Servicing Forecast: Steady as It Goes

DALLAS–For mortgage servicers, the forecast is nice and steady, with little boat-rocking, the Mortgage Bankers Association said yesterday.

“We’re expecting steady, modest growth in the U.S. economy,” MBA Vice President of Research & Economics Lynn Fisher said here at the MBA National Mortgage Servicing Conference & Expo. “We’re seeing real economic growth in a number of indicators.”

Fisher also noted that the U.S. is near full employment, which is creating difficulties for some employers to find workers to match skill-sets. “This in turn is going to drive up wages,” she said. “Over the next two years, unemployment will fall to around 4.5 percent, suggesting further tightening on the labor front.”

Fisher noted, however, that the days of record-low mortgage interest rates are coming to an end. She noted the Federal Reserve has already increased the federal funds rate twice in the past two years and is expected to raise rates at least two more times this year, possibly as early as its March meeting, although most economists (MBA included) believe June is the more likely target date.

“The Fed tries to stay ahead of inflation and might act sooner to cool off an overheating economy,” Fisher said.

By the fourth quarter, MBA expects the 30-year fixed rate rising to 4.7 percent, rising gradually to 5.5 percent by 2019. “Those aren’t huge increases,” Fisher noted.

House prices continue to grow quite sharply, Fisher said, nearly 2 percent higher than the previous 2007 threshold level, prompting the Federal Housing Finance Agency to raise the conforming loan limits for loans purchased by Fannie Mae and Freddie Mac.

MBA expects home prices to increase by 4.28 percent this year, with gradual slowing, with new home sales expected to increase by 10.1 percent.

“It’s been hard putting the construction sector back together” after the recession, Fisher said. But she noted that demand for new housing is only expected to increase over the next 10 years, as Millennials and minorities move into homeownership. “If you fast-forward to 2019-2020, this cohort is going to be ready for homeownership,” she said, with peak demand hitting between 2025 and 2030. “We’re going to build into this–it’s a big group–but it’s going to take some time,” she said.

Purchase applications have been slow to start, Fisher said, but is expected to increase. “We think people will get more comfortable with how things are going to shake out,” she said.

All of this activity has had an effect on mortgage debt outstanding; MBA reported the share rose to nearly 8 percent last month to $9.6 trillion, rising by 4 percent to more than $10 trillion. “We see borrowers moving toward adjustable-rate mortgages and more people active in the jumbo loan market, which tends to change the characteristics of the mortgage portfolio.

MBA forecasts a decline in mortgage originations this year to 1.57 trillion (from 1.8 trillion in 2016). By 2018, originations will decline further to 1.18 trillion.

The MBA fourth quarter National Delinquency Survey, released this week, reported the delinquency rate for mortgage loans on one-to-four-unit residential properties increased by 28 basis points to a seasonally adjusted rate of 4.80 percent of all loans outstanding. MBA reported the serious delinquency rate–the percentage of loans 90 days or more past due or in the process of foreclosure–rose to 3.13 percent, an increase of 17 basis points from the third quarter but a 31 basis point decrease from a year ago.

MBA noted, however, that foreclosure actions continued to drop. The survey said the percentage of loans on which foreclosure actions started during the fourth quarter fell to 0.28 percent, a decrease of two basis points from the third quarter and an eight basis points drop from one year ago. This represented the lowest rate of new foreclosures started since fourth quarter 1988. The percentage of loans in the foreclosure process at the end of the fourth quarter fell to 1.53 percent, down two basis points from the third quarter and a 24 basis point drop from one year ago. This represented the lowest foreclosure inventory rate since second quarter 2007.

What all this means for mortgage servicers, said MBA Vice President of Industry Analysis Marina Walsh, is a relatively supportive environment, noting that the cost to service loans has stabilized in recent quarters.

“We are seeing improvement in terms of servicing expenses,” Walsh said. “This is good news, as we’d seen strong increases in servicing expenses in recent years. Servicers are doing their jobs better.”

Walsh noted, however, that administrative costs for servicer remains high, with compliance costs and security costs representing much of the cost of servicing benchmark. Additionally, default costs continue to be high, despite defaults down to pre-recession levels. “Servicers appear to be unwilling to get rid of those staff people,” she said.

Home Mortgage Disclosure Act data show a continued shift in mortgage servicing from large depository banks to non-banks and independent mortgage banks.

“This important for several reasons,” Walsh said. “IMBs and banks are servicing different kinds of loans, with IMBs servicing a lot of government loans and banks servicing jumbo loans. And many independents are now using sub-servicers; banks in general have their servicing in-house. Also, legacy technology is a key factor. Some IMBs are moving to in-house servicing, creating technology issues that are not a factor with some of the larger banks. Additionally, banks and IMBs hedge their mortgage servicing rights differently.”

Walsh added that as the housing market moves from a refi market to a purchase market, servicing activity could decline slightly over the next few years. “We think the economy will grow, but there could be blips along the way,” she said.