Low Holiday Production Could Be a Sign of Things to Come

Mortgage & Real Estate

WERE HEARING that loan production has really slowed over the holidays and it is scaring some lenders.

Over the past several years, lenders have enjoyed the gift of low interest rates and plenty of borrowers knocking on their doors to refinance.

But refinancing volume is down 63% from a year ago, according to a recent Mortgage Bankers Association mortgage applications survey.

Meanwhile, purchase mortgage applications are off just 11.5% from a year ago. But purchase apps have also fallen 25% over the past four weeks.

One veteran mortgage lender says the industry will have to get used to this seasonality now that the Federal Reserve is tapering and gradually reducing its purchases of agency MBS.

In other words, lenders are getting a taste of old-style normalcy and they will probably not be very busy this time of year going forward.

Now that refis are returning to normal levels, the decline in demand for Federal Housing Administration loans is becoming more apparent.

MBA chief economist Michael Fratantoni points out there has been a significant change in the government share of the purchase market since September.

FHA has been raising its mortgage insurance premium for several years to deal with high delinquency rates and loan losses. In 2010 the government share of the purchase market was running around 40% to 42%. Last June the Federal Housing Administration implemented a new policy of requiring borrowers to pay annual premiums over the entire life of the loan.

With each step up in the MIP, the government share has fallen. Since September, it has dropped below 30%.

Charging annual premiums over the life was enough to make conventional loans competitive with FHA, the MBA chief economist said.

The latest MBA survey shows that 70% of purchase applications were for conventional Fannie Mae and Freddie Mac loans.

COMMENT OF THE WEEK: Its a delight to find some thoughtful insight in our comments box, instead of the lowbrow round of flaming and spamming we often get. Here is reader Frank Previte, commenting on Chris Whalens blog that FHA is the only game in town for low-mod: We estimate that nearly 40% of all Americans will not qualify for a mortgage loan. This will have a disparate impact on minorities. Minorities have lower credit scores on average, which is a proxy for lower income. Also, there is a potential landmine in the new QM and ATR rules ready to go into effect. Consider a borrower who has a good credit score, say 660, total DTI of 48%, lots of unpaid collections (non-medical) on his credit report but has sufficient income to count 5% of the unpaid collections as part of the monthly obligations, and gets an approval on the FHA Total Scorecard. Three years down the road he defaults on the mortgage and claims that the loan should never have been made, that he has a history of never paying his obligations and that this is a violation of the QM rules. Some attorney will take the case and the lender is likely to lose. If he never pays why would you make the loan, notwithstanding the FHA approval. Plus with a 48% back ratio it would be problematic for any but a high income borrower. Boom!

BLOG OF THE WEEK: This week were going with Ari Karens piece on five steps lenders should take this month as the spate of Jan. 10 regulations kicks in. This is as timely as it gets, and it is the thing most on lender minds. Lenders seem to be scared stiff of falling afoul of the federal marshals and the anticipated consequence is that they will pull in their horns until they find a patch of smoother water (that may be a mixed metaphor). Seriously, folks, the CFPBs been nudge-nudge-wink-wink for months that youll get a shakedown cruise first before the guys with the handcuffs arrive. So lets all take a big breath in and get back to work!

MOST READ/EMAILED: This week, somewhat unusually, the same content is the most read and most emailed piece of the week. Thats Brians item on the impact of the qualified mortgage rule on wholesale lending. His conclusion is that wholesale will continue, thank you very much. What is it now, coming up on six years since the government takeover of the mortgage business? Many of the prognosticators were sure wholesale lending was doomed back then. But it is still around. Bad brokers fouled up, no doubt, but by and large it is the good ones that remain. As long as they give good service (a key to them getting referral business) and they are cheaper than bricks and mortar, there will be a use for wholesale lending.

HAPPY NEW YEAR: Our best wishes for a safe and happy New Year, everybody. Were sure most in the industry are wishing that January could have one fewer day this month (that day being Jan. 10), but there should still be a mortgage business standing on Jan. 11.

Mark Fogarty is editorial director of the SourceMedia Mortgage Group and has been commenting on the mortgage market since 1984. Brian Collins is the groups senior editor and D.C. bureau chief. He has worked the mortgage beat since 1988.

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