Apr. 19: Thoughts on how 2014 is going, and thoughts from a few months ago on where things will go

Easter is already here, and the year, as usual, seems to be rushing by. No one has a perfectly accurate crystal ball, of course, but there are some general trends and questions that are easier suggest answers to than others. People email me a lot of questions; which is a good thing considering one day the orderly wheeling me to the arts and crafts room might not care about mortgages and how they are originated or securitized. I’ll tell him anyway, though. With that said, I’ve compiled a list of the most frequently asked “secondary” questions over the past few months, and to appease the one-arm economists out there, will answer bluntly, and to the best of my ability.


Will mortgage origination volumes decline this year, and by how much?

Yes, and from what I have seen 25-35%. I don’t believe this will shock anyone, and don’t feel like I’m a statistical outlier in this conversation. Market factors: rising mortgage interest rates have caused refinance applications to plummet by over 70% since the recent peak in May ‘13. At the start of 2013, the average refinance incentive among 30-year fixed rate mortgages was 160 bp; this incentive has plummeted to just 16 bps by increasing mortgage rates, coupled with the vast numbers of borrowers who were able to refinance from higher note rates. The bright spot in the conversation is the purchase market, where estimates I have read suggest an increase to around $800B. It appears, however, that much of the decline will take place with certain lenders (big banks are most often cited) while other, smaller lenders may actually show an increase – and we’re already seeing that.


With the lack of originations, agency MBS issuance will be off as well, correct?

Yes. The fall in overall origination volumes in 2014 will lead to a corresponding decline in agency MBS issuance. The expected decline in originations will flow approximately one-for-one into declining agency gross issuance. However, because the origination mix should change, from 38% purchase in 2013, to 62% purchase in 2014, net issuance will not decline to the same extent as gross issuance, and indeed we expect agency debt outstanding to grow slightly in 2014.


What can we expect from non-agency securitization this year, will there be any growth?

No; no real growth. To say that securitization levels are off in private RMBS, is like saying the U.S. Tax Code is a little “tricky”. Historically speaking, current RMBS issuance (from what I have seen) is only 3% of what it was in 2006, and roughly 10% of what it was 13 years ago in 2000 (when everyone was more concerned with chasing down Y2K bugs. In 2014, investors will be no more willing to chase yield than in recent years; mainly due to pricing volatility, QRM regulations, and standardized rep and warrant frameworks, which are all YTBD. RMBS issuance is expected to be less than $25B.


Will any of the agency reform bills be enacted this year?

No. Why? Mainly because no specific deadline has ever been mandated, coupled with no real political push to get anything passed. While activity in the form of introducing new or modified GSE reform bills seems likely, the probability that a bill gets enacted in 2014 seems low. Next year is another issue, however. That being said, certain institutions, such as the MBA, are carefully watching the situation – after all, the agencies being under conservatorship is an unstable arrangement and needs to be thoughtfully and prudently corrected at some point.


Will the agencies loan limits be reduced?

No – at this point no one wants to be responsible for putting a damper on the “fragile” housing market. Please don’t remind me if I’m wrong, though. If it does happen, it would be in the latter half of the year. The FHFA has submitted a request for public input on a plan to gradually reduce the maximum loan sizes, but has stated that “the changes…will not affect loans originated before October 1, 2014”. The proposed change would reduce limits by 4%: the $417K standard limit would shrink to $400K, while the $625K high cost limit would shrink to $600K.


While we’re taking a look at trends for the industry, in mid-January AnnaMaria Andriotis, who covers real estate and consumer credit for MarketWatch in New York, suggested five changes to expect in 2014. Much of what she wrote is indeed taking place although things in some areas are a little different. (No one has a 100% accurate crystal ball, right?) Here is what she suggested:


Fewer types of jumbos

Several jumbo-mortgage repayment options are tougher to find. That includes the interest-only jumbo mortgage, which doesn’t require principal payments during the first few years, and many mortgages with balloon payments that require small monthly payments and a lump-sum payment to pay off the remaining balance after five or seven years. Mortgages that are originated with these features fall outside of the definition of a “qualified mortgage,” which was first established by the Dodd-Frank financial reform bill of 2010 and whose terms were announced by the CFPB. Lenders can still originate these loans if they believe the applicant has the ability to repay, but they stand to incur more risk going forward. Should borrowers default, they could challenge foreclosure proceedings by arguing the lender didn’t properly vet them to confirm that they can afford the loan.


