In this update: get highlights from the Federal Reserve’s September meeting and the impact to our industry; gain insights into the latest stats about HELOCs; learn about what a possible U.S. Government shutdown would mean for insurance and mortgage closings; and more!
High Rates Push Mortgage Demand to 27-Year Low. Is Relief in Sight?
Our deputy chief economist, Odeta Kushi, recently posted an interesting blog on the widening spread between 30-year mortgage rates and their benchmark 10-year Treasuries. She looks at the basic components that make up the spread: mortgage product cost and its impact on gain on sale; prepayment and credit risk; and supply and demand for mortgage securities. She believes, “Some of the drivers of the widening of the mortgage rate spread will likely remain sticky, which may prevent mortgage rates from meaningfully declining.” As a result, Kushi expects interest rates to remain elevated in the 6.5%-7.5% range through the end of the year.
This aligns with the news from the Federal Reserve, which concluded its September meeting without raising rates. This was the second time this year that the central bank has paused. In the press conference following the meeting, Federal Reserve Chairman Jerome Powell emphasized the strength in the U.S. economy, as measured by the GDP, but added that the central bank would like to see more progress in its fight against inflation before reducing rates.
Current fed funds rates in the 5% to 5.25% range are continuing to take their toll. In early September when average mortgage interest rates topped 7%, the demand for mortgages fell to a 27-year low. The last time this happened, in 1996, the average interest rate was 7.20%, Bill Clinton was president, and Braveheart beat out Apollo 13 for Best Picture.
Commenting on the decline in application volume, Joel Kan, Deputy Chief Economist for the Mortgage Bankers Association, said: “Given how high rates are right now there continues to be minimal refinance activity and a reduced incentive for homeowners to sell and buy new homes at higher rates.”
The impact of current interest rate headwinds and the lack of existing home inventory was also apparent in Fannie Mae’s updated mortgage origination forecast. “We now expect purchase volumes to be $1.3 trillion in 2023, a downgrade of $30 billion from last month’s forecast,” it said.” We expect purchase volume to rise to $1.4 trillion in 2024 as home sales increase, a downgrade of $29 billion from the prior forecast. Given a higher expected mortgage rate path this month, we reduced our refinance forecast by $10 billion in 2023 to $251 billion and by $14 billion in 2024 to $442 billion.”
But how fast will rates fall?
Recently, Business Insider compiled a list recent interest-rate forecasts from leading financial firms outside of the mortgage industry.
Only one, JP Morgan Asset Management, expects the Fed to cut rates before the end of the year.
Morningstar see cuts coming in Q1. Goldman Sachs, KPMG and State Street Global expect rate improvement in 2Q. Business Insider also pointed to a Reuter’s poll of 97 economists that predicted rates would fall between April and June.
The final predictions from Vanguard and DWS Group put the rate cuts in the second half the year.
HELOC Roundup: Average HELOC Tops $100,000 in First Half; HELOC Securities Upgraded
The average home equity line of credit (HELOC) in the first half of 2023 was $104,000, according to a new study from LendingTree that examined more than 580,000 HELOC offers. The states with the largest average HELOCs were Massachusetts, which topped the list at $146,000, followed by New York, Vermont, New Hampshire and New Jersey.
At the bottom of the list were Mississippi, North Dakota, Missouri and Louisiana, all states in which borrowers were offered HELOCs in the $75,000 range.
Interestingly, the average rate offer was 8% in the states with higher HELOC loan level versus 9% in the states with the smaller average HELOC loan levels.
Earlier this year, we noted a growing interest in home equity securitization. Recently, Fitch Ratings released a report on the performance of various classes of notes that are part of seven securitizations that came to market between 2021 and 2023. The deals were structured using RMBS HELOC 2.0 senior notes. Fitch said it has upgraded 47 HELOC 2.0 classes to positive and affirmed the stable outlook for another 67 classes.
Pending Flood Insurance Shutdown and Higher Homeowner Insurance Premiums Are Twin Challenges to Lenders and Realtors
If the government shuts down on September 30, the National Flood Insurance Program (NFIP) will run out of money which could delay as many as 1,300 mortgage closings per day, according to the National Association of Realtors®. While the inability to access federal flood insurance would certainly cause a significant short-term disruption for the mortgage and real estate industries, it is not the only insurance-related challenge that they are facing.
Homeowners in states like California, Texas, Florida, and Louisiana, for example, are having difficulty obtaining and/or renewing homeowners insurance. In California, several national insurers have stopped and/or significantly curtailed writing new home owners insurance policies with that state.
The Wall Street Journal recently ran a piece on the rising costs of homeowners insurance and the growing trend of dropping coverage and “going bare.” According to the article, nearly 12% of homeowners don’t have insurance against weather-related damage. Homeowners with a mortgage are required to have homeowners insurance.
In the article, an industry consultant said that some borrowers are now delinquent on mortgage payments due to unexpected increases in their insurance premiums. He added that lenders are now factoring in higher premiums when qualifying borrowers for new mortgages. “Ultimately, this will bump some prospective buyers out of the housing market,” the article quoted the consultant as saying. “They will either be unable to afford a home or won’t qualify for a mortgage.”
The Mortgage Bankers Association recently raised up some of these same issues in a letter to the Senate Banking Committee just prior to the Committee’s hearing on “Perspectives on Challenges in the Property Insurance Market and the Impact on Consumers.”
Implementation of New GSE Credit Score Requirements Pushed Back
Looks like the transition to the new credit score models and credit report requirements for GSEs from the Federal Housing Finance Agency (FHFA) will be pushed back to accommodate additional stakeholder engagement and give the GSEs more time for implementation. The GSEs had previously published a Partner Playbook with a proposed timeline for new credit score calculations to be implemented in Q1 2024. After numerous trade and consumer groups pushed back in a letter to FHFA in June of this year requesting more time for implementation and involvement from stakeholders, the agency took note. The FHFA has now announced it will hold stakeholder forums and listening events and that the implementation will occur later than Q1 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.