Apr. 15: Thoughts on IMBs & FHA lending, the current real estate market; vendor tidbits; a primer on bond vs. mortgage pricing

I don’t know if packs of canines are still roaming some neighborhoods near Detroit like they were ten years ago, but if you’re in the area, and don’t have a job, UWM is having a job fair today. In feline news, it’s well known that my cat Myrtle (Felis Catus) isn’t a big fan of the CFPB, and she loves snarky comments and tasty treats, so may be interested in attorney Brian Levy’s Mortgage Musings blog. In this edition, his 60th, Levy serves up some tasty treats about a few of the CFPB’s recent actions along with reflections about his recently deceased mortgage industry colleague, Kim Newby. The CFPB has a lawyer or two on their staff, and certainly knows a thing or two about the legal system, and made the news this week by announcing a revised version of its “Methodology for Determining Average Prime Offer Rates” which describes the calculations used to determine average prime offer rates (APOR) for purposes of federal mortgage rules. (APORs are annual percentage rates derived from average interest rates, points, and other loan pricing terms currently offered to consumers by a representative sample of creditors for mortgage loans that have low-risk pricing characteristics.) Shifting legal gears, as it were, at least eight cities including Cleveland, Seattle and St. Louis are suing Kia and Hyundai for making their cars extremely stealable and running up a serious tab on the city when it comes to investigating and prosecuting carjackings and joyriding. The cities allege that the vehicle manufacturers didn’t install immobilizers on their vehicles as a cost-cutting measure, an issue that affects 4.5 million Kias and 3.8 million Hyundais on the road. On with mortgage banking!

A snapshot of real estate


It seems like every reporter is “chomping at the bit” trying to write about a collapse in real estate. But when you speak to real estate agents and loan officers, a different picture emerges, one of continued lack of inventory at many price points and in many areas. And if sales are dropping, is it because houses are too expensive or because of a lack of sellers?

North of San Francisco, in Larkspur, Coldwell Banker Realty’s Bob Ravasio addresses the state of the market, saying it is “complicated.” “Somehow, we have gone from a very slow, quiet market to what is suddenly, probably temporarily, a Seller’s market! The end of 2023 was severely dampened by rising interest rates, which continued through January as mortgages went above 6 % again. It slowed buyers way down.”

But the weather, specifically the rain, impacted sellers. “Bad weather has made it difficult to get homes on the market, as preparation is difficult. Not a lot of painting happened in January. But according to what we hear at our sales meetings, sellers are also holding back. They don’t want to show their houses in cold wet weather, so they are delaying putting them on the market. The result is that inventory is way down: New listings were down 32% vs. last year for February, and there just are not that many homes for sale.

“Buyers, however, are still looking. As we always tell our clients, life goes on, and life changes that spur the need for a new home continue even when interest rates go up: people get married, have more kids, or need a school system. And those factors are causing buyers to continue to look and buy homes despite higher interest rates.

“So, a severe lack of inventory plus buyer demand means houses going over asking price! It is kind of crazy, given the macro numbers are down, but in the short-term homes are going over asking price. The monthly numbers for February are way down. Sales for the month declined nearly 33% from last year, but listings were down 32%, as indicated by lack of inventory. Average sales price is also down 4.36 % vs. last year. The YTD numbers are equally negative. YTD sales are also off 38.6%, and the other big number is new listings – down 35.8% YTD.

“We are telling clients that although the year is off to a rough start, look for things to turn around if inventory picks up. And if you are delaying putting your home on the market, don’t! Get it out there!”

(Bob goes on to discuss some new legislation, recently introduced. “One of the other stumbling blocks to selling your home in California is the capital gains tax. Currently, sellers must pay capital gains on what they make when they sell the home. Single sellers can exclude the first $250,000, and married couples can exclude the first $500,000. It hasn’t changed in years, despite increasing home prices. But on March 1, the “More Homes on The Market Act” was introduced into the California legislature. It will raise the capital gains exclusion to $500,000 for single filers, and $1,000,000 for married couples. The bipartisan bill also indexes the exclusion to inflation.”)

The economy and bond market: A primer


The 30-year fixed-rate mortgage moved past 7% in October to reach its highest level in two decades, far above the estimated 4% many economists had expected going into 2022. Those higher rates put substantial pressure on the housing market. Rates have fallen, seeming to hover around 6 or 6.5 percent, depending on the attributes of the deal, but the higher rates raise the questions of how did we get here, and where do we go from here?

