As the timeline moved to 2021, it didn’t take long for mortgage rates to rise. Just two weeks into the new year, Freddie mac reported that the mortgage rates climbed 14 basis points to 2.79%, in stark contrast to 2020, a year in which mortgage rates low record 16 times.
Housing industry economists believe the era of extremely low interest rates may be coming to an end, but the transition may be a slow burn.
Freddie Mac’s quarterly forecast estimates that the 30-year average fixed-rate mortgage will be 2.9% in 2021 and 3.2% in 2022. However, the factors that will drive mortgage rate movements still make the difference. subject to debate.
HousingWire spoke to several housing economists to get their take on the mortgage rate hike in 2021, the reaction of lenders and the impact it will have on the housing market.
As the coronavirus pandemic began to ravage the economy, Federal Reserve President Jérôme Powell announcement in March, the central bank would make “unlimited” purchases of mortgage-backed securities, reducing the average 30-year fixed mortgage rate to 3.5% by the end of the month. It was the best option to avoid a credit crunch and shake up the economy by making borrowing cheaper, Powell said.
Today, averaging $ 120 billion a month – split between $ 80 billion in treasury bills and $ 40 billion in MBS – the Fed’s holdings have surpassed $ 7 trillion, and the vice -President of the Fed, Richard Clarida does not see a decline this year.
To Mike Fratantoni, Chief Economist at Mortgage Bankers Association, the current budgetary situation dates back to the “Taper Tantrum” era of 2013.
At the time, former Fed Chairman Ben Bernanke announced that the Fed would reduce the pace of its purchases of Treasury bonds to reduce the amount of money it was pumping into the economy. Bond yields immediately surged, spawning the phrase “Taper Tantrum”.
Despite the Fed’s promise to keep interest rates low until 2022, Fratantoni said recent Fed speeches revealed that they are less engaged in asset purchases and would not be surprised if those purchases were reduced by the end of the year.
“Then-President Bernanke just started hinting that they might slow down asset purchases at some point, and long-term rates jumped a point and a half in a matter of weeks. So, c ‘was definitely a tantrum, “said Fratantoni.” I think we’re ready for the possibility of something like this again. They just have a hard time explaining how they could come out of this program smoothly. The worry not that they immediately stop shopping, but that they start talking about it more seriously.
The Treasury is now expected to auction nearly $ 3 trillion in bonds this year, and with this amount of supply hitting the market, a historically reverse relationship will see bond prices fall and yields rise.
“While for a while people thought that mortgage rates might be less impacted than Treasury rates, the gap between mortgage rates and Treasury rates has narrowed dramatically. In the future, any increase in Treasury rates will really be offset by an increase in mortgage rates, ”said Fratantoni.
But this incredible shopping spree has only been offered as a temporary solution to a problem caused by a pandemic. The Fed will eventually back down, especially when it hits its fiscal targets, economists said.
“Any rational mortgage banker should realize that when the Fed starts to back down, which it will do, especially as we distribute the vaccine and the economy begins to grow, it will eliminate the biggest buyer of backed securities. to mortgages and that will be upward pressure. on interest rates, ”said David Stevens, former president and CEO of the Mortgage Bankers Association. “It is important.”
Are companies ready to ride a smaller wave of refi?
In September, the data and analytics company Black Knight estimated that there were over 19 million applicants for high-quality refinancing in America, representing 43% of all 30-year mortgage holders. Even with an estimated origination volume of $ 4 trillion in 2020 – of which about two-thirds were refi – there is still plenty in the cup.
Although borrowers have flooded the market to take advantage of unprecedented mortgage rates in 2020, circumstances appear less optimistic in 2021. For starters, the Adverse market commission of 50 basis points of the Federal Housing Finance Agency finally landed in December, and lenders have to weigh whether to absorb the loss or raise the price.
This will present interesting challenges for many of the major independent mortgage banks, which have been feasting on refis since the start of the pandemic. About ten of them have become public or plan to do so in 2021 on the basis of historical refi volumes.
“It will be interesting to see how they are able to achieve their goals as shareholders,” Stevens said. “Because shareholders are not used to the volatility of the mortgage industry. I mean banks, banks can offset volatility because they have other investments that they make. But the mortgage companies are monoline and some of the ones that have gone public are heavily refinanced, ”Stevens said.
The two leaders, Rocket companies and United Wholesale Mortgages, have both generated significantly more refi business than purchases since the start of the pandemic. Their smaller rivals exhibit similar trends.
Starting point, the third largest wholesale company, revealed in its S-1 on January 8, this 68% of their origination volume during the first nine months of 2020 was in refinancing activity. Compared to 51% in 2019, low mortgage rates have pushed borrowers to cut their mortgage payments for most of the year. Multichannel lender loan deposit, who filed his intention to make public on January 11, also reported 61% refi activity in the same period.
Investors want to see mortgage companies capable of generating profits in all kinds of different environments, and few have proven over the long term that they can. Several of the companies looking to go public actually lost money in just a few quarters in 2019.
On January 13, the refinancing index increased by 20% compared to the previous week and was 93% more than same week a year ago. Both conventional and government refinancing requests increased, with government loan requests having their strongest week since June 2012.
Sadly, news of this wave of refi came just a day before the report of rising mortgage rates hit the inboxes of economists.
Rising mortgage rates have advantages.
While extraordinarily low mortgage rates brought new borrowers into the market, stocks in the housing market struggled to keep up with demand for months.
Data from National Association of Real Estate Agents and United States Census Bureau revealed that the national supply of homes for sale in September fell to the lowest level never recorded. After months of severe shortages, upward pressure on appreciating home prices has led consumers to fight over the limited supply.
But Andy Walden, director of market research at Black Knight, said this hike in mortgage rates could be just what a bustling real estate market needs to catch up.
“Typically, a 1% movement in the rate is equivalent to about a 10-12% movement in purchasing power,” Walden said. “So this recent increase in mortgage rates has reduced purchasing power in the range of one to one and a half percent. This therefore pulled this purchasing power somewhat, a very slight headwind on the purchasing market, which may be welcome given the intensity of this purchasing market. “
If the bidding wars subside due to the increase in the housing stock, first-time homebuyers who have been sidelined by the upward pressure on home prices may finally have some skin in the game.
Don Layton, former CEO of Freddie Mac, Noted higher house prices mean higher down payments, so future homeowners need more money to be able to buy a first home.
“In other words, housing has become so much of a ‘tradable asset’, with prices fluctuating to reflect supply and demand, that an expansionary monetary policy turns into asset inflation, which hurts buyers. of a first home and thereby at least somewhat reduce the hoped-for impact of the rate cuts to help the economy, ”Layton said.