Some lenders are requiring borrowers to make large down payments. National lender EverBank, for instance, says it requires at least a 35% down payment for interest-only jumbo loans, compared with 20% for other jumbos. Some lenders have been scaling back. By the third quarter of 2013, interest-only mortgages accounted for roughly 3.2% of jumbo mortgages that were being securitized, down from 8.5% the prior quarter, says Guy Cecala, publisher of Inside Mortgage Finance.


Lower down payments

Lenders started lowering down-payment requirements last year. Most notably, Wells Fargo began accepting 15% down payments for jumbos, down from 20%, and Bank of America made the same change for loans of up to $1 million. Experts say more lenders will likely follow and that some will begin accepting 10% down payments.


Low down payments allow affluent borrowers to lock less cash into a home and to invest it elsewhere. For lenders, lower down payments help attract more applicants and are a sign lenders are becoming more comfortable loosening underwriting guidelines. So far, most jumbo lenders aren’t requiring private mortgage insurance—an added expense that was widely employed during the housing boom to lessen losses from borrowers who went into foreclosure. But that is expected to change this year. Private insurers say lenders have been contacting them about reintroducing this cost.


Higher hurdles for “nonqualifed” mortgages

Lenders that originate “nonqualified” jumbos are raising requirements for borrowers.  For instance, in most cases qualified mortgages don’t permit borrowers to end up with a debt-to-income ratio—the percentage of their monthly gross income that goes toward paying debt—that exceeds 43%. Zions Bank, which is based in Salt Lake City, is originating jumbos for borrowers with a DTI as high as 50%. But those borrowers need to meet stricter guidelines, including a higher FICO credit score and provide documentation proving they have six to 18 months of mortgage payments (including taxes and insurance) in cash reserves, says Kim Casaday, president of the bank’s home-financing division.


Separately, fewer lenders will make exceptions for borrowers who don’t supply full income documentation. Affluent jumbo borrowers have been able to provide partial documentation with some lenders and still get approved—a setup that helped those who are self-employed or have complex income structures.

But the CFPB’s new mortgage rules prohibit low- and no-documentation mortgages. These loans “may be much harder to come by,” says Keith Gumbinger, vice president at mortgage-info website HSH.com.


Bigger push to ARMs

Banks will likely ramp up their pitches for adjustable-rate jumbos—in indirect ways. Tom Wind, executive vice president of home lending at EverBank, says lenders will slowly raise rates on 30-year fixed-rates jumbos, which will result in more borrowers turning to ARMs.

Banks hold most private jumbos on their books and prefer ARMs because once their rates reset, they stand to receive larger interest payments from borrowers. While the CFPB’s new mortgage rules have made qualifying for these loans tougher—lenders can no longer approve borrowers based on the loan’s introductory rate—that is unlikely to affect wealthy home buyers who have the income or assets to qualify at a higher rate.

Rate changes

Mortgage experts say jumbo rates are likely to remain low this year in comparison with non-jumbos. Lenders are still courting affluent borrowers and want to add more of these loans to their books. The lowest rates will continue to be on the adjustable-rate jumbos while fixed-rate jumbos are expected to get pricier later in the year.


Further rate increases could come by next year as well. A rule proposed under the Dodd-Frank law will require the small number of securitization firms—which sell mortgages to investors—to retain 5% of the loan amount on their books. The Treasury Department is coordinating the rule, which will be completed by six federal agencies. This rule will likely result in the companies asking investors for a higher price for those loans, which will trickle down to higher rates for borrowers.


Rick Sharga with auction.com writes, “Rob – I read with interest your recap of Fed comments on housing. For the most part, I agree with the comments (and have been commenting on my own along the same lines…nice of them to catch up). But I don’t know what data they’re looking at to come to the conclusion that household formation and population growth are pointing to housing recovery. Population growth has been pretty much flat and – more important in the short term – household formation has been down for the past few quarters. And there is a higher percentage of rental households among those being formed than what would lead to an increase in home sales. Best-case scenario at this point is that we might see existing home sales equal to 2013 numbers this year; more likely, we’re going to see 5-10% less.”


[I replied to Rick that a lot of weight is being put on the shoulders of minorities, and of Millennials moving out of their parent’s basements, to which he wrote “While immigration reform stalls, and student debt levels soar… Great combination, isn’t it?”]



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Rob Chrisman