In the long-term, the Federal Open Market Committee’s 75 basis point hike will help the mortgage industry if it calms inflation, some originators said.
Right now, it is likely to exacerbate existing trends impacting production, especially around affordability and inventory.
During his remarks on Wednesday, Fed Chairman Jay Powell said home buyers, particularly younger ones, “need a bit of a reset.
“We need to get back to a place where supply and demand are back together and where inflation is down low again and mortgage rates are low again,” Powell said. “So this will be a process whereby ideally we do our work in a way where the housing market settles in a new place and housing availability and credit availability are at appropriate levels.”
In the short term, following the announcement, mortgage rates went down according to data from Zillow.
After moving above 6% on Tuesday, the average for the 30-year fixed rate mortgage has been falling, to 5.67% on Wednesday and 5.53% on Thursday, although that is still 32 bps above the previous week’s 5.21%. A separate weekly measure of the average 30-year fixed rate mortgage rate from Freddie Mac recorded an average of 5.78% for the weekly period ending June 16, up from 5.23 the week before.
No matter what the Fed does with short-term rates, it does not control the 10-year Treasury yield, which is the benchmark for the 30-year FRM. On numerous occasions in the past, the 10-year yield has moved in the opposite direction of what the Fed did.
The 10-year yield closed at 3.307% on Thursday, down nearly 9 bps after ending Wednesday up 1 basis point, to 3.395%. Much of the upward movement in the yield was in the prior two weeks, opening on May 29 at 2.724% and closing on June 14 at 3.483%.
Several mortgage industry participants National Mortgage News spoke with expressed relief, not worry, about the FOMC’s decision.
“We’ve been happy to see that the Fed was aggressive and staying on top of inflation, so we pull the Band Aid off faster and get to the parity they need to be at to control inflation,” said Brian Koss, executive vice president of Mortgage Network in Danvers, Massachusetts. “A long slow approach would be painful for us and mortgage banking in general.”
He would like the FOMC to continue on that path by making a second rate hike of that magnitude in the next 30 days.
“We can just get this over with because once you get beyond that midpoint in the Fed raising cycle then bonds (investors) start to realize, ‘okay, they have everything under control, we can relax a little,'” Koss said. “And that’ll be good for bonds and therefore rates would start to top off and begin to creep back down sooner than later.”
Shashank Shekhar, the CEO of InstaMortgage, San Jose, California, also expects further FOMC rate hikes, although not to the extent of 75 bps.
Powell’s statement about future rate hikes actually had the effect of calming the mortgage-backed securities market and pricing dropped, Shekhar pointed out. Investors previously priced into mortgage-backed securities and 10-year Treasury notes the likelihood of a Fed Funds rate hike.
“It might turn out to be slightly positive in the long run if these Fed rate hikes actually end up lowering the super-hot inflation numbers that we’re seeing,” Shekhar said. However, that kind of impact on inflation is likely to take several months.
Even though the optics about a 75 bp hike might seem negative for the mortgage industry, the payoff in the long-term is lower mortgage rates, he continued.
If anything, the Fed’s taper of its bond investment portfolio of Treasurys and mortgage-backed securities, is likely having a larger impact on mortgage rates.
The Fed’s target rate is likely to reach almost 4% by the end of 2023, which should be effective in slowing the economy and ultimately bringing down inflation, Mike Fratantoni, chief economist at the Mortgage Bankers Association, said in a statement.
“The housing market has slowed considerably over the past month as rate increases have taken hold,” Fratantoni said. “We expect that this slower pace will remain through the summer, but buyers could return later this year if the Fed’s plans are better understood by the market and lead to less rate volatility.”
Frantanoni’s latest origination outlook, issued on June 10, calls for a 40% reduction in total volume to $2.4 trillion this year from just shy of $4 trillion last year. But he is still forecasting record annual purchase volume through 2024, including $1.68 trillion this year, up from $1.65 trillion in 2021.
In May, the MBA’s outlook called for $2.51 trillion in total volume this year, of which $1.69 trillion was purchase.
Doug Duncan, Fannie Mae’s chief economist is still predicting a late-2023 recession as part of his June outlook.
“The market’s expectations of the necessary Federal Reserve response to persistent broad-based inflation continue to adjust,” Duncan said in a statement written in anticipation of the Fed’s actions. “Tightening financial conditions are slowing economic activity, and consumers are drawing down savings and increasingly relying on credit cards as they seek to maintain current levels of consumption.”
The rise in interest rates is also impacting employment growth and the stock market.
“Nowhere is this more evident than in housing affordability measures, with the prospective monthly payment on a typical new mortgage climbing dramatically,” Duncan said. “As a result, both new and existing home sales continue to slow, while refinance activity has fallen substantially, with what’s left largely consisting of equity extraction.”
Duncan’s latest forecast expects $2.61 trillion in volume this year, down from $4.47 trillion in 2021. But he diverges from Fratantoni when it comes to purchase originations, predicting these will slip from $1.86 trillion last year to $1.81 trillion in 2022 and $1.69 trillion for 2023.
Fannie Mae’s May outlook predicted slightly under $2.7 trillion of total production this year, of which $1.9 trillion would be purchase.
The shock for the mortgage industry is that this is coming after — except early in the pandemic — a relatively lengthy period of stability and prosperity, said Jim Paolino, CEO of Lodestar Software Solutions, Conshohocken, Pennsylvania.
“In the bigger picture, we’ve survived many previous booms and busts through the years,” said Paolino. “We will adapt and survive this as well.”
If anything, the increased competition among lenders should bring innovation and improvement.
“So I think if we take the long view and keep seeking to evolve, there will be some long-term benefits to the industry in general,” Paolino said. “We just need to be ready to work hard during the current cycle.”
For Mortgage Network, the FOMC action likely makes it more competitive in its home New England market, where it competes against thrifts for mortgage customers, Koss said (although he added the company also sells its loans to some of them).
Thrifts have a lower cost of funds because they can use deposits and the hike levels the playing field, as banks already have moved to raise their own rates.
For Koss, in his 35 years in the mortgage business, the most analogous scenario to what’s happening now occurred in November 1994, when the Fed unexpectedly boosted rates 75 bps. But today’s situation is different.
“This was telegraphed and expected,” Koss said. “The worst is done.”
However, when the 30-year FRM topped 6% earlier in the week, Koss was at a Realtor meeting and the shock in the room was noticeable.
“They didn’t even realize that this happened so fast,” Koss said. “It’s going to get a little worse before it gets better.”
Koss quoted his former boss at North American Mortgage, Terry Hodel, who in 1999 when the industry was reeling from the Russian Debt Crisis, said “We have to walk through the valley of the shadow of death.
“That’s sort of what we got to do right now,” Koss continued. “I don’t know if it’s the land of milk and honey on the other side, but there’s positives to getting through it.”
Still, industry executives who got into the business after the financial crisis of 2008 have never dealt with an industry downturn.
“A lot of mortgage companies are definitely not prepared and have people at the helm who’ve never seen this before, so it’ll be interesting to see how they react,” Koss said.