economists

Apache is functioning normally

In August 2020, Taylor Lopez and her husband Joseph bought their home for $180,000 in the fast-growing city of Anna.

They bought the three-bedroom house built in 1966 with a loan carrying a 3.8% mortgage rate. “From an investment standpoint, it felt like a good choice,” said Lopez, 36, a real estate manager for restaurant chain Wingstop.

Dallas-Fort Worth home sales, prices only take slight hit from higher mortgage rates

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After more than two years in the home, they’ve been thinking about selling. Joseph works in Lewisville and Taylor works in Addison, so they would like to find a place offering a shorter commute.

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But, like many other would-be upsizers in Dallas-Fort Worth, the couple feels locked into their current home.

Although they could get a good return on a sale, they would have to shop in a dramatically more expensive housing market than when they first purchased and sacrifice their current loan for a new one at a much higher rate.

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After a wave of low-rate homebuying and refinancing from 2020 to 2022, more than half of outstanding Texas mortgages have rates of less than 4%, according to Federal Housing Finance Agency data.

Since last fall, the average rate for a 30-year, fixed-rate mortgage has been hovering between 6% and 7%.

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“There are people that want to sell, but that is what is keeping them there at their house,” said Misty Michael, a real estate agent in the Sachse and Plano area.

The Lopez family said any home they would want to buy, in school districts they want to be in and that wouldn’t require a lot of work, would start in the $400,000 range.

“It doesn’t make sense when you weigh out all the pros and cons, so we’re continuing to drive about an hour each way to work,” Lopez said. “We could always purchase a home at a higher interest rate, then refinance it if the interest rates go down, but that’s an if and when situation.

“When you’re playing with that much money, it doesn’t seem like a risk I’m willing to take right now.”

Joseph (left) and Taylor Lopez purchased their home in Anna in 2020 for less than $200,000 with lower mortgage rates and are now waiting out higher rates and prices as they look to sell. (Liesbeth Powers / Special Contributor)

Changing math

Since the start of 2020, the median price of a single-family home in Dallas-Fort Worth has risen more than 50%, according to North Texas Real Estate Information Systems and the Texas Real Estate Research Center at Texas A&M University.

On top of that, the Federal Reserve has aggressively increased its federal funds rate for more than a year, indirectly driving up mortgage rates. Freddie Mac recorded an average 30-year mortgage rate of 6.96% on July 13.

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The result: The monthly principal and interest payment for a median-priced Dallas-Fort Worth home at the average rate with a 20% down payment, before insurance or property taxes, was about $980 in January 2020. In June, it was more than $2,100.

For buyers who purchased a $300,000 home at the record low of 2.65% in January 2021, just buying a house at the same price again at today’s average rate would add almost $900 to their monthly payments before taxes and insurance.

Purchasing a bigger or nicer home would add significantly more to that already-elevated payment, so people with job promotions or babies on the way looking to upgrade to bigger homes may not find a good enough deal to justify it financially.

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“It now is significantly more expensive to make these marginal changes that you might have been planning,” said Texas A&M economist Adam Perdue. He and his wife are expecting a baby soon and have considered getting a bigger home, but they too have a low rate on their home in Brazos County and don’t want to take on higher monthly payments.

While prices are declining slightly year to year, Texas A&M economists don’t expect them to return to where they were at the beginning of 2020. Rates are also expected to decline, but not back down to the record lows. Mortgage Bankers Association forecasts rates in the 5% range by 2024.

Still buying and selling

As mortgage rates rose and sellers held back, new single-family home listings in Dallas-Fort Worth dropped 22% between June 2022 to June 2023, limiting options for people looking to buy.

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Buyers with an immediate need to move are still purchasing homes, and people continue to move to Texas from other parts of the country. Local home sales recorded in June were down only slightly from a year before.

“We have a ton of buyers that are wanting to buy a home,” Michael said, adding that buyers may choose to refinance later. “You have people getting married, having babies, kids going to college.”

More casual buyers without an immediate need to move may no longer be shopping, said Drew Kayes, who heads up homebuying company Opendoor’s operations in Dallas-Fort Worth and Houston.

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“A lot of those folks right now are not in the market because they’re locked into a sub-4% rate, and that’s more of a luxury move than a necessity move,” Kayes said.

An open house sign beckons buyers outside of a home in Plano. (Shafkat Anowar / Staff Photographer)

Jason Dickson, co-owner of North Texas-based Nuwave Lending, said while it may be hard for homeowners to leave their current home, it may be worth it for them to tap into equity they’ve built up during the pandemic to pay off credit card debt or auto loans.

“They’ll gladly sign up for the higher interest rate in the new house if they have the benefit of taking that equity and improving their overall financial position,” he said.

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A silver lining

Nipun Gadhok, development manager for the Nehemiah Company, is looking to move from Fort Worth to buy a home in Mesquite next year.(Liesbeth Powers / Special Contributor)

Nipun Gadhok, 31, doesn’t want to lose his 3% rate but hopes to purchase a new home for him and his girlfriend next year.

Gadhok, a development manager for the Nehemiah Co., a local firm behind residential communities throughout Dallas-Fort Worth, purchased his five-bedroom home in Fort Worth’s Augusta Meadows neighborhood in 2021.

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He’s looking to buy a home along the outskirts of the metro area, potentially in one of his company’s developments on the east end of Mesquite. Knowing he has a rate he may never get again, he’s not planning to sell his Fort Worth house.

He intends to keep it as a rental property and is already renting out rooms to four other tenants. With mortgage rates causing many people to rent, that’s turning out to be a good side hustle.

“People are choosing to rent, they are not as much inclined to buy,” Gadhok said. “The rates really helped me out in the way that I’m not having problems with finding tenants.”

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Source: dallasnews.com

Apache is functioning normally

With elevated mortgage rates sidelining both home buyers and sellers, existing home sales fell in June, according to the latest report from the National Association of Realtors (NAR). Sales were also down significantly from a year prior.

