Fed Raises Rates For First Time Since December 2015
Citing that the “labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since midyear,” as well as that “job gains have been solid in recent months and the unemployment rate has declined,” the Federal Open Market Committee (FOMC) on Dec. 14 voted – as was expected – to increase the Fed Funds rate by 0.25% to a range of 0.50%-0.75%.
It was the first hike since December 2015, when the Fed voted to raise the Fed Funds rate by 0.25%. What’s more, it was only the second increase since 2006.
Whether the Fed will decide to raise rates again in 2017 will depend on a range of economic factors – in particular, the inflation rate, which still remains below the Fed’s target of 2.0%.
Despite the fact that the rate of inflation remains below 2.0%, the FOMC says in its statement that “market-based measures of inflation compensation have moved up considerably” – enough, apparently, for it to decide that a rate increase is in order.
“Inflation is expected to rise to two percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further,” the committee says in its statement. “Near-term risks to the economic outlook appear roughly balanced. The committee continues to closely monitor inflation indicators and global economic and financial developments.”
The Fed’s statement also gives some indication that the committee is planning more increases in 2017; however, as is to be expected, it is taking a “wait and see” approach.
The increase came as little surprise to those in the mortgage industry, as the committee had already given a strong indication in November that a rate hike was coming.
In a statement, Lindsey Piegza, chief economist at Stifel Fixed Income, says the hike was “expected.”
“The dot plot, furthermore, showed a minimally faster pace of tightening in the near term, with an expected three rate hikes [in 2017] as opposed to two projected in September,” Piegza says. “More importantly, however, the Fed’s longer-run outlook for growth and inflation was unadjusted, leaving the longer-term pathway for rates little changed. In other words, the committee sees the potential for a modest uptick in prices and activity over the next 12-24 months. But in the long run, the Fed’s forecast for a moderate [read: blah] trajectory of the economy remains. Despite the market’s more optimistic view, with pro-growth policies potentially ushered in [in 2017], the Fed expects to maintain a slow and ‘gradual’ pace.”
“The Fed’s decision to increase its key interest rate shouldn’t be a major cause for alarm with consumers,” says Doug Lebda, founder and CEO of LendingTree, in a statement. “Mortgage rates offered to borrowers on our network have been increasing over the past few months, from an average of 3.6 percent for a 30-year, fixed-rate loan in August to 4.3 percent as of today, which is a difference of roughly $90 per month.
“The good news is that lenders have been anticipating the Fed’s move and have baked the likelihood of a rate hike into their loan pricing, meaning that mortgage rates are unlikely to change dramatically from where they are today,” Lebda adds.
“The good news for housing is that if interest rates are rising because of an improving American economy, consumers are seeing higher incomes, greater job opportunities and better returns on their savings, all of which will work to help counteract rate increases. With that said, consumers should still revisit their loans and evaluate their options while rates are still relatively low.”
Specifically, the Federal Housing Administration is increasing the baseline, or “floor,” on loans it backs to $275,665, up from $271,050. This is 65% of the national conforming loan limit of $424,100.
MBA: Average Profit Per Loan Increased Again In Q3
It got a little more profitable to be a mortgage lender in the third quarter, as the average net gain on a mortgage loan increased to $1,773, which is up from $1,686 in the second quarter, according to the Mortgage Bankers Association’s (MBA) Quarterly Mortgage Bankers Performance Report.
That’s a significant increase compared with a reported gain of $825 in the first quarter.
Average production volume was $764 million per company, which is up from $654 million per company in the second quarter. This was partly a function of higher loan balances, but it was also due to increased production: Each lender originated an average of 3,072 loans in the third quarter – up from 2,721 loans in the second quarter.
The number of lenders that saw a profit in the third quarter also increased.
“Including all business lines, 94 percent of mortgage lenders in our study reported pretax net financial profits in the third quarter of 2016 compared to 90 percent in the second quarter of 2016,” says Marina Walsh, vice president of industry analysis for the MBA, in a release. “An increase in production volume and slight decrease in expenses in the third quarter kept production profits relatively stable. These profits would have been even higher were it not for a decline in net secondary marketing income, primarily income related to mortgage servicing rights.”
Helping to boost the average profit per loan was a slight reduction in average production expenses.
“For the first time since the second quarter of 2015, production expenses were below $7,000 per loan – at $6,969 per loan,” Walsh says. “However, these expenses remain elevated by historical standards. Given the increase in loan count and the higher pull-through rate compared to the second quarter, we would have expected an even larger reduction in production expenses.
“Loan balances continued their upward march and reached another study high of $247,563, which helped keep production revenue per loan relatively flat despite a revenue drop in basis points from the previous quarter,” Walsh adds.
In terms of dollar volume, purchases represented about 60% of all volume, which is down from 66% in the second quarter. For the mortgage industry as a whole, purchase share was about 53% in the third quarter, the MBA estimates.
The jumbo share of total first mortgage originations by dollar volume was about 7.66%, down from 8.49% in the second quarter.
Low Rates Drove Refinance Boomlet During Third Quarter
Remember the good old days, when fixed mortgage rates were below 4.0% and the refinance segment was booming?
