Rising interest rates are wreaking havoc on the mortgage market, forcing borrowers to sit on the sidelines and making it harder for lenders to originate mortgages.
Mortgage rates have doubled this year, with average 6.94% last weekmortgage applications are their Lowest level in 25 yearsCredit quality is at its lowest level in almost a decade, according to the Mortgage Bankers Association. With mortgage interest rates so high right now, many lenders are losing money on the loans they make.
“For now, in the near future, there will be a growing proportion of potential borrowers who will not be able to get loans,” said Brian Filkey, chief operating officer of Interfast Mortgage, a national mortgage lender. Stated. Based in Rosemont, Illinois.
The mortgage market has been affected by two strategies: the Fed’s rate hikes and rate hikes. Shrinking $9 Trillion Balance Sheet By allowing the mortgage-backed securities portfolio to roll off the balance sheet. Lenders also struggle to meet certain regulatory requirements to curb abusive behavior that came into force after the 2008 financial crisis. Mortgage lenders, who met this week at his MBA’s annual convention in Nashville, Tennessee, are facing the worst headwinds in more than a decade.
Dave Stevens, CEO of Mountain Lake Consulting, former president and CEO of MBA, and former Commissioner of the Federal Housing Administration, said: “We are in the worst cycle of home buying, exacerbated by global events, with the worst interest rates in decades. I have to hope.”
MBA expects total lending to drop 49% from a year ago to $2.26 trillion this year. Refinancing is expected to plummet 74% to $671 billion, while home purchases are expected to fall 14% to $1.59 trillion. The MBA forecasts that a recession will strike in 2023, with mortgage volumes dropping another 10% to $2.5 trillion. Lenders face a fundamentally altered market after a prolonged housing boom that has resulted in a tsunami of refinancing, huge demand during the pandemic, and years of soaring house prices that have boosted the economy.
Susan Stewart, CEO of SWBC Mortgage Corporation, a medium-sized independent mortgage bank in San Antonio, said the whiplash is being felt across the mortgage industry. business during this recession.
“It’s a perfect storm, and lenders are really upset,” said Stewart, who served as chairman of the MBA last year. This time it was much more difficult because people who have worked hard for the past two years now have to turn and say, ‘We failed’. Staff should be reduced. And it’s really tough mentally. ”
Still, many mortgage experts say interest rates have been artificially low for more than a decade because the Fed didn’t fully lift the various forms of post-housing-crisis stimulus. The mortgage market is about to enter its most profitable year yet. During this period, ultra-low interest rates surged loan volumes, resulting in record profits for lenders.
“People have been used to the Fed keeping rates artificially low over the past decade to keep the economy growing, but we have inflation and other problems,” said Ted Tozer, principal at Ted Tozer. So the Fed is no longer doing that.” Ginnie Mae’s advisor and former president.
“A lot of people don’t get their heads around the right range of interest rates.”
Rising interest rates are pushing up mortgage rates in two ways. First, 30-year mortgages are usually pegged to 10-year Treasury yields, so mortgage rates have risen in line with his Fed policy hikes. However, because Treasuries are seen by investors as a safer and more favorable option than mortgage-backed securities, lenders will have to pay more to capitalize loans, which will offset them. should charge higher interest rates. cost.
Stewart said the secondary market was “shaky for now” due to the Federal Reserve’s tightening. Lenders may even face a zero or declining premium, which is the profit borrowers make by selling loans above their eligible par interest rate. These days, lenders typically let her lose $6,000 on a $300,000 loan, she said. A higher interest rate environment means lenders cannot afford to pass costs on to consumers.
“What would you do? You don’t want to tell a borrower you can’t get a loan,” Stewart said.
Regulatory requirements also play a role behind the scenes. After the financial crisis, the Consumer Financial Protection Bureau created the Qualified Mortgages Rule. This relieves the lender (and the investor) of the legal responsibility of verifying the borrower’s ability to repay the loan. The QM rule’s in-the-wees requirement has impacted recent profitability and the likelihood of a borrower getting a loan. The QM rules cap the points and fees charged to the borrower at his 3%. Additionally, to obtain QM status, the loan must be priced 225 basis points below the average prime offer rate. Most loans don’t meet his 3% points and fees standard of the QM rule.
“There are really good loans that are failing that test over and over again,” Stewart said. “If a lender fails his 3% test, he has only two choices: either he can’t run the loan, or he has to give the lender a huge amount of credit, which means closing the loan at a very large loss. It will be.”
Mortgage lenders are also complaining about loan-level price adjustments. This is a risk-based fee assessed by Fannie Mae and Freddie Mac based on loan attributes such as credit score and loan ratio. One challenge is that most lenders factor fees into their mortgage rates, driving up the cost of loans.
InterFirst Mortgage’s Filkey rattled off a list of loans that he said wouldn’t be disbursed any time soon, keeping many borrowers out of the housing market.
“Cash out loans, investment property loans, second home loans, low or high FICO loans [loan-to-value ratios]high-balance loans, multi-unit loans, and condominium loans,” Filkey said.
Experts say the current concern is whether the Fed can make a soft landing or a hard correction. Inflation, which has remained consistently below the Fed’s 2% target since 2008, was further accelerated by global supply chain problems and the massive stimulus injected into the economy during the COVID pandemic. , which surged earlier this year. Stevens said Congress passed his three major bills and the Fed played a role in the series of quantitative easing in early 2020, creating a “tremendous boom in real estate demand.” rice field.
“They have outperformed the coronavirus scenario, and I am equally worried. The whole soft landing is being debated by really great economists, some think there is a risk of a harsher correction.”
Analysts expect home prices to fall about 10% in the coming years. Meanwhile, competition is fierce, margins are thin (if at all), and lenders are stressing their business.
“There has never been a market like this in most people’s memories,” says Stewart. “The economic expansion is very strong, there’s a lot of money in the market and we’re probably paying for it. Lenders who’ve really been paying attention to their balance sheets will survive another day, but It will be very difficult.”
Kyle Campbell contributed to this article.