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Rates Are Falling, Will It Continue?

With the 10-year treasury yield at 2% again, and the Federal Funds Rate (FFR) at 2.5%, it is natural for the rational mind to assume that this cannot go on for much longer. During normal market conditions, the treasury curve slopes upward; typically, short-term treasuries yield less than the long-term treasuries yield. In our current environment, the FFR is higher than a two-year treasury.


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The Federal Reserve (Fed) will eventually need to bend to the market and cut their FFR in order to align their policy stance with the dual mandate and market conditions. In fact, the Fed pivoted for a second time this year during July’s FOMC meeting. They essentially removed the “patience” approach and are considering rate cuts if economic data weakens further. The market is expecting a 50bp cut to the FFR by September’s FOMC meeting… will they get it?


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We do know that this rally to 2% will likely be short lived in the grand scheme of things. There will be some ups and downs, but the long-term trend is still bullish.


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If a recession is defined as two straight quarters of negative GDP, it’s a matter of time before we see much lower GDP and hints of a recession. In the short term, typically interest rates fall before a recession because investors seek risk-free returns. A quick reversal (50BP FFR cut) could reverse the economic slowdown.


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The only soft landing we have seen in the past 30 years occurred when the Fed, with Greenspan at the helm, realized that they overtightened so they cut FFR several times shortly after their last increase. On the opposite side, if nothing is done, we will see slower GDP, lower rates, and a much worse ending to the current business cycle.

Optimal Blue: Rates Falling, Are Volumes Responding?

Optimal Blue recently released a suite of indices known as the Optimal Blue Mortgage Market Indices (OBMMI). These indices are calculated from actual locked rates with consumers across more than 30% of all mortgage transactions nationwide and are developed around the most popular mortgage loan products and specific borrower attributes.


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Rates have been falling steadily since mid-November 2018 and particularly sharply in March 2019. Specifically, the average 30-year conventional confirming 30-year rate fell from 5.16% in November 2018 to 4.55% in March 2019.  This drop was enough to spark a surge in mortgage consumer lock volume, with lock activity increasing by approximately 2.5% in Q1 2018 relative to Q1 2017. 


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Despite the drop in mortgage rates which is normally associated with signs of economic weakness, the economy has continued to show strong signs of growth, with unemployment at 3.8% in February and GDP growth at 2.6% in the fourth quarter of 2018. And signs of strength are also apparent in the housing market, with the monthly purchase only House Price Index showing a 0.57% increase in January. However, some market indicators suggest that an economic slowdown could be around the corner. In particular, the spread between 2-year and 10-year Treasury securities has narrowed since mid-2018 which is indicative of a weakening economy.  When the 10-year Treasury yield is near or less than the 2-year Treasury yield, it implies that markets expect the Federal Reserve to eventually reduce short term rates, a process which is generally associated with an economic slowdown. This expectation is supported by Federal Reserve Board statements indicating that they do not plan to raise rates the rest of the year and that they are slowing the runoff of the balance sheet. 


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The chart shows the Optimal Blue conforming 30-year fixed index plotted with the 2-10 yield spread, and indexed volumes of locked loans through the Optimal Blue product and pricing engine. Note that the yield spread has been low for a while, coinciding with the fall in rates. Unsurprisingly, the stark decline in rates has led to an uptick in mortgage activity.  

Citations:

Federal Reserve Bank of St. Louis, 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity [T10Y2Y], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/T10Y2Y, April 2, 2019.


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Optimal Blue, OBMMI, Conforming 30-Year Fixed Rate index, https://www2.optimalblue.com/obmmi/, April 2, 2019

Optimal Blue, internal locks volume information

U.S. Federal Housing Finance Agency, Purchase Only House Price Index for the United States [HPIPONM226S], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/HPIPONM226S, April 2, 2019.

U.S. Bureau of Economic Analysis, Real Gross Domestic Product [A191RL1Q225SBEA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/A191RL1Q225SBEA, March 27, 2019.

U.S. Bureau of Labor Statistics, Civilian Unemployment Rate [UNRATE], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/UNRATE, April 2, 2019.

Putting The Interest Rate Hike Into Perspective

Should the interest rate hike be a concern for the mortgage industry? Will the demand from prospective homebuyers be decimated? The short answer is no.

Like most veterans of the mortgage industry, I remember when mortgage rates reached 18 percent. Today, that’s an APR on a credit card – not the interest on a mortgage payment.

