The mortgage industry is getting a handle on the Brave New World it is currently in, but it still seems a little unsure about which way it is headed due to two recent developments muddying housing and interest rate outlooks.
As Mortgage Bankers Association (MBA) chief economist Jay Brinkmann put it at the MBA's National Secondary Market Conference, "This has been a somewhat tough year to forecast."
He cited as an example the benchmark 10-year Treasury yield's drop to levels not seen in some time near 3.1% on May 25.
As of late morning, May 28 when this story went to press, that benchmark was back near 3.3%.
This recent volatility from overseas financial concerns, in contrast to previous expectations for an increase in long-term rates and the effects in a recent housing tax credit expiration deadline that has affected purchase apps are two key developments making it challenging to determine market direction.
When purchase apps plummeted in the last two weekly application surveys to 13-year lows it was almost as if they had been flipped off like a light switch, Michael Fratantoni, vice president of research and economics at the MBA, told National Mortgage News.
But the economics experts told attendees at the conference they believe the repercussions of the purchase app drop are unlikely to be as severe. Fratantoni said it looks like the drop in purchase apps will result in about a 5.5% seasonally adjusted decline in existing home sales between the second and third quarters of this year.
At the same time, consensus seems to be building that the boost from the recent tax credit expiration could be followed by some temporary and relative backsliding in housing/purchase financing. Brinkmann said at the conference he doesn't see a sufficient appetite to renew the tax credit in Washington. So once its influence recedes from the market it seems possible that it could be a little easier to chart the purchase market's course.
It is more difficult to see whether the overseas financial concerns that have been putting downward pressure on rates have permanently receded.
In the mean time, for the production side of the business, the unexpected low rates have been somewhat of a boon given the drop in purchase apps. While the latter has fallen to 13-year lows, weekly refinance applications have increased and now represent more than 72% of apps, up from closer to 50% at the beginning of the month, according to the MBA. This appears to be more than simply an effect of the purchases receding, as the MBA's index does register a jump in refi apps to a high not seen since October of last year as well.
However, as is always the case with apps-especially in a tight market like today's-there remains the question of how many will actually close.
Similarly, there remains the question of how many loans actually benefit from low rates when rates have been low for awhile. Credit Suisse mortgage researcher Mahesh Swaminathan confirmed what many lenders have been saying at the secondary conference last week when he said that the average 30-year primary mortgage rate, at 4.78% by Freddie Mac's figuring last week, would have to fall even further to 4.5% to really give a significant batch of mortgages to new refi opportunities. And even then he said any subsequent refinancing would be likely to be a far cry from the 2003 refi wave, for example.
Interestingly, while mortgage rates have been dropping, they have not been dropping to the same extent as some of yields in the bond market driving them. Spreads between Treasuries and mortgages have widened somewhat of late, the MBA economists noted.
But Fratantoni said the widening has been modest. In contrast to the height of the crisis when spreads widened by as much as roughly 250 basis points, spreads had returned to close to 130 bps. More recently, they have been a bit wider, maybe 140 basis points.
When asked why, Fratantoni said it could be a factor of international involvement in the market and the supply-demand situation in Treasuries relative to mortgages. Treasuries, in comparison, have had more supply available and been cheaper, he said.
