May 2016 - Rise and Fall

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46 | TH E M R EP O RT O R I G I NAT I O N S E R V I C I N G A NA LY T I C S S E C O N DA R Y M A R K E T ORIGINATION THE LATEST Lending Profitability on Shaky Ground Low interest rates, fewer refinances cut into lender bottom lines. A lthough interest rates have been at historical lows, they are signifi- cantly up from 2012 lows. Not only has this caused many eligible refinancers to shy away from the market, but origi - nators' profits are also suffering. A report from Urban Institute found that originator profitability, which is a calcula - tion from the Federal Reserve Bank of New York of the price at which the originator actually sells the mortgage into the second - ary market and adds the value of retained servicing as well as points paid by the borrower, has been in the narrow range of 2.04 to 2.70 since 2014, and stood at 2.6 in February 2016. "As interest rates have risen from the lows in 2012, and fewer borrowers find it economical to refinance, originator profitability is lower," Urban Institute said. The report continued, "When originator profitability is high, mortgage rates tend to be less responsive to the general level of interest rates, as originators are capacity-constrained. When originator profitability is low, mortgage rates are far more responsive to the general level of interest rates." Urban Institute also reported that first-lien originations in the first three-quarters of 2015 totaled approximately $1.35 bil - lion. Portfolio originations made up 31 percent of this total, the data showed. Meanwhile, the GSE share fell 1 percentage point year-over-year to 46 percent, showing the decrease in FHA market share due to the FHA premium cut. FHA and VA and private label originations account for 23 percent and 0.8 percent, respectively. In January 2015, the Federal Housing Administration (FHA) announced a reduction of 0.50 percent to its annual mortgage insurance premium. The FHA said this reduction would offer positive benefits for middle-class and lower-income homebuyers, particularly first-time buyers, but this may not neces - sarily be the case, according to data from the Urban Institute. According to the White House Office of the Press Secretary, "This step is part of the President's broader effort to expand responsible lending to creditworthy borrowers and in - crease access to sustainable rental housing for families not ready or wanting to buy a home." First Mortgage Origination Balances Way Up in 2015 Subprime credit lending is on the rise. F irst mortgages totaled $1.82 trillion in 2015, which represents a 43 percent increase over 2014 originations, according to the latest Equifax National Consumer Credit Trends Report release last month. The report, which looks at March numbers, also found that the total number of new first mort - gages last year was 7.71 million, an increase of 31.6 percent over 2014. Amid these increases was a strong showing in lending to borrowers with subprime credit (those with credit scores below 620). According to the report, there were more than 83,000 new loans originated for borrowers with subprime credit in 2015, a year- over-year increase of 31.2 percent. In that same timeframe, the total balance of new loans was $1.73 billion, an increase of 6.5 percent. Also, in 2015, 10.5 percent of all loans were issued to subprime- credit borrowers, a slight increase from the previous year's share. The total number of new loans originated in 2015 also was the highest level in more than seven years, and according to the report, 2014-2015 showed the third-highest percentage increase for a calendar year since 2008. "We saw a nice jump in mortgage lending in 2015 that was driven by both rising home-pur - chase activity and solid refinanc- ing volumes," said Amy Crews Cutts, SVP and chief economist at Equifax. "While low interest rates are helping, continued gains in employment and consumer confidence are key." That said, Cutts acknowledged that credit scores are still a major factor in lending. "What we are not seeing is any meaningful loosening of under - writing, at least with respect to credit scores," she said. "The median credit score on new first mortgages in the fourth quarter of 2015 was 750 and 90 percent of first-mortgage borrowers had a score in excess of 646. These values are essentially unchanged for the past three years." "As interest rates have risen from the lows in 2012, and fewer borrowers find it economical to refinance, originator profitability is lower." —Urban Institute Report WW-M-Report-022015.indd

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