Total existing home sales slipped 3.3% in June from the prior month to a seasonally adjusted annual rate of 4.16 million. Year-over-year, sales dropped 18.9% from 5.13 million in June 2022.

“The first half of the year was a downer for sure with sales lower by 23%,” said Lawrence Yun, NAR’s chief economist. “Fewer Americans were on the move despite the usual life-changing circumstances. The pent-up demand will surely be realized soon, especially if mortgage rates and inventory move favorably.”

The median existing-home price in June for all housing types – which includes single-family homes, condos and townhouses – was $410,200, the second-highest price of all time and down 0.9% from the record-high of $413,800 in June 2022. The monthly median price surpassed $400,000 for the third time, joining June 2022 and May 2022 ($408,600). Also noteworthy, prices rose in the Northeast and Midwest but waned in the South and West.

We’ve seen home sales drop on an annual basis since the Federal Reserve began hiking the benchmark rate in spring of 2022. Mortgage rates have settled into the 6% to 7% range over the last three months, depressing existing home sales.

Total housing inventory recorded at the end of June was 1.08 million units, unchanged from May, but down 13.6% from June 2022 (1.25 million). Meanwhile, unsold inventory sits at a 3.1-month supply at the current sales pace, up slightly from 3.0 months in May and 2.9 months in June 2022, NAR said.

“Home sales fell but home prices have held firm in most parts of the country,” NAR’s Yun added. “The national median home price in June was slightly less than the record high of nearly $414,000 in June of last year. Limited supply is still leading to multiple-offer situations, with one-third of homes getting sold above the list price in the latest month.”

Although all four regions experienced year-over-year sales declines, the Northeast fared better while the Midwest held steady, and the South and West posted decreases.

Zooming in on the Northeast, existing-home sales there grew 2.0% from May to an annual rate of 510,000 in June, down 21.5% from June 2022. The median price was $475,300, up 4.9% from the prior year. In the Midwest, existing-home sales remained unchanged from one month ago at an annual rate of 990,000 in June, decreasing 19.5% from one year ago. The median price there was $311,800, up 2.1% from June 2022. In the South, existing home sales disappointed as they faded 5.4% from May to an annual rate of 1.91 million in June, a decrease of 16.2% from the previous year. The median price was $366,600, down 1.2% from June 2022. Lastly, in the West, existing-home sales declined 5.1% from the previous month to an annual rate of 750,000 in June, down 22.7% from one year ago. The median price was $606,500, down 3.4% from the same period last year.

The good news is that the housing recession that was predicted by some economists has not materialized, noted Lisa Sturtevant, chief economist for Bright MLS. 

”With positive inflation news and a strong labor market, the possibility that the Fed will be able to bring the economy in for a “soft landing” is improving. As the economy normalizes, however, we are still in the midst of a very unusual housing market, with so much inventory locked down as a result of the low pandemic mortgage rates,” said Bright MLS’s Sturtevant.

Properties in June on average remained on the market for 18 days, identical to May but up from 14 days in June 2022. Conversely, 76% of homes sold in June were on the market for less than a month. First-time buyers were responsible for just 27% of sales in June, down from 28% in May and 30% in June 2022, illustrating the affordability crisis at play.

For transaction types, all-cash sales accounted for 26% of purchases in June, up from 25% in both May 2023 and June 2022. Meanwhile, individual investors or second-home buyers, who make up many cash sales, purchased 18% of homes in June, up from 15% in May and 16% the previous year.

Distressed sales, which include foreclosures and short sales, represented only 2% of sales in June, virtually unchanged from last month and the prior year.

In this market, the lack supply remains the main constraint but new housing construction should help alleviate some of the supply pressures, according to Sturtevant. As a result, homebuilders kept capitalizing on a lack of competition and injected supply into the marketplace. However, inventory will still be sparse and prices “will have nowhere to go but up in the second half of 2023.”

“Existing home sales will continue to remain suppressed while both sides of this market are feeling the heat of affordability constraints, and we will likely continue to see buyers turning their eyes towards the new construction market – which can offer incentives to tip the scales in favor of buyers’ budgets as well as offer more available inventory,” added Nicole Bachaud, a senior economist at Zillow.

Source: housingwire.com

Apache is functioning normally

Mortgage rates dropped to 6.78% this week, the biggest weekly decline since mid-March, as investors digested a raft of mixed incoming economic data.

Freddie Mac’s Primary Mortgage Market Survey, which focuses on conventional and conforming loans with a 20% down payment, shows the 30-year fixed rate averaged 6.78% as of July 20, down from last week’s 6.96%. By contrast, the 30-year was at 5.54% a year ago at this time. 

“As inflation slows, mortgage rates decreased this week,” said Sam Khater, Freddie Mac’s chief economist in a statement. “Still, the ongoing shortage of previously owned homes for sale has been a detriment to homebuyers looking to take advantage of declining rates. On the other hand, homebuilders have an edge in today’s market, and incoming data shows that homebuilder sentiment continues to rise.”

Homebuilder sentiment rose for the seventh consecutive month and new construction activity slightly pulled back as the cost of materials picked up. Simultaneously, retail sales improved modestly and industrial production declined on waning demand.

Other mortgage rate indexes showed mixed results: 

HousingWire’s Mortgage Rates Center showed Optimal Blue’s 30-year fixed rate for conventional loans at 6.74% on Wednesday, compared to 6.85% the previous week. However, the 30-year fixed rate for conventional loans was at 7% at Mortgage News Daily on Thursday, up 13 basis points from the previous week.

After June’s relatively positive inflation data, the market’s attention has turned to the upcoming FOMC meeting.

“Though inflation has slowed, the level remains well above the 2% target and investors expect the Fed to hike interest rates in pursuit of this target,” said Hannah Jones, economist at Realtor.com, in a statement. “While the Federal Funds rate does not directly impact mortgage rates, it installs a floor beneath the cost of borrowing, meaning mortgage rates are likely to remain elevated for the time being.”

