While U.S. economists debate how a set of troubles playing out overseas will affect the American mortgage market, Kroll Bond Rating Agency predicts that these troubles will probably not bring the refinancing volume some might think.
Kroll’s outlook report for the second half of 2016 stated that the financial troubles in Europe and China that are helping to keep U.S. mortgage rates near historic lows “will probably boost refinancing volumes less than expected.” At the same time, “continued strong growth in mortgage loans for new home purchases will probably offset at least some of the difference,” Kroll reported.
The Mortgage Bankers Association estimates $1.7 trillion in mortgage originations for 2016, which is up slightly from 2015. This, Kroll stated, should increase lending volume throughout the rest of the year.
The MBA also expects $880 billion in purchase mortgages and $749 billion‒‒46 percent share‒‒for mortgage refinance transactions.
The International Center on Housing Risk in Washington recently noted that lending to borrowers with FICO scores below 700 has increased dramatically, with the GSEs up as much as 27 percent year-over-year.
But Kroll cautioned that increased lending volumes will also carry potential hazards down the road. For one thing, mortgage rates historically have lagged behind benchmark 10-year Treasury securities, even as yields have hit an all-time low. As is usual, prices for residential mortgage-backed securities have trailed the upward move in Treasury bonds, Kroll reported. This, however, is consistent with the move in mortgage rates in 2012, when the all-time low was set.
“With interest rates falling under the inexorable pull of debt-deflation, there is reason to believe that in the near term mortgage refinance volume will rebound to half of total originations.”
Kroll Bond Ratings Agency
“If you look at the 2012 period, one can see that the 10-year yield bottomed out in July, and started rising into the end of the year,” said mortgage industry veteran Rob Chrisman of Bay Area-based Chrisman LLC. “Mortgage rates kept falling throughout the year, bottoming out in December. So, in 2012 mortgage rates didn't bottom out until 5 months after Treasuries did.”
Though Kroll’s report admitted that predictions in a free-market environment in a growing amount of chaos, Kroll also stated that “the results so far in the US mortgage market point to a bullish year for purchase mortgages and the possibility of a better year in refinancing volumes, albeit from a lower base.”
According to Kroll, mortgage lending by depositories continues to fall, with loans securitized with servicing retained down to $704 billion (14 percent from last year).
Also, mortgage banking profits tumbled 27 percent from Q4 2015 to Q1 2016.
“Commercial banks continue to retreat from mortgage lending under the relentless bombardment of prudential and consumer regulators, who have collectively made 1-4 family mortgages the most problematic asset that a bank can originate and hold,” the report stated. “Adding insult to injury, non-cash losses due to model-driven markdowns of mortgage servicing rights have been a significant drag on the reported profitability of all mortgage originators.”
So while lending could be robust, the potential secondary lending boom some expect could amount to not much.
“With interest rates falling under the inexorable pull of debt-deflation,” Kroll reported, “there is reason to believe that in the near term mortgage refinance volume will rebound to half of total originations.”
Click here to view the full report from Kroll Bond Ratings Agency.