In this update: gain insights into rate hikes; read updates to loan-level pricing adjustments; understand what a bridge loan is and why home equity lenders should be mindful about them; learn about a possible trigger lead ban and more!
Pause in Rate Hikes?
Mortgage interest rates have been moving in a more positive direction during the last few months, partly because of the regional banking crisis. In March and early April, mortgage rates were in the 7% range, causing application volume to drop by 8.8% during the week ending April 14. Then on May 3, the Federal Reserve delivered a .25-point interest rate increase moving the Federal Fund Rates to a range of 5 to 5.25% – the highest since 2007.
But many observers expect the Federal Reserve to slow or even pause future increases in response to better news on inflation and concerns over the turmoil in the regional banking sector. They point to a decline in the inflation rate to just above 5% (though this is still far above the Federal Reserve’s 2% target), as well as signs of a softening job market, tighter credit, and slower economic growth. The central bank has also softened its language on future increases. Looming ahead are several key economic reports that will inform the Fed’s next step: labor market data (i.e., added jobs and jobless claims could cause rates to increase) and release of the Consumer Price Index. In addition, the Federal Reserve is watching potential distress with other regional banks where perhaps the only relief for some of these struggling banks might be future rate cuts.
The day after the Fed increase, mortgage rates declined to 6.29%, down from the prior week’s 6.43% according to Freddie Mac’s Primary Mortgage Market Survey. The 30-year fixed rate has increased slightly above 6.5% as of May 8. HousingWire lead analyst Logan Mohtashami believes the rates should be lower still. He writes: “Mortgage rate spreads are bad now…and should be a lot lower today versus the 10-year yield.” With financial credit getting tighter and the Fed no longer buying mortgage-backed securities, it has been hard for spreads to improve, according to Mohtashami. “Mortgage rates should be 5.55% not 6.5%,” he says.
Loan-Level Pricing Adjustments Update
In mid-May, the Federal Housing Finance Agency (FHFA) dropped its controversial proposal to impose a loan level pricing adjustment (LLPA) based on borrowers’ debt-to-income ratio over 40%. The proposal was originally slated to go into effect on May 1 but was postponed until August. The decision to kill the plan entirely is a big win for our industry.
While changes in loan level pricing are often big news within the mortgage industry, it’s rare they make national news. Recent changes as to how Fannie Mae and Freddie Mac are planning to calculate homebuyer’s interest have drawn national media and political attention. The brouhahas started with false rumors that lower-credit score/low down payments borrowers will get better pricing then borrowers with higher credit scores and bigger down payments. Yes, it is true that borrowers with lower credit scores and smaller down payments can now get better rates and fees than before the LLPA updates, but lower-risk Individuals with higher scores will still see an overall better pricing structure than those with lower credit scores.
FHFA’s recent decision to waive fees for low-income, first-time homebuyers and changing other LLPAs in April 2022 may have contributed to the confusion. Dave Stevens, CEO of Mountain Lake Consulting, responded by saying “Yes, they are right in saying that lower-credit score borrowers still pay more. But to have us believe that the risk of low credit/high LTV borrowers warranted halving the LLPA while borrowers with mid-700 scores and 15% or 20% down payments are worse risk. C’mon.”
A coalition of 27 state officers has sent a letter to President Biden and the FHFA director calling on the administration and FHA to scrap the LLPA fee changes. “Those who make down payments of 20% or more on their homes will pay the highest fees – one of the most backward incentives imaginable,” the letter said.
The new GSE LLPA adjustments may result in an uptick in FHA financing due to the better overall benefit for many borrowers (note that FHA is not included in the new Fannie/Freddie adjustments). Recent Mortgage Insurance Premium (MIP) reductions are also creating savings for borrowers going the FHA route. First American helps clients support the increase in FHA submissions by offering an FHA Scoreset based on their guidelines.
Creative Financing / Bridge Loans
Lenders are adding new and creative loan programs to attract customers and offset the sharp decline in refinance volume. For example, we’re seeing non-qualifying mortgage programs adding temporary bridge loans to help their borrowers purchase a home before selling their current home. Bridge loans are frequently temporary interest-only loans with a maturity of five years or less. Often the maturity date arrives before the amortization date so most of the loan amount is due and payable after only a few years. Since these are non-QM, they usually require only limited documentation. These loans can put buyers in a stronger position since they are making an all-cash offer or putting a higher down payment and waiving contingencies for buyer financing. As more brokers are starting to promote these creative financing products to real estate agents to generate additional business, our clients are using our FraudGuard® solution as their go-to risk product.
As these loans become part of many companies’ purchase option programs, it is critical for home equity lenders to be on the lookout for these bridge loans. One main criterion of second lien HELOC underwriting guidelines is that the first position mortgage is not due and payable before the new home equity loan. Our FraudGuard solution now has a “Senior Lien” module that will locate potential balloon mortgages in addition to other possible non-qualifying characteristics that will help determine eligibility at the time of application.
Diminishing Appetite for Jumbo Non-Conforming Loans
Banks are the country’s top non-agency jumbo mortgage producers. The leaders in 2022 were Wells Fargo, Chase, Bank of America and First Republic, which was recently seized by the government and sold to Chase Bank. Along with the run of deposits and drop in customer confidence, Bloomberg cited First Republic’s aggressive ultra-low interest-only jumbo mortgages (loans greater than $726,200) as a key factor in its fall. This extremely popular program during the pandemic housing boom helped First Republic double its assets in just four years. But instead of packaging these loans into mortgage-backed securities and selling them to investors, First Republic made the bold decision to hold onto many of these loans. When interest rates skyrocketed, these portfolio loans that were not even close to maturity saw their value plummet. Industry experts believe the current turbulence has the potential to significantly impact the overall jumbo space and reduce the investor appetite in the secondary market. As banks pull away from the jumbo market, some large non-bank players are signaling that they will continue to be a takeout for jumbo product.
Possible Trigger Lead Ban
A new bill (H.R. 2656) was introduced in Congress in April to curb the number of unwanted calls borrowers receive after they start the application process to buy or refinance a home. The proposal would deliver “long-needed relief” to consumers and the mortgage marketplace by ending the “dangerous practice of trigger leads,” Ernest Jones Jr, president of NAMB said in a statement to HousingWire. The proposed legislation would prohibit consumer reporting agencies from sending out leads in connection with a credit transaction not initiated by a consumer, specifically if the report is based on an inquiry made in connection with a residential loan. Credit bureaus sell trigger leads created when a borrower applies for a mortgage. Many brokers and lenders, desperate for volume, use trigger leads to generate business at any cost. Industry leaders argue that this practice creates confusion for consumers who are inundated by calls, emails, and texts from companies other than the one they applied to.
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.