George Ratiu, chief economist at Keeping Current Matters, on the other hand, stressed that the spread between the 30-year fixed-rate mortgage and the 10-year Treasury remains north of 300 basis points. To Ratiu, it is a clear signal that investors are still pricing a premium for the higher macro risk.

This ongoing uncertainty permeating financial markets has a direct impact on mortgage rates.

As expected from the traditional vacation season, consumers are more focused on services and travel experiences this summer rather than buying products, added Ratiu.

At today’s rate, the mortgage payment for a median-priced home is about $2,300, a 13% premium compared to last year’s peak-price period. Ironically, the elevated mortgage rates are not making a dent on home prices, which remain high because of a depleted inventory. Hence, the lower mortgage rates bring little relief to hopeful homebuyers. 

“Many home owners feel ‘locked-in’ by their current mortgage rate and are therefore choosing to hold off on listing their home for sale,” said Realtor.com’s Jones. “As a result, after more than a year of new listings lagging behind the previous year’s pace, the number of homes for sale has tracked lower than last year’s levels for the past four weeks. In light of limited home inventory, buyers are turning to new construction and builders are picking up the pace of construction to fill the gap.”

Economists largely agreed that current market dynamics are likely to persist until affordability and inventory gains are made.

Source: housingwire.com

Apache is functioning normally

U.S. single-family homebuilding fell in June, but permits for future construction rose to a 12-month high on the weakness of the existing home sales market. The decline in housing starts came after a massive 18.7% surge in May, which propelled the number of starts on single-family projects to an 11-month high.

Housing starts in June dropped to a seasonally adjusted annual rate of 1.43 million, under economists’ expectations for 1.48 million, according to the U.S. Census Bureau. That was down 8.1% from a year ago.

In June, only 600,000 existing homes were listed for sale across the U.S., noted Bright MLS Chief Economist Lisa Sturtevant. 

“While new construction will not immediately solve the supply problem in the housing market, the recovery in the homebuilding industry and the delivery of more new homes is essential for meeting the nation’s housing needs and easing housing affordability challenges for prospective home buyers,” she said in a statement.

Overall, single‐family housing starts in June came in at a rate of 935,000, 7% below the revised May figure of 1,005,000. The June rate for units in buildings with five units or more was 482,000.

Issued permits, an indicator for future completions, also decreased 3.7% overall from May, and they were 15.3% lower from a year ago. But single-family permits increased (+2.2%) while the more volatile multifamily permits declined (-12.8%). June permits increased in the Midwest (+5.9%) and declined in South (-2.6%), West (-4.0%), and Northeast (-23.4%).

Completed homes fell 3.3% from the prior month, but were 5.5% above the May 2022 level.

The number of single-family homes under construction remains high. Meanwhile, a record number of multifamily units are under construction even if the pace is slowing. 

“When these units are completed, it should put some downward pressure on prices,” said First American Deputy Chief Economist Odeta Kushi.

Homebuilder sentiment regarding single-family sales in the next six months dropped slightly in June, pointing to more uncertainty. This comes at a time when increasing new home inventory is critically important as existing homeowners aren’t moving, handcuffed to their low mortgage rates, noted Nicole Bachaud, a senior economist at Zillow.

Stubbornly high mortgage rates might pose a threat to builders’ ability to bring more homes on the market. Reduced affordability alongside ongoing supply-side challenges and tighter lending standards for acquisition, development and construction (AD&C) loans could also throttle builder momentum, added Kushi.

Source: housingwire.com

Apache is functioning normally

The average 30-year fixed-rate mortgage fell eight basis points from the week prior to 2.9%, according to data released Thursday by Freddie Mac‘s PMMS.

According to Sam Khater, Freddie Mac’s chief economist, last week’s dip followed the concurrent drop in U.S. Treasury yields earlier this week.

“While mortgage rates tend to follow Treasury yields closely, other factors can be impactful such as the labor markets, which are continuing to improve per last week’s jobs report,” said Khater. “We expect economic growth to gradually drive interest rates higher, but homebuyers and refinance borrowers still have an opportunity to take advantage of 30-year rates that are expected to continue to hover around three percent.”

Mortgage rates have been in a state of limbo for several months now. Economists and investors are closely watching for any indication that the Federal Reserve may change its position on the tapering of assets. Minutes released on Wednesday of the Fed’s June FOMC meeting revealed the conversation may be happening sooner rather than later.

Several Fed officials said they would like to reduce the pace of purchasing mortgage securities “more quickly or earlier” in light of skyrocketing home prices.

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But other Fed officials pushed back, saying that it was preferable to slow down the purchases. Since March 2020, the Fed’s asset purchases are split between $80 billion of Treasurys and $40 billion of agency MBS each month, keeping interest rates low.

Despite June’s minutes just now being released, the industry is already anticipating rates rising to a more standard level expected in today’s market. A year ago at this time, the 30-year FRM averaged 3.03%.

Fannie Mae’s Home Purchase Sentiment Index (HPSI) reported the percentage of respondents who expect mortgage rates to go up in the next 12 months increased from 49% to 57%. The share who think mortgage rates will stay the same decreased from 38% to 30%. A remaining 6% are hopeful that they will continue to drop.

Even with consistently low rates, home prices and lack of inventory are causing a market slowdown. Mortgage applications fell for the third straight week, according to a Wednesday report from the Mortgage Bankers Association.

“Treasury yields have been volatile despite mostly positive economic news, including last week’s June jobs report, which showed ongoing improvements in the labor market,” said Joel Kan, MBA associate vice president of economic and industry forecasting.

Kan noted while the 30-year fixed rate was 11 basis points lower than the same week a year ago, refinance applications have trended lower than 2020 levels for the past four months.

Source: housingwire.com

Apache is functioning normally

The average 30-year fixed-rate mortgage fell two basis points from the week prior to 2.88%, according to mortgage rates data released Thursday by Freddie Mac‘s PMMS.