Mortgage rates are impossible to forecast, and LOs often ask why 30-year rates are higher than “normal” compared to Treasury securities. There are a lot of factors that come into play, including government bonds, the mortgage-backed securities (MBS) market, prepayment speeds, and how investors perceive the relative risk of different asset classes. Let’s go through each of those factors, starting with government bonds.

As a reminder, a 10-year Treasury note is issued by the government to support its spending and obligations. Investors buy bills, notes, and bonds because they are compensated for lending the government money. The yearly interest rate paid by the government is called the yield. Bonds are perceived to be extremely safe investments because they are backed by the full faith and credit of the U.S. government. Not so with some types of home loans.

The Federal Reserve is directly raising overnight interest rates, which is different than the yield on the 10-year Treasury note. The bond yield is determined by supply and demand with investors taking into consideration inflation, Federal Reserve policy changes (yields often rise in anticipation of rate increases versus at the time of the rate increases), and how the anticipated policy changes will impact the economy. Investors, then, place their money accordingly.

Yields on fixed-income securities usually rise due to investor optimism about the U.S. economy. Bond yields and price move in inverse directions, so if investors think economic prospects are good, they will demand less government bonds and the yield will rise to entice more demand. The 10-year yield can also rise as a result of higher inflation, like what we are seeing today.

But what about the link to mortgage rates? Investors looking to place money in the fixed-income markets will compare assets, looking for a steady return in similar products, and often compare securities issued by the government and securities backed by mortgages.

The MBS market has become a bit dysfunctional in 2022 following the Federal Reserve ending Quantitative Easing and removing itself as a buyer of MBS. And there is plenty of talk about the Fed selling its MBS holdings, though that is conjecture.

If we enter a recession, investors expect that there is a higher possibility of default due to potential income losses for borrowers. MBS liquidity has dropped somewhat, especially pertaining to jumbo, non-QM, or other non-Agency securities. Investors have been demanding a higher interest rate to hold or buy more MBS. That, in turn, has pushed the 30-year fixed rate mortgage up.

There is a strong correlation between mortgage rates and 5- or 10-year Treasury yields. But with the possibility of property values dropping, certain banks liquidating MBS portfolios, the chance of a recession, and the Fed no longer interested in not only buying MBS but possibly selling its existing holdings, the correlation has gone askew.

30-year fixed-rate mortgages have traditionally been an average of 1.7% higher than the 10-year Treasury yield. Put another way, the spread between the two averaged 1.7%. The spread between the 30-year fixed rate mortgage and the 10-year Treasury yield averaged 2.9% for the month of October, 1.2 percentage points above the historical average and 1.4 percentage points above levels this time last year.

If the spread were to “normalize” back to the historical average, we would be looking at a mortgage rate in the low or mid-5s. As we learn more about buyers of existing and future MBS issuance, and borrower’s credit is stable, this may happen. Stay tuned!

Independent mortgage banks & FHA lending


Dave Stevens, CEO of Mountain Lake Consulting, Inc., recently distributed his thoughts on the residential lending business. Specifically, how independent mortgage banks are expanding access to homeownership, discussing the Housing Finance Policy Center’s March Monthly Chartbook. “The data highlights two things. First, the FHA program does more loans to minorities than any other agency or private label lending source so much so that it dwarfs the GSEs, VA, and others. Second, if it weren’t for independent mortgage bankers (IMBs) the opportunity to get into homes for first time homebuyers would be significantly constrained.

“Let’s start with the basics. In looking at full year 2021, 49.3 percent of FHA’s purchase transactions were provided for minority home loans. That compares to only 28 percent for both of the GSEs combined. To be clear, the FHA remains the primary provider of mortgage financing for minorities in this country. Even with the improvements in LLPAs for high LTV/low FICO borrowers, FHA remains better execution for borrowers below a 740 FICO which means, all of this pricing effort from the GSE’s to sweep in more minority homebuyers is likely for naught.

But who does the FHA loans today? GNMA issuance is dominated by IMBs that make up 90% of total volume. And yes, while IMB’s are the majority of all originations in all categories, the GNMA concentration stands out and is one that policy leaders in housing should be discussing.