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Earlier in the year it was reported that the median price of a house in 27 major metro areas in the U.S. was $222,700. Even if a buyer puts 20 percent down, an 18 percent interest rate means that the loan costs more than $965,000 over 30 years. Thankfully, this is no longer the case. As I write this, the average fixed-rate on a 30-year mortgage is 3.43 percent, which means that today’s homebuyer would pay less than $286,000 over the life of the loan – that’s a savings of more than $680,000. So a slight rate increase will not be detrimental for lenders. Consumers will still be purchasing homes; they’ll just adjust their budgets accordingly. It will be up to lenders to adjust and cater to their needs.

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All things considered, the industry is doing very well. The industry has been very effective at increasing the quality of loans within the past few years. With new regulatory standards -and most lenders’ ability to now adjust and appropriately respond to evolving compliance requirements – delinquency and default rates are at historic lows. Equifax recently reported that as of June 2016, the first mortgage write-off rate in the U.S. was 3.3 basis points of outstanding balances, while the total number of first mortgage defaults was 17,909, the lowest since January 2007.

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While the industry will not suffer dramatically from a rate hike, the cost of mortgages will certainly increase; therefore, the emphasis should shift toward making sure borrowers are provided with personalized service, a powerful differentiator that will grow your business. Thankfully, we live in an era in which technology is evolving faster than ever and new tools have made the home search and purchase process easier than ever for borrowers. Digital and mobile apps provide the most up-to-date, detailed information on a property, such as days-on-market, square footage, price, age, structure, associated school districts, interior and exterior layout, utility information and more. The borrower is engaged earlier than ever and is coming to the table with greater expectations of convenience and service. And the ability to meet these expectations requires that lenders’ systems are optimized to handle the workload. LOS technology workflows need to be configured so that the process is smooth, timely and compliant. There is always room for improvement and lenders should evaluate where systems can be tweaked to minimize timeframes. With ongoing improvements in operations, you can effectively manage the pipeline growth provided by your marketing department.

In addition to lenders taking a proactive approach to the rate hike, they shouldn’t ignore that the sentiment of home buyers continues trending upwards. In September, the Fannie Mae Home Purchase Index in July-August was up 4.2 points over the same time period in 2015. Doug Duncan, SVP and chief economist at Fannie Mae, said the return to a slight upward trend in the HPSI is in line with Fannie Mae’s forecast, which calls for a four percent growth in home sales this year “to the best level since 2006 and continued improvement for 2017.”

Ultimately, synergy between departments is going to dictate a lender’s success. From a marketing standpoint, the ability to effectively communicate and connect with a diverse population of potential homebuyers of all ages across digital and traditional channels will help you identify the best path to homeownership for everyone – something that is fundamental to helping borrowers achieve debt-free homeownership. Operationally, success relies on the deployment and integration of systems that streamline the origination process and facilitate ongoing relationships. And together, these two components must work in tandem to maximize the quality and volume of business.

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Rates Trend Downward

The average rate for conforming 30-year fixed-rate mortgages fell by six basis points (0.06 percent) to 3.69 percent, according to HSh.com. Conforming 5/1 Hybrid ARM rates decreased by eight basis points, the largest decline since early April, closing the Wednesday-to-Tuesday wraparound weekly survey at an average of 2.97 percent.

“The most recent economic data was on the soft side, especially for the May employment report,” said Keith Gumbinger, vice president of HSH.com. “After a soft first quarter, the kind of strong economic rebound we’ve seen in the second quarter in each of the past few years doesn’t appear to have formed, and this will probably give the Fed pause for at least another meeting.”

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The Federal Reserve has taken great pains to prepare the financial markets for the eventuality of higher short-term interest rates. However, the central bank’s plan to raise rates has been thwarted on a number of occasions by soft growth patches, unsettled financial markets and global conditions that have kept the Fed in check.

“It’s still likely that we will see a rate increase this year, perhaps two,” added Gumbinger. “With almost half the year already over and no clear signs of any economic acceleration or strong uptick in inflation, interest rates can’t rise drastically. The economy is only chugging along which isn’t especially welcome, but good news is that low mortgage rates will continue to hang around to complete the spring homebuying season and beyond.”