Man, what a difference six months can make.
ATTOM Data Solutions’ quarterly origination volume report shows that approximately 1.9 million loans were originated in the third quarter – a decrease of 2% compared with the second quarter but an increase of 1% compared with a year earlier.
Of the approximately 1.9 million (1,919,180) loans that were originated, about 876,633 were refinances – up 7.0% compared with the second quarter and up 16.0% from the third quarter of 2015.
Refinances accounted for 45.7% of all originations in the third quarter – up from 42.1% in the second quarter and up from 39.5% from the third quarter of 2015.
About 743,880 of the loans originated were purchase loans – down 8% from the previous quarter and down 11% from a year earlier.
Prior to the third quarter, purchase originations had increased on a year-over-year basis for nine consecutive quarters going back to the second quarter of 2014, ATTOM notes.
Purchase originations accounted for 38.8% of all loan originations in the third quarter – down from 41.4% in the second quarter and down from 43.8% in the third quarter of 2015.
Higher average loan amounts – a function of increasing home prices – pushed the total dollar volume of loan originations to about $502 billion, an increase of 8% compared with the third quarter of 2015.
“The nominal increase in overall originations compared to a year ago masks divergent refinance and purchase loan origination trends during the quarter,” says Daren Blomquist, senior vice president at ATTOM Data Solutions, in a statement. “Refinance originations increased 16 percent compared to a year ago, while purchase originations were down 11 percent and home equity lines of credit [HELOCs] originations were down six percent. Uncertainty surrounding the outcome of the presidential election may have kept some would-be home buyers on the sidelines, while the prospect of rising interest rates following the election may have prompted many homeowners to refinance to lock in low interest rates.”
About 298,667 HELOCs were originated in the third quarter – a decrease of 7% compared with the previous quarter and a decrease of 6% from the third quarter of 2015.
Prior to the third quarter, HELOC originations had increased on a year-over-year basis for 17 consecutive quarters going back to the second quarter of 2012, ATTOM notes.
HELOC originations accounted for 15.6% of all loan originations in the third quarter – down from 16.5% in the previous quarter and down from 16.7% a year earlier.
Originations of loans backed by the U.S. Department of Veterans Affairs (VA) took a nice jump in the third quarter to reach a 10-year high, according to the report. A total of 143,366 VA loans were originated – up 2% from the previous quarter and up 26% compared with the first quarter of 2006.
VA loans accounted for 8.8% of all loans originated – up from 8.6% the previous quarter and up from 7.1% a year earlier.
A total of 266,404 loans backed by the Federal Housing Administration (FHA) were originated – down 7% from the previous quarter and down 15% from a year earlier.
FHA-backed loans accounted for 16.4% of all loans – down from 17.6% the previous quarter and down from 19.8% a year earlier.
FHA, FHFA Raise Loan Limits For 2017
In response to rising home prices, the Federal Housing Administration (FHA) and the Federal Housing Finance Agency (FHFA) have raised the size limit of mortgages allowed under their respective guidelines. In both cases, the changes took effect on Jan. 1.
As for the FHA, in high-cost areas, the national loan limit “ceiling” for FHA-backed loans is now $636,150, up from $625,500.
Additionally, the maximum claim amount for FHA-insured home equity conversion mortgages, or reverse mortgages, has increased to $636,150. This is 150% of the national conforming limit.
Due to the changes to the FHA’s “floor” and “ceiling” limits, the maximum loan limits for forward mortgages increased in 2,948 counties, while 286 counties saw no change. There were no areas with a decrease in the maximum loan limits for forward mortgages.
The FHA notes that its minimum national loan limit “floor” applies to those areas where 115% of the median home price is less than 65% of the national conforming loan limit.
Meanwhile, the FHFA increased the maximum conforming loan limits for mortgages to be acquired by Fannie Mae and Freddie Mac.
Specifically, the FHFA raised the maximum conforming loan limits for one-unit properties to $424,100, up from $417,000.
It was the first increase in the baseline loan limit since 2006.
Q3 Originations Among Highest Quality Since 2001
CoreLogic recently introduced the CoreLogic Housing Credit Index (HCI), a new quarterly report that measures variations in home mortgage credit risk attributes over time, including borrower credit score, debt-to-income ratio (DTI) and loan-to-value ratio (LTV).
A rising index score indicates that new single-family loans have more credit risk than during the prior period, while a decreasing score means that new originations have less credit risk.
The inaugural report shows that mortgage loans originated in the third quarter had lower credit risk compared with loans originated in the third quarter of 2015.
In fact, the mortgages originated during the third quarter are among the highest-quality home loans originated since 2001, the firm says.
The average credit score for borrowers who secured mortgages in the third quarter was 739, an increase of five points compared with 734 in the third quarter of 2015.
As of the end of the third quarter, the share of home buyers with credit scores under 640 had dropped by more than three-quarters compared with 2001.
The average DTI for home buyers fell slightly to 35.4%, down from 35.7% a year earlier.
In the third quarter, the share of home buyers with DTIs greater than or equal to 43% was about the same compared with 2001.
