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TH E M R EP O RT | 63 SECONDARY MARKET THE LATEST O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T KBRA: 2016 May Be as Good as It Gets for Lending The firm offers three overarching reasons FHFA's change in conforming loan limits will not lead to any meaningful increase in mortgage origination volume. W hile reaction in the industry has been posi- tive toward the recently announced change in the conforming loan limit for mort- gages acquired by Fannie Mae and Freddie Mac, Kroll Bond Ratings Agency (KBRA) said in a report released Monday they "disagree with the consensus view" that the change will have a meaningful ef - fect on mortgage lending volumes. "Indeed, while 2016 has been an excellent year for the U.S. mort- gage industry with almost $2 tril- lion in new loan originations, we believe that this year is also likely to be the peak in terms of lend- ing volumes for years to come," said Christopher Whalen, Senior Managing Director with KBRA. There are three reasons why KBRA does not believe that raising the conforming loan limit will have a significant impact: The increase is insignificant compared to the home-price appreciation experi - enced in the last decade; the mod- est increase in the conforming loan limit will not be enough to offset rising interest rates and widening credit spreads; and banks will con- tinue to exit the single-family loan market due to a negative regulatory environment and low-risk adjusted returns, which will reduce capacity for mortgage lending. "With interest rates rising, the economic and financial environ - ment for the U.S. housing market is going to become progressively less hospitable," Whalen said. "After nearly a decade-long recovery in both HPA and mortgage-lending volumes thanks to the Federal Open Market Committee, KBRA believes that the U.S. housing sector is in the process of normalizing— albeit from rate levels that are, in historical terms, still extremely low." The average 30-year FRM spiked above 4 percent after the election for the first time in a year, but KBRA pointed out that mortgage rates are still not close to their 2013 levels (after the "Taper Tantrum") or the early '70s, when they averaged close to 8.26 percent. The average FRM peaked at 18 percent in 1981 and reached a low of 3.31 percent in late 2012. The MBA predicts that the rate will be 4.4 percent by the end of 2017 and 5 percent by the end of 2018. "Given the regulatory environ - ment and rising trend in interest rates, KBRA believes that lending volumes for both insured deposi- tories and non-bank lenders are likely to fall in 2017 and beyond as relatively lucrative refinancing vol- umes dry up," Whalen said. "This downward trend in mortgage vol- umes could be a negative factor on earnings in Q 4 2016 and beyond for banks and non-banks alike." As banks originate fewer single- family mortgages, KBRA said non-bank lenders will move into the space more—but "no amount of prospective regulatory relief or changes in the rules for loan guarantees in Washington can fully offset the dampening effect of rising interest rates on the home finance sector," Whalen said. In its September 2016 Mortgage Monitor released in early November, Black Knight Financial Services examined the possible effects of increasing the GSE con - forming loan limit, stating, "One example scenario shows that, with all else being equal, raising the conforming loan limit by $10,000 could result in a one percent increase in originations—approxi- mately 40,000 new loans and $20 billion in new loan balances." Freddie Mac Takes a Giant Step Toward a Single Security The GSE implemented a common securitization platform software and will announce the next phase of progress early this year. F reddie Mac has reached a "critical" milestone toward its goal of implementing the Single Security Initia - tive with the first use of Common Securitization Platform (CSP) software, known as Release 1, ac- cording to an announcement from the agency in December. Release 1 includes the imple- mentation of the CSP's core infrastructure and operations and was successfully launched on November 21, according to both Freddie Mac and the agency's conservator, the Federal Housing Finance Agency (FHFA). "The successful implementation of Release 1 is a significant mile - stone toward the ultimate goal of a common securitization platform and a Single Security," FHFA Director Melvin L. Watt said. The Single Security is a joint initiative of the GSEs under the direction of the FHFA to de- velop a single mortgage-backed security issued by the GSEs to finance fixed-rate mortgage loans backed by single-family proper- ties. The CSP is a technology and operational platform developed by Common Securitization Solutions (CSS), a joint venture of the GSEs, that will perform many of the core back-office operations for the Single Security, according to FHFA. The successful launch of Release 1 indicates the functional - ity of systems, operations, and controls of the CSP and CSS, ac- cording to FHFA. It also enables Freddie Mac and Fannie Mae to use CSS and CSP to issue the new Uniform Mortgage-Backed Securities (UMBS). "We're excited to use CSS operations and the CSP to support our securities issuance," said David Lowman, Executive Vice President of Freddie Mac's Single-Family Business. "This is a milestone marking several years of intensive work across Freddie Mac, Fannie Mae, CSS, and FHFA to take this project from concept to reality. I'm very appreciative of the collabora - tion and drive exhibited by every- one working on this project. This is one of the ways we're working together to build a better Freddie Mac and a better housing finance system for families, customers, and taxpayers." David M. Applegate, CEO of Common Securitization Solutions, LLC, stated, "We are very pleased to be partnering with Freddie Mac, Fannie Mae, and FHFA as the CSP progresses. Today's announcement by Freddie Mac that it has successfully completed its first bond issuance and bond administration on the platform is an important step forward in bringing additional liquidity and fungibility to the TBA market." Now that Release 1 has been successfully launched, the next step is Release 2, which accord - ing to Freddie Mac, "will enable a combined Freddie Mac and Fannie Mae $3.5 trillion market of to-be-announced MBS." FHFA expects to announce a timeframe for Release 2 in the first quarter of 2017, according to the agency. "FHFA has developed a timeline of key achievements to date and will update the timeline as milestones are reached. We remain committed to building the CSP in a transparent manner," Watt said.