Ellie Mae: Interest Rates On The Rise

Interest rates on mortgage loans in July reached their highest levels since the fall of 2014, according to the latest  Origination Insight Report released by EllieMae. The average rate on a 30-year fixed-rate mortgage rose to 4.29 percent last month, up from 4.12 percent in June and its highest level since October 2014, when the average rate was 4.37 percent.

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Ellie Mae’s data also showed that lenders’ share of purchase loan volume climbed to 63 percent, an increase of 22 points since February. Nearly two-thirds of loan applications, or 66.2 percent, closed in July, the highest level since Ellie Mae began tracking this data in August 2011. Meanwhile, the closing rate on purchase loans climbed above 70 percent for the first time in four years.

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Despite the higher rates, the average FICO score on closed loans fell for the third consecutive month to 725, its lowest level since February 2014.

“Mortgage rates appear to be rising in anticipation of the Federal Reserve’s first rate increase since the global financial crisis,” said Jonathan Corr, president and CEO of Ellie Mae. “However, credit availability appears to be broadening, which is certainly good news for consumers and the housing market.”

The Origination Insight Report mines its application data from a robust sampling of approximately 66 percent of all mortgage applications that were initiated on the  Encompass all-in-one mortgage management solution.

The Story On Interest Rates

Rates on the most popular types of mortgages edged downward, according to HSH.com‘s Weekly Mortgage Rates Radar. The average rate for conforming 30-year fixed-rate mortgages fell by two basis points (0.02 percent) to 4.09 percent. Conforming 5/1 Hybrid ARM rates also decreased by two basis points, closing the Wednesday-to-Tuesday wraparound weekly survey at an average of 3.06 percent.

“With the latest Fed meeting behind us, financial markets would like nothing more than to prepare and position for the upcoming summer doldrums,” said Keith Gumbinger, vice president of HSH.com. “However, with the Greek debt mess unresolved, there are still too many unknowns to get too comfortable at the moment. It’s still not clear whether a resolution will be reached, and that is keeping the markets a bit on edge right now.”

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Mortgage and other interest rates have moved higher in recent weeks as better economic news in the U.S. and abroad has surfaced. In turn, this improvement puts the Federal Reserve on a path to start lifting short-term interest rates as soon as September. Conversely, economic and monetary troubles in the Eurozone have proven beneficial to U.S. mortgage borrowers over the last couple of years, as foreign investors plowed money into U.S. bonds for safe haven. It is possible that we may see some of this again if a resolution isn’t reached, or if Greece exits the Euro as a currency. The coming days will tell.

“If the situation isn’t resolved to the liking of the markets, we could see a dip in interest rates here on a flight-to-safety buy,” adds Gumbinger. “That said, it is likely that some form of agreement will be worked out, so it’s best not to expect any major dip in rates. In fact, there remains more upward pressure on mortgage rates at the moment than not, so waiting around to get a mortgage deal in place isn’t likely the best idea.”

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Average mortgage rates and points for conforming residential mortgages for the week ending June 23, according to HSH.com:

Conforming 30-year fixed-rate mortgage

  • Average Rate:   4.09 percent

  • Average Points: 0.21

Conforming 5/1-year adjustable-rate mortgage

  • Average Rate:   3.06 percent

  • Average Points: 0.11

Average mortgage rates and points for conforming residential mortgages for the previous week ending June 16 were, according to HSH.com:

Conforming 30-year fixed-rate mortgage

  • Average Rate:   4.11 percent

  • Average Points: 0.16

Conforming 5/1-year adjustable-rate mortgage

  • Average Rate:   3.08 percent

  • Average Points: 0.07

Let’s Get Perspective

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Last year one of the big stories was that rates are going up. Why was this a big story? Because with rising rates, refinance activity will slow. With refinances slowing, that means that lenders will have to work harder to get more purchase money in the door. How much harder will lenders have to work? That depends.

“Mortgage rates have settled over the last few days in January, as we’re in-between market-moving events,” said HSH.com vice president Keith Gumbinger. “The soft December employment report is behind us; the next Fed meeting, where we may or may not get another cut in Treasury and MBS purchases is coming up. Investors are watching the incoming data closely for signals that the Fed will or won’t make a move, so interest rates are holding fairly steady at the moment.”

The Federal Reserve trimmed QE purchases by $10 billion at its December meeting, and outgoing Fed Chairman Ben Bernanke left a strong impression that the Fed would like to reduce purchases of MBS and Treasuries at a like amount over the next seven Fed meetings. However, the Fed has noted that the decision to do so is dependent upon whether the economy is performing satisfactorily, that the risks to inflation aren’t rising, and perhaps most important, that the program is still having the desired impact. With interest rates already well off their bottoms, it just may be that the program is no longer generating the economic heat that it once was, and there may not be much additional upward impact on mortgage rates if the taper continues at a measured pace.

