TheMReport — News and strategies for the evolving mortgage marketplace.
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14 | TH E M R EP O RT MONTH IN REVIEW mortgage insurance market, the FHA is unlikely to drop its prices anytime soon to avoid overexposure to higher risk borrowers, given the high quality of mortgages originated post-crisis. In April 2016, the PMI industry lowered premiums for borrowers with credit scores above 700, considered lower- risk borrowers, and raised them for higher-risk borrowers, or those with credit scores below 700; the higher (or lower) the credit score, the greater the decrease (or increase) in the bor- rower's mortgage insurance premium. The FHA has not lowered its insur- ance premiums since January 2015. 5 Fannie Mae's Q3 2016 Mortgage Lender Sentiment Survey found that the outlook for lender profit has increased significantly compared with this time last year. Fannie Mae's survey, conducted in August, found that 28 percent of mortgage lend- ers expect their respective firms to increase their profit margin in the next three months. Approximately 17 per- cent of respondents said they expect a decrease in profit margin over the next three months, while 55 percent said they expect no change. Lenders who expect their profits to increase cited operational efficiency and tech- nology, and consumer demand as the top drivers of the expected increase. Notably, among lenders who expect a decrease in profits over the next three months, the cost of regulatory com- pliance was not the top reason for the eroding profit outlook for the first time in the history of the survey. The percentage of lenders who cited com- pliance costs as an expected driver of declining profits fell from 61 percent in Q3 2015 down to 39 percent in Q3 2016, an all-time survey low. 6 The House Financial Services Committee passed the Financial CHOICE Act passed by a 30-26 voice vote, almost completely among party lines. Every Democrat on the Committee who voted on the CHOICE Act voted against it. Democrats were steadfastly unwilling to compromise their position, offering not one single amendment to the proposal during the markup. Committee Chairman Jeb Hensarling (R-Texas) introduced the Financial CHOICE Act (Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs) in June 2016 as an alternative to the highly controversial Dodd-Frank Act. Among the CHOICE Act's key proposals are giving banks the option for relief from certain regulations if they meet a certain capital threshold; eliminating the government's power to designate firms as "systemically important;" and wholesale reforms to the Consumer Financial Protection Bureau that include removing the Bureau's director and replacing him with a five-member bipartisan commission. 7 The Florida Atlantic University and Florida International University faculties reported in their latest Buy vs. Rent index that the United States housing market as a whole is moving marginally deeper into buy territory. This trend suggests that, on average, the majority of residential housing markets around the country are in good shape and remain a sound investment. Based on numbers from the end of the second quarter, the latest Beracha, Hardin & Johnson Buy vs. Rent (BH&J) Index comes on the heels of the latest S&P/ CoreLogic Case-Shiller Home Price Index, which found home prices climbed nationally 5.1 percent since June 2015. Both indices incorporate property appreciation from housing markets around the country, but un- like Case-Shiller, the BH&J Index adds additional rental, maintenance, and alternative investment data streams, among others, to indicate when and why housing markets might be changing direction. 8 Freddie Mac's September 2016 Outlook found that mortgage originations are expected to surge in the third quarter as the agency's fore- cast for the best year in home sales in a decade looks more and more on target. The average 30-year fixed rate mortgage (FRM) is expected to come in at 3.6 percent for the whole year of 2016. A 3.6 percent average would be the lowest annual average for 30-year FRMs in more than 40 years (the current record low is 3.66, set in 2012). The 30-year FRM has fallen from around 4 percent at the end of 2015 down to around 3.5 percent as of mid-September. Homeowners con- verted a total of $13.3 billion worth of home equity to cash during refinanc- ing in the second quarter, an increase from $11.4 billion in the first quarter. Q2's total was still substantially lower than the peak cash-out refi volume of $84 billion, which occurred during Q2 2006. 9 The MLS Solutions division of Black Knight Financial Services and CRS Data have formed a strategic partnership to create a simple solution integrating the capa- bilities of Paragon MLS, Black Knight's flagship multiple listing service (MLS) system, and CRS Data's tax suite. The integration of the two systems will provide a "one-stop shop" for MLS members that bundles the indus- try's highest-rated MLS system with powerful property tax data tools. The combined product offers such features as optimization for mobile devices, intuitive navigation, ability to add home improvement values, and multi-county search capabilities. 10 The ACES Risk Management inaugural Mortgage QC Industry Report, covering the first quarter of 2016, found that, though the overall critical defect rate for mortgage loans trended downward for most of 2015, the rate began to rise in the third quarter last year that has continued on into Q1 this year. The critical defect rate for mortgage loans increased to 1.92 percent in Q1 (up from 0.77 in Q3 2015), during which time a similar increase was seen in the number of Legal/Regulatory/ Compliance defects. The share of Legal/Regulatory/Compliance defects as a percentage of all defects nearly doubled from 2015 to the first quarter of 2016 (from 25.9 percent up to 50 percent). 11 CoreLogic's Home Price Index (HPI) for July 2016 reported that home prices appreciated at the rate of 6 percent year-over-year in July 2016 and are expected to continue to rise at only a slightly lesser rate (5.4 percent) by July 2017. Month-over-month, home prices rose by 1.1 percent from June to July and are expected to increase by another 0.4 percent from July to August. The current economic climate—an unemployment rate of 4.9 percent and 232,000 jobs added per month from June to August, combined with mortgage interest rates hovering above record lows, are providing the perfect setup for an increase in home sales. 12 Redfin found that despite ongoing concerns over tight inventory and declining affordability, about 55 percent of two- to four- bedroom homes for sale in July in the 40 largest metros were both afford- able and large enough for the working class. In 25 of those 40 metros, more than half of the homes fit both of the criteria—big enough and affordable enough to accommodate working class households, using housing data from Redfin and income data from the U.S. Census. Leading the way was Detroit with 97 percent of homes listed for sale in July both large enough and affordable for a working class income. 13 ATTOM Data Solutions reported that single-family residential loan originations were down 4 percent over-the-year in Q2 (totaling about 1.87 million during the quarter) in its Q2 2016 U.S. Residential Property Loan Origination Report. The over-the-year decline in residen- tial originations was largely driven by a 12 percent decline in refinance origi- nations during the quarter, the second consecutive quarter with an annual decrease. One particular segment of the originations market has enjoyed continued success for more than four years, however. Home Equity Line of Credit (HELOC) Originations rose by 5 percent over the year in Q2, which was the 17th straight quarter that HELOC originations have increased year-over-year. 14 The recent spike in mort- gage refinances driven by near historic low mortgage rates has benefited the loan production process by lowering the frequency of defects, fraudulence, and misrepre- sentation in the information submit- ted in mortgage loan applications, according to First American Financial Corporation's Loan Application Defect Index for July 2016. The index reported a decline of 2.8 percent over the month in July and a drop of 16.7 percent over the year. The Defect Index in July was down by 31.4 percent from its risk peak, reached in October 2013.