At the start of each year, HSH.com details the important factors most likely to influence the mortgage and real estate markets in the coming year. While it seems we have made our way out of the turbulent times that have bounced the market around for the last few years, there is still plenty of uncertainty ahead. Here is a mid-year update to the nine factors affecting the markets in 2014:
1. Mortgage rates: Expect 5 percent for fixed-rate mortgages
have been on a gentle downward slide for the first half of the year, pressed there largely by external forces, but also by a negative U.S. growth rate to start the year. If we are going to see 5 percent handles for fixed-rate mortgages in 2014, we'll need to see some significant change in the stance of the market in the last half of the year. This would need to show in the form of accelerating economic growth coupled with rising inflation and a growing likelihood of a sooner-than-expected hike in short-term rates by the Fed. There is still time for this outlook to come to pass, but it is becoming increasingly unlikely… and that's a good thing for homebuyers.
If everything goes as planned (always a long shot; see the 2013 Outlook), there will be good news and bad news for mortgage shoppers in 2014.
2. Real estate: Markets and prices stabilizing
The original summary of the real estate market seems to be on track at midyear. Sales of existing homes in December 2013 were running at a 4.87 million annual rate; this dipped to about a 4.59 million rate but has again been moving upward, landing at a present (May) 4.89 million annualized level. Meanwhile, the National Association of Realtors noted that inventory levels have moved up from a thin 4.6 months in December to a closer-to-normal 5.6 months in May, and price gains - running at a 9.1 percent year-over-year clip in December - have cooled to just a 5.1 percent rate of gain in both April and May. Sales of new homes have been more erratic, but have also moved upward in recent months and the latest report puts them at better than six-year highs. Prices here have been back and forth, and inventories have been closer to normal, too, excepting the unexpected drawdown of stockpiles in May. The housing market continues to grind toward recovery.
3. Fed taper: Stimulus is going, going... gone
The Fed's QE program - which was purchasing Treasuries and MBS at a full $85 billion per month when we first wrote this outlook at the start of 2014 - has been pared down to just $35 billion, and continues to be trimmed by $10 billion at each Fed meeting. At the present pace, the program will be concluded at the October 28-29 meeting. With a huge decline in loan originations in 2013 through 2014, there have been fewer MBS for the Fed to buy (as noted above), so even with reduced buying the Fed's influence is still being felt in the market. Meanwhile, private investors have discovered some appetite for these high-quality offers (and always have one for Treasuries) so mortgage and other interest rates have been little affected by the Fed's diminishing influence.
4. Fannie, Freddie reform: Nope. Well, maybe. Or sort of.
Although a reform bill pushed by Senators Tim Johnson and Mike Crapo got some serious consideration earlier this year, the realities of reforming the GSEs in an election year has at the very least been put on the back burner for the remainder of 2014. So far, the Johnson/Crapo bill has made it further along in consideration than any other idea, but with Fannie and Freddie technically solvent and kicking billions into government coffers, it may be that we never get to a place of reform.
Mel Watt, the new head of the FHFA, has made it pretty clear that he is interested in operating Fannie and Freddie to the concept of the conservatorship, namely running them for as long as they exists and leaving any reform up to Congress. His first action upon taking office was to delay indefinitely the slated increases in both Guarantee Fees and Loan Level Pricing Adjustments (LLPAs), so mortgage costs have not increased to borrowers, at least for the moment. There is some whispering that these LLPAs may actually be reduced or modified at some point this year.
5.Regulations: Revenge of Dodd-Frank
We're about six months into the era of the new rules and documentation, and so far, it's been pretty smooth sailing. Worries that the implementation of the new regulations and documentation would constrict credit or slow down the process of getting loans through have not come to pass, and the market seems to be managing these items comfortably. That said, it would appear that we won't see a minimum down payment requirement as part of the QM definition, but regulators still haven't agreed on this. If they do, there will probably be trigger provisions to review or adapt the regulation at regular intervals if risks appear to be rising.
6. Growing the audience: Return of "near prime"?
Several players have re-entered or expanded their operations in the subprime space in 2014. The New York Times even had a June 28 article in the business section entitled “In Home Loans, Subprime Fades as a Dirty Word.” While not yet mainstream by any means, this is a natural progression of the market at work: Plenty of borrowers looking for money, lenders looking to find underserved, profitable markets, regulators warily eyeing these riskier loans and plenty of politicians hoping that private capital will return to the mortgage market, lessening the mortgage market's still-huge dependence on government backing to function.
The new subprime loans aren't easy to come by, require very deep equity stakes and carry interest rates of perhaps double or even triple what the “prime” marketed can obtain - but access to money at all is the primary consideration here, with the price of that access a secondary concern.
7. Lawsuits: Are we done yet?
“Are we done yet?” Nope, and probably not even close. BofA may be hit with a new lawsuit over MBS which could carry up to a $12 billion price tag; smaller banks such as SunTrust just settled for close to $1 billion, the FHA is suing Wells Fargo, Ocwen (a larger servicer) was slapped with levies, Citibank may face a lawsuit over mortgage activity, and the list goes on and on. At some point all this will come to a close, but it may be years yet.
It bears noting that fines, fees, levies and settlements could total $100 billion or more, a truly astounding number. If paid directly to homeowners, this could have paid off 500,000 mortgages of $200,000; could have cured the average first mortgage underwater position of $52,000 (Corelogic; 1Q2014 data) for nearly two million mortgage holders - about one third of all currently underwater homeowners. These vast sums of money may be changing hands, but the likelihood of meaningful amounts making its way to actual homeowners remains slim.
8. Loan modifications: First "step" to kick in for some
You heard it here first… and almost nowhere else. The process of interest rate increases for some borrowers did get a little play, especially after the Special Investigator for the Troubled Asset Relief Program (SIGTARP) issued a report in January noting that about 90 percent of the 900,000 borrowers with HAMP modifications would see rate increase from 2014 to about 2021. For borrowers whose rates were moved down to the lowest allowable levels, their first increase from a 2 percent to a 3 percent rate will happen before the year is out, and lots of others will move from 3 percent to 4 percent, and 4 percent to 5 percent (most of these step-ups in rates will cap in the low-to-mid 5 percent range). The SIGTARP report notes that when the process completes, the median increase in monthly payment will be $200, but some extreme cases could see a payment jump by up to $1,724 per month.
The process is just underway, so expect to see more headlines on the topic as we go… and get ready for the concept of re-modifying modified mortgages at some point, especially if the economy founders.
9. Wondering about refinancing activity? Don't bother.
Refinance activity was in decline when we rote the 2014 Outlook in December, and it's safe to say that it's a non-factor in the market despite falling mortgage rates for much of the first half of the year. Refinance activity, as reported by the Mortgage Bankers Association of America, is presently running at levels last seen in late 2008 - when interest rates were in the low-to-mid 5 percent range. Since it's an election year, it's not out of the realm of possibility that we could see the HARP program opened up to try to include even more borrowers, but that might be the only way refinance activity gets a kick.