“The Fed’s QE program certainly provided key and needed support for the housing markets, fostering sales, firming prices and reducing the number of underwater homeowners,” adds Gumbinger. “However, the economy may no longer need as much of this unusual support. Aside from refinancing, the housing market has done fairly well in the last half of 2013, even with mortgage rates a full percentage point or more above last May’s lows.”

So, let’s take a deep breadth and put things into perspective. Rates are going to rise. Refinance activity is going to lessen. Purchase business lenders will be successful. All of this is just our current and future reality. What confuses me is why this intimidates some lenders. Is it that they forgot how to do purchase loans? Of course not, even lenders that were heavy in refinances did some purchase lending. Doing purchase loans may not be as quick and easy as doing a refinance, but quick and easy isn’t going to work anymore. As the old saying goes, slow and steady wins the race.

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Will You Have A Job In Six Months?

The Mortgage Bankers Association is predicting a 32% decline in mortgage originations and a 57% drop in refinance originations in 2014. For many in the industry, the bell has already been tolling. Independent mortgage banks and mortgage subsidiaries of chartered banks have seen their profits slide throughout the past 12 months, and there is no reason to expect an abrupt turnaround soon.

Furthermore, the major lenders in this space have been pulling back and seeking other opportunities. Hey, there are just so many times that the big banks can get shaken down by the federal government for so-called settlements linked to sour mortgage transactions from the previous decade.

The wider environment is also hostile to the industry’s fortunes. The U.S. economy remains stagnant, and the only job creation trend happening now involves low-wage part-time work. Throw in the new consumer expenses related to Obamacare and the picture becomes truly depressing. Now, try to grow a housing market in this miasma!

Something else will be lacking in 2014: the number of people employed in the industry. It is impossible to imagine that current employment levels will be maintained in a shrinking industry.

The major lenders that are pulling out of the mortgage space have already jettisoned hundreds of staffers as part of their exodus. The companies that remain in good health will work furiously to ensure they don’t collapse. One way they will seek to achieve that is by whittling away at their staff levels.

During the course of this year, we’ve already seen a new spin in mergers and acquisitions, and this will pick up in intensity in 2014. Merged entities are notorious for laying off surplus employees, which will swell the ranks of the unemployed.

Then we will be seeing a continuation in the shrinking number of branch offices for depositories and mortgage lenders. Last week, PNC Financial Services was the latest to announce closures, with the shuttering 25 of its branches in 2014. Factor in the number of branch workers that will be absent a place of employment and you will have even more folks that will be calling CareerBuilder.com their home away from home.

There will also be a domino chain effect here. Fewer players in the industry will require less in the way of products and services. There is already a swirl of mergers and acquisitions among the industry’s vendors, and that will result in staff reductions. And fewer companies in the industry will lead to fewer advertisers for the industry’s trade journals. One once-prominent monthly (that won’t be named here) couldn’t publish its August edition this year due to an acute lack of advertisers – we could easily see more of that in 2014. This, of course, will result in more lost jobs in this ancillary orbits.

So, let me plant some seeds of paranoia in your mind: do you believe, with no degree of uncertainty, that you will be working in this industry six months from today? Do you believe that your company will still be operational come June? Or will there be efforts underway to promote a so-called leaner-and-meaner workplace – with the mean people in charge of your company cutting you away so their business remains lean?

If you feel 100% confident that you will be happily employed in six months, more power to you. But if there is even the slightest twinge of concern that the near-horizon is not a happy place to visit, it might be a good time to get a contingency plan ready in the event that circumstances beyond your control put you in a different situation. It can happen – don’t be surprised if it does, and don’t get caught short it this occurs.

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Are High Home Prices Bad For The Economy?

*Are High Home Prices Bad For The Economy?*
**By George Yacik**

NEW-GeorgeY***One of the standard chestnuts of U.S. economic policy is that high home prices are good for the economy. Nobody embraces that thinking more than the Federal Reserve, which at its past two monetary policy meetings decided against tapering its quantitative easing bond purchases –  nearly half of which include mortgage-backed securities – to a large degree because it was worried that any rise in interest rates might derail the nascent housing recovery. Pumping more money into the market, so the thinking goes, helps home prices and thus the larger economy.