According to Sam Khater, Freddie Mac’s chief economist, the decline provides modest relief to those who are looking to buy homes in a tough market, with scant inventory and mounting home price appreciation.

“The summer swoon in mortgage rates continues as the 30-year fixed-rate mortgage fell for the third consecutive week,” Khater said. “Since their peak at 3.18% in April, mortgage rates have declined by thirty basis points.”

Mortgage rates have been hovering around 3% for several months. Economists and investors are closely watching for any indication that the Federal Reserve may change its position on the tapering of mortgage backed securities and bond purchases.

During testimony to the U.S. House of Representatives Financial Services Committee on Wednesday, Federal Reserve Chair Jerome Powell pushed back at Republican lawmakers’ concerns about volatility in the prices of some goods, including lumber. High inflation, Powell said, is limited to “a small group of goods and services directly tied to the reopening,” and the U.S. central bank’s bond buying will continue until there is substantial progress on jobs.

Increasing Lending and Servicing Capacity – Regardless of Rates

The low-rate environment won’t last forever, and both lenders and servicers need to be able to keep their costs down while managing volume fluctuations once things start to normalize.

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Tapering the U.S. central bank’s $120 billion in monthly bond purchases, is “still a ways off,” Powell said.

“If we continue to make progress on our goals we’ll reduce those purchases,” he said. Powell is scheduled to testify in front of the U.S. Senate Banking Committee Thursday morning.

Since March 2020, the Fed’s asset purchases have been split between $80 billion of U.S. Treasury bonds and $40 billion of mortgage backed securities each month, keeping the cost of long-term borrowing low. 

Still, the industry is already anticipating rates rising to a more standard level expected in today’s market. A year ago at this time, the 30-year fixed-rate mortgage averaged 2.98%.

Fannie Mae’s Home Purchase Sentiment Index (HPSI) reported 64% of respondents said it’s a bad time to buy a home, up from 56% last month. Seventy-seven percent of respondents said it’s a good time to sell, up from 67% last month. Year-over-year, the overall index is up 3.2 points.

The low cost of borrowing — despite soaring home prices and a lack of inventory — has also  coincided with a spike in mortgage applications. Mortgage applications jumped 16% for the week ending July 9, 2021, according to the latest report from the Mortgage Bankers Association.

Declining mortgage rates are spurring borrowers to refinance, said Joel Kan, MBA associate vice president of economic and industry forecasting.

“Treasury yields have trended lower over the past month as investors remained concerned about the COVID-19 variant and slowing economic growth,” Kan said. “There also may have been a delayed spillover of applications from the previous week, when rates also decreased but there was not much of response in terms of refinance applications.”

Those lower rates may be helping some homebuyers close on their purchases, especially first-time homebuyers, he noted.

Source: housingwire.com

Apache is functioning normally

A slew of financial journalists has been talking about a ‘mortgage time bomb’ in recent weeks. This comes as rising interest rates set by the Bank of England in response to inflation – well above its target level of 2% a year – are leading to higher mortgage interest rates and monthly mortgage payments for households and buy-to-let landlords.

With a total of £1.6 trillion borrowed as mortgages in the UK, the effect of interest rates going up is  huge. Just last week, two-year fixed mortgage rates reached 6.7% – a level not seen since the global financial crisis of 2007-09.

How can we understand what is happening to mortgage rates?

Thinking the problem through like an economist helps to understand what is happening. Economists think in real or ‘inflation-adjusted’ terms, which is key to unpicking the misunderstandings that prevail in much of the media commentary on mortgage interest rates. Thinking in these terms also provides the answer to the problem of rising mortgage interest rates.

The key point is that mortgage contracts are specified in nominal terms and so do not take account of inflation. As a result, when we have higher inflation, the value of the outstanding mortgage is reduced directly by inflation.

With 10% inflation, this effect is substantial. For example, in real terms, a £200,000 mortgage will have fallen in value during 2022 by about 10%, or £20,000. In 2023, if inflation averages about 6%, the figure will be £12,000.

Thus, in the two-year period 2022-23, a mortgage worth £200,000 in 2021 will have fallen to £168,000 in 2021 prices. This will have happened just as a result of inflation, even if not a penny of the original capital has been repaid by the borrower (on an interest-only loan, for example).

Interest rates – including mortgage rates – are still below the rate of inflation. This may change but we are not there yet.

How do mortgages need to be adjusted to be inflation-neutral?

Interest rates consist of two parts: one is to compensate the lender for the declining value of the loan due to inflation; the other is the ‘real return’, or what Irvin Fisher called the real interest rate, which is the nominal rate minus the rate of inflation.

For example, if the inflation rate were 10%, then the mortgage interest rate would need to be 10% just to compensate the lender for the fall in the value of its loan due to inflation. A real interest rate of 2% would require a mortgage rate to be 12% – inflation plus the real rate.

Thus, when we look at the effect of inflation on mortgages, a ‘neutral’ interest rate, one that leaves the borrower and lender unaffected by inflation, is equal to the real rate plus inflation. Given that economists estimate that the equilibrium real rate is between 1-2%, a neutral mortgage interest rate would be at the level of inflation plus 1-2%.

But other factors beyond a neutral interest rate influence whether or not the mortgage contract is affected by inflation.

We also have the amount of the mortgage in nominal pounds. Even if the mortgage rate rises in line with inflation, there is a second very important effect of inflation: it speeds up the rate at which the mortgage is repaid in real terms.

To see this, consider the same mortgage in real terms and nominal terms, assuming that there is a zero-interest rate: the £200,000 mortgage is paid off at £5,000 per year over 40 years. Figure 1 shows time in years on the horizontal axis and the amount outstanding in terms of prices at time 0 on the left-hand vertical axis.

