The Mortgage Corner

It looks like the housing market still has to play catch up in 2014. Both mortgage volume and existing-home sales have declined drastically. But new-home sales and housing construction have picked up, even with the Polar weather, which should add to depleted inventories bought up during the ultra-low interest rates in 2013.

But recent higher interest rates are having an effect, so we will have to wait for the spring thaw to know if consumers have the means to continue buying homes.

In January, we saw origination volume continue to decline to its lowest point since 2008, with prepayment speeds pointing to further drops in refinance-related originations,” said Herb Blecher, senior vice president of Black Knight Financial Services’ Data & Analytics division, formerly LPS Data & Analytics.

LPSorigs

Graph: LPS/Calculated Risk

One can see from the graph that originations in Q4 2005 were equally divided between Fannie Mae/Freddie Mac conforming and private label mortgages, whereas today Fannie/Freddie originate almost all conventional mortgages. Banks have not begun to originate and sell their own products yet, in other words.

This is while mortgage delinquencies continue to fall. The January 2014 overall delinquency rate fell to 6.27 percent and foreclosure rate to 2.35 percent. This meant 4,315,000 million were still in trouble, down from 5,208,000 in January 2013. That’s still a lot of homes in trouble, folks, and is contributing to the lowered inventories, since these borrowers have a much harder time either refinancing or selling their homes.

Overall originations were down almost 60 percent year-over-year, with HARP volumes (according to the most recent FHFA report) down 70 percent over the same period. (The HARP loan program allows home owners to refinance at today’s rates, even if their loans are underwater, i.e., have negative equity.) These declines are largely tied to the increased mortgage interest rate environment, which is having a significant impact on the number of borrowers with incentive to refinance. A high-level view of this refinancible population shows a decline of about 13 percent just over the last two months,” said Blecher.

LPS

Graph: Calculated Risk

“Of course, in addition to higher interest rates, a good deal of this decline can be attributed to the fact that a majority of those who could refinance at historically low rates in recent years already have, and we see a similar dynamic in terms of HARP-eligible loans,” continued Blecher.. “The volume of HARP refinances over the past year has driven this population down to about 700,000 loans in January 2014, as compared to over 2.3 million at the same time last year. From a geographic perspective, outside of Florida and Nevada, we see the Midwestern states of Illinois, Michigan, Missouri and Ohio have among the highest percentage of HARP eligibility.”
We see, therefore, the need for more new homes, but also housing’s continued price and value appreciation to bring more of those delinquent homes back on the market. And that depends on whether new Fed Chairwoman Janet Yellen will support lower interest rates.

But she continues to maintain QE3 purchases will be lower in months to come, and that is the reason for higher mortgage rates, which are tied to Treasury Bond yields. So she is walking a fine line between deficit hawks and those who believe the housing market is not yet fully recovered. Let us hope she realizes that the housing market still needs such low interest rates to fully recover.

Harlan Green © 2014

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