Last week, the Federal Housing Finance Agency (FHFA) raised the confirming loan limit for mortgages acquired by Fannie Mae and Freddie Mac from $417,000 to $424,100 in most parts of the country starting in 2017. It was the first such increase in a decade.
While reaction in the industry has been positive toward the change, Kroll Bond Ratings Agency (KBRA) said in a report released Monday they “disagree with the consensus view” that the change will have a meaningful effect on mortgage lending volumes.
“Indeed, while 2016 has been an excellent year for the U.S. mortgage industry with almost $2 trillion in new loan originations, we believe that this year is also likely to be the peak in terms of lending volumes for years to come,” said Christopher Whalen, Senior Managing Director with KBRA.
There are three reasons why KBRA does not believe that raising the conforming loan limit will have a significant impact: the increase is insignificant compared to the home price appreciation experienced in the last decade; the modest increase in the conforming loan limit will not be enough to offset rising interest rates and widening credit spreads; and banks will continue to exit the single-family loan market due to a negative regulatory environment and low-risk adjusted returns, which will reduce capacity for mortgage lending.
“With interest rates rising, the economic and financial environment for the U.S. housing market is going to become progressively less hospitable,” Whalen said. “After nearly a decade-long recovery in both HPA and mortgage lending volumes thanks to the Federal Open Market Committee, KBRA believes that the U.S. housing sector is in the process of normalizing—albeit from rate levels that are, in historical terms, still extremely low.”
The average 30-year FRM spiked above 4 percent after the election for the first time in a year, but KBRA pointed out that mortgage rates are still not close to their 2013 levels (after the “Taper Tantrum”) or the early ‘70s, when they averaged close to 8.26 percent. The average FRM peaked at 18 percent in 1981 and reached a low of 3.31 percent in late 2012. The MBA predicts that the rate will be 4.4 percent by the end of 2017 and 5 percent by the end of 2018.
“Given the regulatory environment and rising trend in interest rates, KBRA believes that lending volumes for both insured depositories and non-bank lenders are likely to fall in 2017 and beyond as relatively lucrative refinancing volumes dry up,” Whalen said. “This downward trend in mortgage volumes could be a negative factor on earnings in Q4 2016 and beyond for banks and non-banks alike.”
As banks originate fewer single-family mortgages, KBRA said non-bank lenders will move into the space more—but “no amount of prospective regulatory relief or changes in the rules for loan guarantees in Washington can fully offset the dampening effect of rising interest rates on the home finance sector,” Whalen said.
In its September 2016 Mortgage Monitor released in early November, Black Knight Financial Services examined the possible effects of increasing the GSE conforming loan limit, stating, “One example scenario shows that, with all else being equal, raising the conforming loan limit by $10,000 could result in a one percent increase in originations—approximately 40,000 new loans and $20 billion in new loan balances.”
Click here to view KBRA’s complete report.