With IMBs contributing 90% of the loans where the highest concentration of minority purchase transactions are, it raises the question as to why are these same policy makers so focused on attacking this channel? Yes liquidity concerns exist, but there are solutions that simply require focus and leadership here…

“One has to ask, why are the IMBs so effective with GNMA lending? The answer is simple: they don’t add the credit overlays that banks generally do. IMBs do higher DTIs and lower FICOs than banks. And they do this while staying well within the guidelines of the various agency programs… when you are looking to expand credit access and opportunity and meet the needs of more first-time homebuyers, especially minority first time homebuyers, it is the IMB that is making this all happen.

So the conclusion is simple really, all made clear by the Urban Institutes Monthly Chartbook. The FHA is the program that has the vast majority of minority purchase loans, and IMBs do approximately 90 percent of these mortgages. And they do this much simply because they use the entire credit set provided by FHA and the other programs thus allowing lower FICOs and higher DTI’s than banks… when it comes to expanding affordability and access, it’s simply the Independent Mortgage Banker that fills this role.” Thank you, Dave.

Vendor/third-party provider bits and pieces


AREAL.ai, the no-code automation platform for the title and mortgage ecosystem that makes it easy to reliably extract data from complex documents and integrate data with existing tools and workflows, announced the release of the Closing Disclosure Balancer Automation Tool, an AI-powered solution that allows lenders and their title agency partners to easily compare and balance Closing Disclosures to remain in full compliance with the CFPB’s TRID rules. REAL.ai’s CD Balancer is designed to reduce the friction between industry partners with advanced software that flags every unmatching section on the Closing Disclosure, highlights any changes made and then sends the corrected data back to the various systems of record automatically. This new offering has been very well received by the industry and the company is now supporting new customers on a first come first served basis. To get on the waitlist and learn more about AREAL.ai’s CD Balancer Automation Tool, please visit here or email Bill Hajjar.

Fannie and Freddie rolled out their social index disclosures in November 2022. Consisting of two measures, the Social Criteria Score and the Social Density Score. New Agency data available on the Edge Platform assigns every pool two fully transparent scores; one indicating the percentage of loans in a pool that satisfy any of the defined social criteria, the other reflecting how many criteria a pool’s average loan satisfies. Taken together, these enable Agency traders and investors to view and understand each pool along a full continuum of the social index, as opposed to simply assigning a binary social designation. This new functionality is the latest in a series of enhancements that further the Edge Platform’s objective of providing frictionless insight to Agency MBS traders and investors, knocking down barriers to efficient, clear and data-driven valuation and risk assessment.

A Press Release announced MCT’s integration with Freddie Mac’s Income Limits application programming interface (API). Created for the first-time home buyer area median income (AMI) limits, Freddie Mac’s Income Limits API allows for the accurate pricing of the credit fee in price (Exhibit 19, or “Credit Fees”) waivers. This is the latest in a series of successful API integrations between MCT and Freddie Mac, and helps promote both pricing transparency and housing affordability.

Cloud-based texting platform, Textel, is now part of Capacity, the AI-powered support automation platform. In Capacity’s announcement, the company explains it will be expanding capabilities to include AI-powered SMS business texting features for organizations who view text messaging as a key communication channel for customers and employees.

Spruce is an official member of ACUMA (American Credit Union Mortgage Association). ACUMA is an organization that provides educational resources for industry leaders and professionals.

There I was sitting at the bar staring at my drink when a large, trouble-making biker steps up next to me, grabs my drink, and gulps it down in one swig.

“Well, whatcha’ gonna do about it?”, he says, menacingly, as I burst into tears.

“This is the worst day of my life,” I say. “I’m a complete failure. I was late to a meeting and my boss fired me. When I went to the parking lot, I found my car had been stolen and I don’t have any insurance. I left my wallet in the cab I took home. I found my wife with another man and then my dog bit me.

“So I came to this bar to work up the courage to put an end to it all, I buy a drink, I drop a capsule in, and sit here watching the poison dissolve; then you show up and drink the whole thing!

“But enough about me, how’s your day going?”


Visit www.robchrisman.com for more information on our industry partners, access archived commentaries, or to subscribe to the Daily Mortgage News and Commentary. If you’re interested, visit my periodic blog at the STRATMOR Group web site. “The Yield Curve Is Inverted: Should Lenders Care?” is the current blog. The Commentary’s podcast is live and at any place you obtain your podcasts (like Apple or Spotify).


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Rob Chrisman