****But is the Fed doing the right thing by trying to boost home prices, at least in terms of growing the economy? Is there really any factual basis for this way of thinking?

****A new paper from economists at Southern Methodist University and the University of Pennsylvania argues that this long-held approach may actually be wrong-headed. Rising home prices actually hurt the economy by decreasing lending to more economically beneficial areas, specifically commercial businesses, they argue.

****The paper, entitled “Do Asset Price Bubbles Have Negative Real Effects?” argues that high home prices, rather than benefiting the economy at large, actually hurt it by disincenting lenders from making loans in other economic sectors.

****The paper notes that the negative effects of asset-price declines have been well studied in great detail, including a 1983 paper by Ben Bernanke (yes, that Ben Bernanke).

****But, the SMU and Penn economists say, “Our paper finds that even while asset bubbles are on the rise, there can be negative effects for firms and the economy. To the best of our knowledge, our paper is the first one to provide empirical evidence of a negative effect of asset-price increases on borrowing and investments.”

****“In general, increases in housing prices in a bank’s deposit base lead banks to decrease commercial lending,” the paper contends.

****The academics found that in “areas with high housing appreciation, banks increase the amount of mortgage lending and decrease the amount of commercial lending as a fraction of their total assets. This allocation results in (commercial) firms receiving reduced loan amounts, paying higher interest rates, maintaining lower leverage ratios, and reducing investment. If anything, firms should have more, instead of fewer, investment opportunities in the face of strong housing returns and economic growth.”

****“These results suggest that when asset prices increase in one sector (such as the housing market), banks may respond by reallocating capital away from other sectors (such as commercial lending) towards the supported sectors.”

****The conventional thinking in the U.S. is that by “improving asset prices, and specifically housing assets, consumers will increase demand, which will lead to increased business investment and hiring,” the economists write. “However, these arguments are leaving out the potentially negative effect of asset-price increases. An increase in activity and asset value in one sector, such as mortgage lending, may crowd out resources from other sectors and activities, such as borrowing and investment by commercial firms. The focus on increasing asset prices, and in particular real-estate prices, may be wrong as the potential harm to commercial firms’ borrowing and investment will hurt the economy as a whole.”

****“Our results imply that there may be room to scale back the actions to support and improve real-estate (and other asset) prices, as those attempts may lead to a crowding out effect for productive investments by commercial firms,” the authors conclude.

****Even if the authors are correct, I doubt the housing and mortgage lending industries, and the other industries that are heavily dependent on them, need to worry about any imminent change in government policy. Too many Americans – myself included – are too wedded to the existing state of affairs to want a change – any more than we can expect or want any major changes to Medicare or Social Security. Besides, the thinking that high home prices are good for the economy is so engrained in conventional economic thinking that we probably shouldn’t expect much change.

****But this paper is certainly food for thought.

****The Fed had a big hand in creating the housing bubble in the early 2000s through its low interest rate policies. Maybe we should be worried that it’s doing so again. We all know what happened the first time.

Try A New Business

*Try A New Business*
**By Tony Garritano**

TonyG***If your concerned that the rise in rates is going to negatively impact your bottom line, I have a suggestion. A lot of originators are looking to get into servicing to make up the difference, and there are companies out there interested in helping originators make this leap. For example, Fay Servicing, a special servicer that manages distressed and at-risk residential mortgages, has launched an initiative to create strategic partnerships with mortgage lenders to help train origination staff for a career in the servicing industry.

****The program provides training to hone key skills such as managing initial calls with borrowers, refining listening skills, meeting all applicable compliance requirements and conducting a Personal Budget Analysis (PBA) for borrowers.

****Fay Servicing has developed an employment model that seeks professionals with extensive mortgage expertise combined with borrower engagement skills, enabling them to successfully work with distressed homeowners to avoid foreclosure. Relationships with lenders that are downsizing origination staff allow the company to attract the next generation of special servicers.

****“These strategic alliances with mortgage lenders provide a new career option for origination staff who are seeking positions in the servicing industry,” said Ed Fay, chief executive officer of Fay Servicing. “And act as a way for the mortgage industry to shift its collective resources to related sectors where there is substantial growth.”

****Mortgage originators interested in learning more about opportunities at Fay Servicing should contact them at careers@fayservicing.com.