Lower Rates and Better Times Ahead?
Finally, some good news. Federal Reserve Chair Jerome Powell suggested that he is pleased with this summer’s inflation decline and that the Fed is unlikely to raise interest rates again this year, unless it sees clear evidence that stronger economic activity jeopardizes such progress.
Coming decisions over whether to raise rates again and how long to hold them near current levels would depend “on the totality of the incoming data, the evolving outlook, and the balance of risks,” he said.
At the MBA 2023 Annual Convention & Expo in Philadelphia earlier this month, Mike Fratantoni, the MBA’s chief economist, predicted the Fed’s pause and presented the association’s 2024 outlook, which is forecasting a 19% improvement in overall volume next year with originations climbing to $1.95 trillion.
As for mortgage interest rates next year? Dave Stevens, former FHA commissioner and MBA president and CEO, expects rates to pull back into in the 5% range within the next 18-24 months, thereby creating more refinances and a surge in housing demand from move-up buyers while, at the same time, freeing up inventory demand.
Early Increase in Conforming Loan Limits
A growing number of lenders recently raised the agency conforming loan limits from the current $726,200 to $750,000 ahead of the Federal Housing Finance Agency (FHFA) decision expected in November. Given the fierce competition in today’s mortgage market, more lenders may follow suit in the coming days or weeks. The higher loan limits put additional pressure on the jumbo market which, according to HousingWire, has recently seen regional banks pulling back due to liquidity concerns, surging mortgage rates, and regulatory risk following this spring’s collapse of several large banks. Going forward, finding jumbo loans exceeding Fannie and Freddie’s new limits may be more difficult.
Homeowners Insurance Premium Increases
The home insurance market is facing unprecedented volatility with carriers declining new business and increasing premiums to all-time highs. To help lenders deal with this challenge, the FHFA has scheduled a two-day symposium on homeowners insurance availability and affordability on November 14 and 15.
Higher insurance premiums and fewer carriers in certain markets may create challenges for originations, as closings are delayed and debt-to-income (DTI) calculations exceed acceptable limits once accurate insurance costs are factored in. Based on rate data provided by Quadrant Information Services, the national average home insurance premium is $1,428 per year for a $250,000 policy. This is about 3% higher than the 2022 home insurance average of $1,383. Coverage and cost vary drastically based on several unique factors including the age of a home, square footage, cost of building materials and, of course, location. Each state has different regulations and natural hazards that also impact the cost of home insurance.
With DTI becoming even more of a factor in lending decisions, lenders may want to consider our undisclosed debt monitoring (UDM) and ownership modules in FraudGuard, which will highlight other debts obligations affecting DTI.
Fannie Mae Fraud Alert
During this past summer, Fannie Mae issued a mortgage fraud alert for lenders in Northern California warning of heightened instances of misrepresented child-support income. Fannie Mae uncovered a pattern of income misrepresentations, including: fraudulent bank statements and canceled checks that were created to support falsified child support, as well as child support and spousal support documentation in loan files that do not match public records. The scheme also included altered court documentation with case numbers that begin with “HF,” a designation not used in California court case numbers. Borrowers that are part of these schemes would not typically qualify for a loan without including the mispresented income, according to Fannie Mae.
In the past six months, both Fannie Mae and Freddie Mac have updated their Seller/Servicer guidelines regarding compliance with the Office of Foreign Asset Control (OFAC) watch lists. For years, lenders that sell to the GSEs have been required to check borrowers’ names against the main OFAC watch list (among others). Now that requirement has been extended to servicers.
Freddie Mac’s updated guideline says: “The Servicer must periodically screen the Mortgages that it services for Freddie Mac against the OFAC SDN List. The frequency of such screening should be based on the Servicer's OFAC compliance program and be commensurate with the Servicer's OFAC risk profile. A Servicer that identifies a valid Borrower match against the OFAC SDN List must notify Freddie Mac via e-mail within 24 hours of identifying such match.”
Most of our customers know that OFAC monitoring is built into the First American Data & Analytics FraudGuard solution. But what they might not realize is that this OFAC matching functionality is also available in our other tools as well as via a standalone OFAC API, which makes it more adaptable for the servicers.
Basel III “Endgame”
U.S. bank regulators released plans on July 27 for a sweeping overhaul of capital rules, including higher requirements for large lenders holding residential mortgages, Bloomberg reported. The changes would be part of the U.S. version of Global Accord which is known as Basel III “endgame” and has been six years in the making. Bank regulators would require banks to set aside an additional 16% in capital the regulators believe is needed to strengthen the financial system. Holding more capital could potentially diminish the returns on equity and profits and, not surprisingly, has been met by pushback from major banks. JPMorgan Chase CEO Jamie Dimon, for example, has called the new plan “hugely disappointing,” claiming it was poorly designed and would shrink access to credit for consumers and small businesses.
In late October, regulators extended the comment period on the new rules from November 30, 2023 to January 16, 2024.
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.