The blue line is what happens when there is zero inflation: the outstanding value of the mortgage simply declines in a straight line (£5,000 per year) to zero in year 40. With 5% inflation, we get the red line, which declines much faster and has a convex shape. The dashed grey line gives the ratio of the two, with the outstanding debt for 5% inflation as a percentage of the outstanding debt with no inflation, the percentage being given by the right-hand vertical axis.

The basic point is that with a fixed nominal mortgage, the higher the inflation rate, the faster the repayment in real terms.

Figure 1: Repayment after inflation

This brings us to the second way in which the mortgage needs to be adjusted to be inflation-neutral and to avoid the speeding up of repayment. The outstanding mortgage needs to be increased in nominal terms to keep the real value the same.

This is achieved by the borrower increasing the mortgage in line with inflation – in effect remortgaging in line with inflation. If the lender increases the mortgage in this way, both the borrower and lender have exactly the same profile of real assets and liabilities over time for any level of inflation.

If we combine the two elements needed for the mortgage to be inflation-neutral, the ‘first-best’ mortgage would follow two principles. First, the mortgage interest rate would be adjusted to maintain the agreed real return (the real interest rate plus inflation).

Second, the size of the mortgage in nominal terms would increase with inflation. In effect, the borrower increases the mortgage to pay off the increase on mortgage payments due to inflation. At the end of the year, by following this rule, the real value of the mortgage would be constant (for both the lender and borrower) and the real return would be the same for the lender.

What does this all look like in reality?

This is, of course, an imaginary ideal, and in practice there are potentially lots of problems in implementing it. Current mortgage contracts are very different and take no account of inflation at all. But from a policy point of view, knowing what an inflation-neutral mortgage would look like can help us to design a policy that can address the problem of rising interest rates.

If nothing is done, mortgage payments rise and the possibility of households missing payments and even having their homes repossessed or becoming homeless increases.

Mortgage lenders also suffer as their balance sheet is damaged by the ‘bad mortgages’. This is clearly a very bad outcome and totally unnecessary.

To avoid this, a policy of forbearance needs to be introduced by the government that will improve the situation for both borrowers and lenders.

Mortgage borrowers who find it difficult to meet increased mortgage payments should be offered a range of options by lenders. The general idea is that with inflation paying off part of the outstanding value of the mortgage in real terms, this leaves space for lenders to help out the borrowers with their cash flow.

What are possible solutions?

There are three possible ways that households could be offered support:

  1. Where there is equity in the property – that is, the current house price exceeds the mortgage – a simple fast-track remortgage (equity release) should be offered. This can be used to meet the increased mortgage payments in part, or even whole. This is a suitable solution for older mortgages with a low loan-to-value ratio. This mimics the inflation-neutral mortgage.
  2. So long as the inflation rate exceeds the mortgage rate, borrowers should be offered a suspension or reduction in capital repayments for a fixed period – for example, two years. In this case, a tapered return to full payments should be designed.
  3. In the longer run, even when inflation has returned to 2%, it is likely that the Bank of England will set rates in excess of inflation, probably averaging in the range 3-4%. That means that mortgage rates will be in the range 5-6% in the long run. For some households this will be difficult, and it may be necessary to come up with arrangements to help these households – for example, by extending the life of the mortgage.

Different options would suit different people. Nothing should be imposed on borrowers – if they choose to meet the higher payments and, in effect, speed up the repayment of their mortgages, they should be free to do so.

But the government should require mortgage lenders to offer a suitable range of options along the lines of the suggestions above (points one and two).

In reality, it will not be possible to save all households. For example, households that have just bought a house or which are in negative equity and have become unemployed might not be able to meet payments under normal circumstances with or without inflation.

Even in these cases, inflation improves matters in the longer run and so some households might be able to reach a solution from option two (above) that would not have been possible without the rise in inflation.

Once we understand that inflation makes mortgage borrowers better off, it also becomes apparent that giving direct help to borrowers in the form of some kind of mortgage interest relief from the Treasury is not only unnecessary, but also perverse. This would be giving money to people who are already being made better off by inflation.

Buy-to-let mortgages raise different issues, not least because they are sometimes interest-only to start with. It is beyond the scope of this article to deal with this in detail, but the same general principle applies: that the long-run financial position of buy-to-let landlords is improved by inflation.

The Chancellor Jeremy Hunt has just introduced a policy that is partly in line with this notion of forbearance. Households can switch temporarily to interest-only payments for a six-month period and repossessions are delayed for 12 months. Households can also increase the length of their mortgages.

This policy does not really show an appreciation of the underlying economic principles, and it should be extended for a longer time and allow for more options, as described above.

In the longer run, mortgage interest rates are likely to be higher than they were during the period of near-zero Bank of England policy rates, which was a historical anomaly. But the currently elevated inflation makes the situation better for mortgage holders, even with higher interest rates.

This is the most important insight that economists can provide to discussions of the mortgage time bomb. The solution to the problem is made more obvious once we look at the real inflation-adjusted world.

Where can I find out more?

Who are experts on this question?

  • Jagjit Chadha
  • Huw Dixon
  • Michael McMahon
  • Silvana Tenreyro
Author: Huw Dixon
Picture by Victor Huang on iStock

Source: economicsobservatory.com

Apache is functioning normally

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  • BoE expected to raise its main rate to 4.75% on Thursday
  • Two-year government bond yields highest since 2008
  • Government plays down prospect of aid for mortgage-holders

LONDON, June 19 (Reuters) – Two-year fixed-rate borrowing costs for British home-buyers topped 6% on Monday, reaching their highest since the period after September’s “mini-budget” crisis and adding to strains that are weighing on the housing market.

British lenders have raised interest rates sharply in recent weeks as stubbornly high inflation has pushed up expectations among investors for where Bank of England rates will peak.

The BoE is expected to raise its borrowing costs for a 13th time in a row on Thursday as it attempts to tackle stubbornly high inflation.

Financial data company Moneyfacts said the average rate for a new two-year fixed-rate mortgage reached 6.01% on Monday, the highest since Dec. 1 and up from 5.98% on Friday. The average five-year fixed rate increased to 5.67% from 5.62%.

