last year. Freddie Mac uses AMI limits to determine whether a borrower’s AMI percent meets program requirements for various loan programs. The AMI limits are also used to determine whether a loan is eligible for credit fee caps and other credits, if applicable, including mortgages for first-time homebuyers. The new update to the limits means lenders will be able to offer even more flexibility and affordable lending opportunities to their borrowers.

Only Congress Can Fix Fannie Mae and Freddie Mae

In its annual report to Congress, the Federal Housing Financing Agency (FHFA) said only Congress has the authority to ensure the secondary mortgage market is safe, sound and equitable. Aside from imposing capital requirements on Fannie Mae and Freddie Mac, the FHFA does not possess much authority to improve the GSEs’ financial health or change their missions. The FHFA highlighted specific issues that only Congress has the power to alter, including “changes to the Enterprises’ charter acts, adjustments to their statutory business model, the nature of any government guarantee, and the creation of reserves funded by Enterprise guarantee fees to be accessed in the case of losses.”

Delinquencies are Ticking Up, But the Credit Market Is Still Sound

The consumer credit market remains resilient in the face of the challenging economic environment, according to TransUnion. TransUnion’s first quarter Credit Industry Insights Report noted delinquencies continue to rise across several credit categories, including credit cards, mortgages and auto. “We have seen delinquencies tick up in recent quarters which is certainly something lenders need to follow closely” said Michele Raneri, VP and head of U.S research and consulting at TransUnion. “At the same time, the consumer credit market remains resilient given the compounding of relatedly high interest rates and persistent inflation. The prevailing hope is that as long as unemployment figures remain relatively low, serious delinquency rates may stabilize.”

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.