For IMBs, Calm Amid Economic, Housing Volatility

SAN FRANCISCO–It’s been “quite a ride” for the mortgage market and the broader economy, said Mortgage Bankers Association Chief Economist Mike Fratantoni, and circumstances are not likely to change in the near future.

“We have had a lot of stock market volatility and economic uncertainty,” Fratantoni said here at the MBA Independent Mortgage Bankers Conference. “The global economy has been slowing for some time, with volatility in France and Germany and in particular Britain, with uncertainty over Brexit.”

By job market measures, the U.S. economy is quite strong, Fratantoni said. “But we have to see how global factors play in,” he said. “The recent shutdown has had some impact on the economy, but not nearly as bad as first feared. Analysts say the economy took a $3 billion hit–not an insignificant amount, but a drop in the bucket in the ocean.”

Another source of economic uncertainty lies with central banks, typified by the U.S. Federal Reserve, which, with other central banks, had moved away from quantitative easing, “but are now rethinking their strategy.”

So, what does this mean for the U.S. housing market? “Not much,” Fratantoni said. “Our forecast hasn’t changed too much, with increases in the purchase mortgage market and declines in the refinance market. So far, what has happened has aligned with our forecast.”

The MBA forecast calls for total mortgage originations of $1.613 trillion in 2019, representing $1.232 trillion in purchase originations and $381 billion in refinance originations.

“The biggest threat to the forecast is the possibility of a recession, which an increasing possibility by 2020,” Fratantoni said. “However, employment remains strong and the housing market is showing increasing signs of affordability, which is a good sign. Unemployment is at near-50-year lows and wage growth is picking up. That’s going to bring more potential home buyers in to the market.”

MBA expects two more rate hikes by the Federal Open Market Committee this year–one in July and one in December, to about 3 percent. All that said, Fratantoni noted, MBA doesn’t expect mortgage interest rates to move much over the next two years, hovering between 4.5 percent and 5 percent. He noted mortgage rates have dropped by about 5o basis points since October, which hasn’t sparked a lot of activity, which he attributed to most homeowners already having rates under 4.5 percent. “But their equity has exploded, so there’s a market for the cash-out refi market, particularly for those who still have a relatively high interest rate,” he said.

The rate of household formation is holding steady at around one million per year, Fratantoni said, an improvement from the years immediately after the financial crisis. “We’ve turned the corner, he said. “Last year, we had almost 1.5 million new households formed. The Millennials are finally starting to leave the house.” He added the homeownership rate has grown to above 65 percent “and will grow higher. The problem here is homes available for sale. We are still trying to catch up from a lack of building inventory that has persisted for 10 years. The challenge is not putting up more units, but putting up the wrong unit in the wrong location. We’re starting to see some improvement.”

The market has changed, Fratantoni said. MBA data show purchase activity slowed toward the end of 2018, particularly in homes with large loan sizes. “We’re seeing signs of moderation in home price growth,” he said. “Home prices were accelerating at a 6 percent rate or higher, which wasn’t sustainable or affordable. A year from now, we’ll be at a 3-4 percent home price growth and a 3-4 percent wage growth, which should provide some balance.”

MBA Vice President of Industry Analysis Marina Walsh said IMBs continue to gain originations volume share. “It shows the dependence of depositories to IMBs,” she said. “They’ve been relying on their correspondent channels for their servicing income.”

On the servicing side, Walsh said IMBs are gaining market share as well; non-depositories now have nearly 40 percent of servicing volume. “That’s reassuring as well, with low delinquencies and higher loan balances, which drive up servicing fees,” she said.

However, Walsh noted production profitability among MBA/STRATMOR Peer Groups continued to drop in 2017 and 2018. “We’re in a cyclical business,” she said. “Now, in 2019, the mini-boomlets we saw a few years ago aren’t happening.

The MBA quarterly Mortgage Bankers Performance Report show IMB net production profits have been “anemic,” at less than $500 per loan in the third quarter. “It’s tough right now,” she said.

“From a lender’s perspective, there’s a lot to be optimistic about,” Fratantoni added. “However, we are going to see some economic tailwinds for the next five years.”