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The prolonged decline in mortgage rates may be over, but according to a working paper from the Urban Institute released on Wednesday, the nation is only beginning to feel the impact of that end.
In a paper called "The Impact of Higher Interest Rates in the Mortgage Market," the Urban Institute outlined six significant impacts that rising rates will have on the mortgage market. According to the paper, rates are up since the 2016 election, with 30-year mortgages rising 49 basis points since November.
First and foremost, the paper reports, mortgage origination volumes will drop as rates rise.
"In the wake of the 2016 presidential election and the continued recovery of the US economy, no more substantial rate declines are likely, suggesting modest refinance activity and a substantial drop in mortgage origination," the paper reported. "Fannie Mae, Freddie Mac, and the Mortgage Bankers Association provide estimates of the expected dollar volume of mortgage originations. All three project a sharp drop between 2016 and 2017 and muted declines in 2018."
As a result of declining originations, lenders will report lower profitability, thereby necessitating consolidations and mergers within the industry.
"This decline in volume and profitability is likely to mean consolidation in an increasingly fragmented industry," the paper reported. "Origination concentration has declined significantly since 2011. The market share of the top five originators dropped from 64 percent in 2010 to 29 percent in 2016, and the share of the top 25 originators dropped from 89 percent to 56 percent over the same period. There has been some consolidation in 2017, and we expect more."
According to the paper, rising rates will also cause the speed on prepayments will slow, home prices and first-time buyer activity to increase, and return buyers to drop. It may also bring about the return of second liens which, the paper says, "were made extinct in the wake of the financial crisis."
"Second-lien debt has a horrible reputation thanks to the financial crisis," the paper reported. "Second liens were used for borrowers with high loan-to-value ratios, with the ratios calculated off inflated appraisals. But the problem was not with the instrument, but with how it was used."
Read the full report at Urban.org.
