Where activity is strongest, where it is not and what lies ahead
The housing and mortgage markets have been the few bright spots in an otherwise fragile economy caused by the ongoing COVID-19 pandemic. The volume of mortgage origins this year is on track to be the highest in more than 15 years, driven by a strong wave of refinancing.
How busy have the lenders been? 2003 was the last time refinancing activity hit $ 1.75 trillion MBA forecasts for 2020.
Mortgage rates reached historically low levels, driven by unprecedented economic weakness, as well as Federal ReserveThe massive effort to keep the economy afloat by lowering short-term rates to zero and buying over $ 1 trillion in mortgage-backed securities. Homeowners enjoy lower monthly payments, while lenders struggle to manage high volumes – all at a time when their employees continue to work remotely and many temporary assembly flexibilities remain in place.
Millions of homeowners still have a significant incentive to refinance, given the difference between their current loan rate and the rates available in the market. However, recent data from the Weekly MBA Applications Survey shows a robust level of activity (as shown in Table 1), but a volume quite sensitive to relatively small changes in rates. Moreover, digging into this data, one thing is clear: the current boom in refinancing has not been spread evenly across all segments of the market.
While the pandemic brought economic activity to a screeching halt this spring, leading to a sharp rise in unemployment and mortgage default rates, this national emergency is unlike the great financial crisis (GFC) of over ‘a decade. A central aspect of GFC has been a sharp drop in house prices, which has led huge numbers of households to find themselves underwater (who owe more on their mortgages than their home is worth) and be prevented from refinance. The Affordable Home Refinance Program (HARP) certainly helped many households, but it was limited to those with existing loans backed by government-sponsored businesses. Fannie Mae and Freddie mac.
In contrast, the history of the housing market in recent years has been the severe shortage of homes for sale on the market, which has resulted in home prices rising twice as fast as incomes across the country. . That’s why homeowners, overall, have earned over $ 10 trillion in real estate equity over the past decade. This time around, homeowners who were able to keep their jobs because of this emergency should be able to qualify for refinancing.
At this time, there is little indication that house prices will drop in the near term, as demand has returned to the market since the start of the summer and housing stocks remain tight. Additionally, growth in home equity suggests that even after we hit peaks in rates and term refinances next year, demand for cash refinancing is expected to remain strong.
Turning to the elephant in the room, there is certainly also an impact – at least in the conforming conventional market – of the imposition of the GSE’s adverse market commission on refinancings. Even before the imposition of these fees, now in effect on December 1, 2020, it was not unusual for lenders to offer higher rates for refinances compared to purchase loans. Recently, some lender websites have posted rates up to 50 basis points higher for rate / term refinance loans compared to purchase loans.
In the larger market, and with more control over the relevant risk factors, there is usually a small difference. Until the announcement of the fees, this difference was generally quite small. As shown in Figure 2, which uses rate interlock data from Optimal blue, this gap widened in mid-August and then narrowed again due to the postponement of the implementation date. We certainly anticipate that adverse market charges will be fully factored into refinancing rates, likely around an eighth of a rate point, well before the December 1 date, to account for the time between rate foreclosure and acquisition by GSEs.
While much of the attention regarding the refinancing wave is focused on the conventional segment, there is certainly considerable activity in the government space as well, both for FHA and Virginia refinancing. While about three-quarters of the recent total volume of refinancing requests were for conventional loans, the annual growth in refinancing according to our weekly request survey has actually been faster for government loans than for conventional loans – especially through the VA’s refinancing activity, as shown in the table below. 3.
It was surprising to see recently in MBA data that FHA rating rates, which are generally lower than conventional rates, exceeded 30-year compliant rates for much of the pandemic period.
What is driving this? We know that FHA loans went into default at a much higher rate, with the total arrears rate exceeding 15% in the second quarter (as reported in MBA’s National Delinquency Survey), and loans from the FHA and the VA were in abstention at a much higher level. rates than GSE loans, according to our weekly forbearance and call volume survey. Ginnie mae service values were certainly negatively affected by anticipated service costs due to these higher failure rates, and Ginnie Mae’s MBS values were also affected by faster and less predictable prepayment speeds.
These factors are passed on to the borrower through both stricter credit requirements and higher rates. In this case, the rates offered are surprisingly even higher than conventional compliant rates, which do not enjoy full government confidence and credit.
There is no doubt that these higher FHA rates both reduce the magnitude of the FHA refinancing volume and likely also lead some FHAs to conventional refinancings, where possible. However, the imposition of the GSE Adverse Market Fee is likely to complicate this transition. Fortunately, the exemption from GSE’s affordable housing programs and very low credit mortgage loans could help some of these homeowners qualify for refinancing while rates remain at historically low levels.
Looking at refinancing activity by loan size, the fastest growing refinancing volume has been at the heart of the conventional compliant market: loan balances between $ 300,000 and $ 510,000. Low balance loans, in many cases probable FHA loans, are affected by the factors mentioned above. It is also interesting to note the relatively low refinancing volume of GSE and non-agency jumbo loans. During the crisis, secondary market spreads on agency jumbos widened due to the relative lack of liquidity of these loans – a result of the restriction that, in order to remain eligible for TBA, no more than 10% of a pool cannot be made up of jumbo agency loans.
Jumbo non-agency loans over the past decade have been mostly held on bank balance sheets, with a limited portion securitized in private label securities (PLS). During the pandemic, PLS issuance plummeted and banks had many competing demands for limited balance sheet space. As a result, the credit standards for the jumbos tightened and the jumbo rates did not fall nearly to the same extent as the compliant rates.
In fact, jumbo fares are once again higher than compliant fares. As shown in Table 6, while the jumbo compliance gap had been negative for most of the time over the past seven years, as of this spring that gap has grown from a slight negative to a high of 30 basis points.
Typically, prepayment speeds on larger loans are much more sensitive than smaller ones for a given rate change because the fixed costs of refinancing can be spread over the larger loan balance. The relatively subdued refinancing response of jumbo loans so far is likely due to the credit crunch and lesser rate cuts as noted. However, this does indicate that there could be potential for more jumbo refis as we approach 2021.
MBA is currently forecasting over $ 3 trillion in mortgage application volume this year, with refinancings accounting for $ 1.75 trillion of the total. A recovering economy and historically high levels of US Treasury the issue is expected to put some upward pressure on Treasury and mortgage rates, even as the Fed acts to support the economy by keeping short-term rates at zero and making further purchases of active.
With even a modest increase in mortgage rates, we expect refinancing volume to drop in 2021 – particularly in the second half of the year – to $ 772 billion. As noted above, we expect the makeup of refi activity to change over the course of the year as both ends of the spectrum, FHA and the giant borrowers, begin to see conditions and rates. more favorable as the economic recovery continues.
2020 was a banner year for mortgage originators and the millions of households that benefited from historically low rates thanks to refinancing. The industry will benefit from this boom for a while longer, but we expect the refi wave to peak as the air gets brighter and summer officially comes to an end.