Most UK home-buyers take out mortgages which have a fixed rate for two or five years, after which they pay a floating rate or refinance at a new fixed rate.

Mortgage brokers said rates ranged widely around the averages quoted by Moneyfacts, depending on borrowers’ credit risk and loan size, but were definitely on the rise.

“If customers have a good credit score, there are 2-year fixed rates below 6%,” said Elliott Culley, director at Switch Mortgage Finance. “However, this is in stark contrast to just two to three weeks ago, when you could get a 2-year fixed rate under 5%.”

Two-year mortgage rates peaked at 6.65% in October when government bond yields shot up as markets baulked at the extra borrowing needed for then-Prime Minister Liz Truss’s tax cut plans.

Reuters Graphics

Much of the impact of higher borrowing costs on mortgage-holders is yet to be felt. Industry body UK Finance said 800,000 fixed-rate mortgages will need to be refinanced in the second half of this year, and a further 1.6 million in 2024, out of a total of around 9 million residential mortgages.

The Resolution Foundation think tank estimated on Saturday that the average mortgage holder refinancing next year would pay an extra 2,900 pounds ($3,700) a year.

Prime Minister Rishi Sunak, who is facing the prospect of contesting a national election next year against the backdrop of a cost-of-living crisis, said on Monday that the best way to tackle the rise in borrowing costs was to bring down inflation.

“I know the anxiety that people will have about mortgage rates. That’s why the first priority I set out at the beginning of the year was to halve inflation,” he told ITV television.

Government minister Michael Gove said on Sunday that there were no immediate plans to provide new assistance to borrowers.

Rising mortgage rates are already having an impact on house prices, with property website Rightmove reporting that asking prices fell in early June for the first time in six years. June normally brings a seasonal rise in house prices.

While economists polled by Reuters last week predicted the BoE’s Bank Rate would peak at 5% in August or September, up from 4.5% now, investors expect increases beyond that. On Monday interest rate futures showed a slightly greater than 50% chance that BoE rates will reach 6% or higher early next year.

Two-year government bond yields – which reflect interest rate expectations, and influence lenders’ own borrowing costs – hit 5% on Monday for the first time since July 2008.

($1 = 0.7811 pounds)

Additional reporting by Sinead Cruise; Editing by Chizu Nomiyama

Our Standards: The Thomson Reuters Trust Principles.

Source: reuters.com

Apache is functioning normally

The average 30-year fixed-rate mortgage fell four basis points from the week prior to 2.98%, according to data released Thursday by Freddie Mac‘s PMMS. Within the past almost three months, mortgage rates have only peaked above 3% one time.

“Economic growth remains steady and is bolstering more segments of the economy,” said Sam Khater, Freddie Mac’s Chief Economist. “Although low and stable mortgage rates have kept the housing market booming over recent months, a deterioration in affordability and for-sale inventory has led to a market slowdown.”

Borrowers are still shopping at a feverish pace, at least by historic standards. Pending home sales metrics released by the National Association of Realtors on Wednesday revealed pending home sales reached its highest mark for the month of May since 2005, up 8% from the previous month of April. Even Lawrence Yun, NAR’s chief economist, said this came as surprise given the number of would-be buyers getting priced out in numerous markets.

More recently, however, mortgage applications dipped 6.9% last week, according to data from the Mortgage Bankers Association. That almost 7% dip brought application volume to its lowest level in almost 18 months, according to Mike Fratantoni, MBA’s senior vice president and chief economist.

“Mortgage rates were volatile last week, as investors tried to gauge upcoming moves by the Federal Reserve amidst several divergent signals — including rising inflation, mixed job market data, strong consumer spending, and a supply-constrained housing market that has led to rapid home-price growth,” Fratantoni said.

Increasing Lending and Servicing Capacity – Regardless of Rates

The low-rate environment won’t last forever, and both lenders and servicers need to be able to keep their costs down while managing volume fluctuations once things start to normalize.

Presented by: Sutherland

For some economists, rising rates are the better option for counterbalancing the market. The effect of higher mortgage rates, which in late 2018 crested at 5%, also contributed to more stability in housing prices. The solid demographics for home purchasing and historically low mortgage rates — which have been in a downtrend for four decades — have created a housing market where prices are rising too fast, said Logan Mohtashami, lead analyst for HousingWire. 

“Even though we have good demographics for housing, we are not seeing a growth in sales that would account for the rate of growth in prices,” said Mohtashami.

According to Mohtashami, once the 10-year yield gets above 1.94%, mortgage rates could finally rise above 3.75%, giving the market enough time to cool down.

Source: housingwire.com

Apache is functioning normally

Search Engine; Co-Issue, TPO, LO Survey, Credit, HELOC Servicing Products; Be Wary of Interest Rate Predictions

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Search Engine; Co-Issue, TPO, LO Survey, Credit, HELOC Servicing Products; Be Wary of Interest Rate Predictions

By:
Rob Chrisman

Thu, Jul 13 2023, 10:38 AM

As rumors continue to swirl regarding the purchase of a well-known Southeastern Texas mortgage bank, lenders are watching the current drop in rates. It is generally believed that a slowing economy, aka a recession, leads to lower rates. Some have been predicting a recession for a few years, and it becomes a little tiresome, especially with the Fed continuing to focus on inflation. At some point, there will be agreement that things have slowed (like small business optimism is now) and they’ll be right. Meanwhile, it is hard to have a recession when the labor market, housing prices in much of the nation, consumer spending, and credit availability, remain as strong as they are. At this point rates probably won’t drop much in the near future, and vendors and lenders can’t sit there, wringing their hands, waiting for things to get better on their own. Are lenders suddenly going to make huge margins on lots of volume in the second half? Are LOs who were doing 2-3 loans a month in the first half suddenly going to do 4-6? Are vendor reps suddenly going to double their clients? Are rates going to plummet? Is the number of houses for sale going to skyrocket? (Today’s podcast can be found here and this week’s is sponsored by SimpleNexus, the homeownership platform that unites the people, systems, and stages of the mortgage process into one seamless, end-to-end solution that spans engagement, origination, closing, incentive compensation, and business intelligence.)