The LTV for home buyers decreased about one percentage point, falling from 86.8% in the third quarter to 85.6% in the third quarter of 2015.
The share of home buyers with an LTV greater than or equal to 95% had increased by more than one-fourth compared with 2001.
“Mortgage originations over the past 15 years have exhibited a huge swing in credit tolerance, as shown in our Housing Credit Index,” says Frank Nothaft, chief economist at CoreLogic, in a statement. “The index incorporates six risk attributes, including the three C’s of underwriting – credit, collateral and capacity.
“Using 2001 originations as a base year, the HCI shows the significant loosening of credit running up to 2006,” Nothaft says. “This was followed by a dramatic tightening of credit in response to the real estate crash and a decline in high-credit-risk applicants, beginning with the Great Recession. While low down payment and high payment-to-income products are available today, borrowers generally need good credit scores to qualify. This may be a factor that has led to the drop-off in applications from those with lower credit scores during the last few years.”
Nothaft also observed that one of the consequences of this prolonged trend is that many potential home buyers appear to believe that they cannot get mortgages.
“When we compare applications to closed loans, what we find is that lenders are originating the bulk of the applications that they are receiving, but the applications that are coming in tend to be from relatively high-quality, low-risk applicants,” he says.
Ally Bank Getting Back Into The Mortgage Business
Ally Bank – which was in the mortgage business but then got out of it in 2013 following a slew of financial problems related to the economic crisis – is now getting back into the mortgage business with the official launch of a new direct-to-consumer mortgage offering, Ally Home.
The online-only lender says in a release that it is now “well positioned to offer a compelling value proposition in the home loan market.”
Through Ally Home, the bank plans to offer a variety of mortgage products, including both fixed-rate and adjustable-rate loans.
“At Ally, our goal is to ‘Do It Right’ for our customers, many of who have expressed a desire to deepen their relationships with us through additional products to meet their personal finance needs,” says Diane Morais, CEO and president of Ally Bank. “Because a home loan is a cornerstone financial product and the largest market within the consumer lending space, this is a natural next step for Ally.”
Ally says it has the technology infrastructure and resources in place to deliver a “best-in-class, high-touch experience throughout the entire [mortgage] process.” The bank says this is important because “consumers cite service to be nearly as important as competitive rates when shopping for a mortgage.”
“Every interaction has been thoughtfully designed to combine the best people with the best technologies to best serve customer needs,” the bank states in its release.
The bank reports that LenderLive will be helping with the launch of the new mortgage business by providing outsourced mortgage fulfillment, settlement and document services.
MBA: Mortgage Credit Availability Increased In November
Mortgage credit availability increased 1.6% in November to reach a score of 174.1 on the Mortgage Bankers Association’s (MBA) Mortgage Credit Availability Index (MCAI).
A decrease in the MCAI indicates that lending standards are tightening, while increases in the index are indicative of loosening credit. The index was benchmarked to 100 in March 2012.
Breaking credit availability down by loan type, credit availability for conforming loans saw the most loosening in November – up 2.2%. Credit availability for government-backed loans increased 1.8%, while credit availability for conventional loans increased 1.5% and credit for jumbo loans increased 0.8%.
“Mortgage credit availability increased for the third consecutive month in November, driven by increased availability of conventional low down payment and streamlined refinance loan programs,” says Lynn Fisher, vice president of research and economics for the MBA, in a statement.
Survey: Fewer Mortgage Lenders Think Credit Box Is Too Tight
About half of mortgage professionals say mortgage credit continues to be too tight and that it is hurting homeownership opportunities for U.S. home buyers, according to a survey conducted by Genworth Mortgage Insurance during the Mortgage Bankers Association’s Annual Convention and Expo recently held in Boston.
Although that seems high, it’s down considerably from 2014, when 61% of mortgage professionals polled said credit was too tight.
Of the 226 executives surveyed on-site, 50% said they believe that overly tight underwriting standards are keeping too many potential buyers on the sidelines, especially first-time home buyers, who are having a hard time meeting down-payment requirements.
Compounding the problem is the fact that inventory of single-family homes is very low right now, which, in turn, is boosting up home prices.
Forty-five percent of respondents said increased compliance burdens were the biggest threat to the housing industry over the next 12 months.
An additional 32% cited borrower access to credit as the biggest threat, while 20% believe the biggest threat is the current rising rate environment. Only about 3% cited a lack of progress on government-sponsored enterprise reform as the most severe industry threat.
“This year’s survey data is consistent with the industry’s emphasis on improving credit access for more home-ready home buyers,” says Rohit Gupta, president and CEO of Genworth Mortgage Insurance, in a statement. “While there is certainly more to be done on this front, we are pleased by the gradual progress we have seen over the past two years.”
About 12% of respondents said they feel that tighter underwriting restrictions are still needed. About 38% said they believe the current standards are appropriate; that’s an increase of 24 percentage points compared with the 2014 survey.
Officials at Genworth think the increase in the number of executives who believe the current standards are appropriate reflects a higher comfort level with today’s credit environment.