Lender and Broker Software, Services, and Products

The MBA defends mortgage servicers…. In response to audit reports recently published by the HUD OIG, Bob Broeksmit, MBA president and CEO, spoke out in defense of mortgage servicers. As the HUD OIG looks at areas of “failure” that occurred in handling loss mitigation and COVID-19 forbearance, Broeksmit points out this is due to “never-before-seen volume”. It is possible to rise above the problems of the past, scale effectively, and overcome industry obstacles. CLARIFIRE®’s “Conquering Record-Breaking Change” blog lists the points of failure identified by the HUD OIG and the solutions you need to prepare for the future. It’s time to act on how you use the experiences of the past to ensure readiness by implementing proven modern, intelligent, seamless process automation software. CLARIFIRE® is Truly BRIGHTER AUTOMATION®.

“I am looking to sell my Vendor Surf search engine platform! After more than 5-years of an immensely gratifying journey, Vendor Surf is being retired. Having just successfully navigated a major cancer battle, life’s priorities have never been clearer. Sadly, my seemingly undying passion for the vendor marketplace has met its match. Life awaits! I offer my sincere thanks and gratitude to our superb client base, as well as those that listened to our story and read our content over the years. Ours is a special industry. Scott Roller (FYI, we have enlisted a liaison to market the search engine platform for purchase, transferrable to any global industry. It can be re-skinned and launched as fast as you can define your search filters. Email me.)”

Rising interest rates and inflation causing a dip in originations? Maximize your portfolio reach with HELOC options designed to help your customers tap into their home value to remodel kitchens, fund education, and more. LoanCare has a comprehensive understanding of the special nuances involved in servicing HELOCs such as knowing what’s required to appear on monthly statements, ensuring that interest calculations are accurate, and setting up the HELOCs correctly when the loans are on-boarded. We can accommodate segmented, fully amortized, and interest only HELOCs. Contact LoanCare today!

The digital online retail revolution has taught us that speeding up processes and increasing visibility can bring tremendous benefits. That’s exactly why Equifax is delivering Telco, Pay TV and Utilities insights alongside our traditional mortgage credit report. With a better view of 191 million potential homebuyers, you can help lenders automate and streamline their underwriting process, save costs, and build a better consumer experience. And just as importantly, grow your business. Ready to make inefficient mortgage lending a thing of the past? Learn more about the solutions and latest news from Equifax Mortgage and Housing.

“Hey there lenders, how important are surveys in your mortgage origination process? Maybe you use them to collect needed info from borrowers? Or to get client feedback and reviews once the loan is closed? Have you ever wanted to send surveys straight from your LOS? Velma wants to know and is conducting a quick 3-minute survey to find out how mortgage pros, just like you, are using surveys in their day-to-day operations. (Plus, if you’re interested, we’ll share the results with you…) Take the Velma Connector Survey on Surveys Today!”

TPO Channels for Lenders and Brokers

AmeriHome Correspondent, backed by the strength and stability of Western Alliance Bank, continues to grow market share in the correspondent space. When you combine AmeriHome’s industry leading loan purchase platform with Western Alliance Bank’s warehouse lending and treasury management services, this is one “must-have” relationship for mortgage bankers of all shapes and sizes. IMBs and financial institutions alike benefit from AmeriHome’s Delegated and Non-Delegated options, full suite of conventional and government products, and Bulk, Bulk/AOT and Best-Efforts delivery options. They are currently running a pricing special for Purchase loan amounts of $200,000 or less and offer a stable of temporary rate buy-down options. Catch them in August at the Colorado MLA Annual and the Western Secondary Conference or check out their Upcoming Events page for details on where they’ll be this summer! Find your local sales rep here or send them an email to learn more about the advantages of partnering with AmeriHome.

“The 3rd quarter of 2023 is already upon us, and Newrez Wholesale is excited to reveal our 2nd Quarter RezClub qualifiers next month. One of the many reasons for being a RezClub member is our non-solicitation protection of your business through RezConnect. Get in RezClub and get protected! To learn more, click here or call your AE for details. Here are just a few reasons why you should send Newrez-serviced borrowers back to us: A 1/8th price improvement, the ability to net escrows, saving your borrower cash out of pocket at closing (on same property refinances), priority service and faster turn times, and ease of transaction: We already know your borrower. These benefits apply to any new loan transaction in good standing, whether that’s a purchase of a new home or a refinance of another property. We want to be your partner of choice for new and repeat business, and we’re serious about retaining your borrowers.”

Interest Rate Predictions: Keep Them in Perspective

I am asked all the time, “Hey Rob, where do you think rates will be in six months?” My answer, after I say that I can’t even predict where I’m going to have lunch tomorrow, is always the same, “Higher, or lower, or possibly the same.” Or sure, one can have a prediction until a ship becomes stuck in the Suez Canal, or a pandemic occurs. STRATMOR’s current blog is titled, “Interest Rates are Like the Weather? Or Like Signs of the Zodiac?”

For some outside input I asked James Hedvall, grizzled capital markets veteran. He replied, “The interest rate markets have a way of humbling almost all the ‘experts’ and the very first thing you learn in Secondary Marketing is that you shouldn’t take a view on where rates are headed because half the time, you’re wrong anyway. In Q4 last year the arm-chair prognosticators were predicting that we’d see rates come down by the end of 2023, however, that simply does not appear to be the case as many LOs are originating in the 7% range currently.

“The Federal Reserve, in its attempts to control inflation and cool a very strong economy, have raised Fed Funds three times just in 2023 alone, with another 25-bps increase predicted for July’s meeting, and a window left open for another increase before the end of the year. I continue to read, however, inside the world of mortgage banking, opinions expressed that rates will not only come down, but when to expect this to happen. Based upon what data, I ask? Are their views speculative, biased, or just hopeful?

“I would challenge these prognosticators as to ‘why’ mortgage rates are positioned to fall. What leads them to predict that? I’m sure some opinions are based on fundamentals: Fed raises rates to control inflation, money is taken out of the economy, the economy cools, Fed cuts rates, and mortgages come down to some predicted level. A lot of the predictions I see are not rooted in actuality, but rather rooted in exuberance for mortgage banking.

“Here’s some additional perspective. None of the macro data even hints at a reduction of short-term interest rates. Current inflation is a tad north of 4% with the Federal Reserve’s target set at 2% Economists have modeled that unemployment would need to reach as high as 7% in order for inflation to come down to 2%; however, June’s unemployment report had very little change from May’s with the current rate at 3.6% Remember, when an economy ‘slows’ jobs are not created, historically they’re lost.

“Everything points to the Fed being hawkish in its monetary policy for the remainder of the year. Anyone predicting where interest rates will be in the future would need to start by predicting where the Federal Funds rate NEEDS to be in order to see inflation that’s appealing to the Fed, and then ultimately, HOW LONG rates needs to remain there; when is it warranted to reduce borrowing rates under recessionary fears? These are two almost impossible questions to answer since the number of variables that you need to get right, coupled with unpredictable world events, play such a strong role in forecasting interest rates.”

Like I said before, a year from now, rates will either be higher, lower or the same. So let’s discuss your products and services!

Capital Markets

As the market moves through different cycles, lenders are continuously evaluating whether to retain or release mortgage servicing rights (MSR) as part of their overall strategy. MCT & Mr. Cooper released a whitepaper, Getting Started with Co-Issue Transactions, that reviews the basics of co-issue transactions, helps dispel common MSR myths, and explains how to incorporate various strategies to achieve your business objectives. If you’re interested in co-issue executions, MCT’s BAMCO offers expanded execution options for sellers while providing new client acquisition options for buyers, creating a more convenient way to conduct co-issue transactions. BAMCO provides sellers with the ability to incorporate co-issue pricing from MSR buyers on the platform into the best execution analysis, regardless of approval status. Learn more about how MCT’s Marketplace is maximizing liquidity, eliminating barriers, and optimizing execution.

For those hoping for lower rates, yesterday’s report on the Consumer Price Index for June brought good news. Headline consumer price inflation cooled versus May, increasing just 0.2 percent over the month and 3.0 percent over the past year, the slowest rate in more than two years. Excluding food and energy prices, the core CPI increased 0.2 percent over the month, the smallest monthly increase in core inflation since February 2021. Consumer-price inflation is now just one-third of the level it reached a year ago, good news for consumers, the markets, and the Fed. The report likely isn’t enough to stop the Fed from going ahead with its well-signaled interest rate hike this month (92 percent probability) after the June jobs report showed wage increases still running hot, but it raises doubts about whether more hikes will be forthcoming. The implied likelihood of another increase in November fell to 26.8 percent from 42.4 percent on Tuesday.

Inflation has been moderating on the heels of severe tightening by the Fed, but core-inflation printed at 4.8 percent in June, still a far cry from the Fed’s 2 percent target. Speaking of the Fed, yesterday it released its Beige Book for June describing overall economic activity as having increased slightly since the May report. Five Fed Districts saw slight or modest growth while five saw no change and two reported slight declines. Consumer spending was mixed with some pressure on discretionary spending. Tourism was robust and demand for hospitality services is expected to remain strong during the summer. Auto sales were little changed while manufacturing improved in six Districts and weakened in the other six. Lending softened but demand for residential real estate remained solid. Employment increased modestly while growth in prices was also described as modest. Related to inflation, the report said, “price expectations were generally stable or lower over the next several months,” and “some Districts noted reluctance to raise prices because consumers had grown more sensitive to prices.”

Today’s economic calendar kicked off with two key economic releases: jobless claims (237k, lower than expected) and wholesale inflation for June (+.1 percent versus expectations of +0.2 percent month-over-month and 0.4 percent year-over-year). The other primary event for the market is the final leg of the mini-Refunding consisting of an auction of $18 billion reopened 30-year bonds, though markets will also receive remarks from San Francisco President Daly and Board Governor Waller. We begin the day with Agency MBS prices better by .125, the 10-year yielding 3.83 after closing yesterday at 3.86 percent, and the 2-year, which a week ago was north of 5.10, is at 4.66 after the producer price numbers.

Employment

Evergreen Home Loans™ is committed to its GROWTH conviction. One way is by positioning loan officers for success, beginning with its VIP onboarding experience. “Our onboarding team is amazing,” said Loan Officer and Branch Manager Amber Page. “They walk right beside you to make sure you are all plugged in with the right passwords and system setups. Makes you feel like you have a friend right from the start at the company.” Evergreen also invests heavily in digital mortgage technologies, offers product training and business coaching opportunities, and develops innovative programs to answer current and future market challenges, among other things. And not only do these advantages support loan officer growth, but they also help win business for agent partners. Loan officers looking to experience feeling supported in professional growth can explore current opportunities on the Evergreen careers page.

“Planet Home Lending is defying the odds and achieving remarkable retail growth. Halfway through one of the industry’s toughest years, we’ve welcomed more than 100 MLOs. Our response to the challenges of shrinking volume, constrained margins, and market unpredictability was to build a foundation for growth. You can expect financial stability, operational sophistication, approachable leadership, and unwavering multichannel support, along with competitive pricing to help you reach more borrowers and close more loans. To thrive in an ever-evolving market, reach out today for a confidential discussion with Brian Miller, Planet’s SVP Talent Acquisition, at 214-223-9986, or Peter Briggs, VP Talent Acquisition, at 949-202-8213.”

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Source: mortgagenewsdaily.com