MReport June 2018

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60 | TH E M R EP O RT 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 Fannie Mae Optimistic for the Road Ahead Fannie Mae looks ahead to 2019 in report, predicting key market indicators such as interest rates. F annie Mae is remaining optimistic about overall economic growth in its April 2018 Economic and Housing Outlook report. The GSE projects higher numbers across the board in housing prices, starts, and originations in all four quarters of 2019, compared to those in 2018. Projections for the second, third, and fourth quarters of 2018 are higher than their corresponding quarters in 2017 for housing starts, sales, and prices. All cobbled together, there were 1.2 million housing starts and sales in 2017 and Fannie predicts there will be al- most 1.29 million by the end of this year. The 2019 numbers in April's report look to finish around 1.3 million. Fannie expects interest rates on fixed mortgages to rise to 4.5 percent by year's end and then hold there throughout 2019. It projects a little more of a steady climb on adjustable-rate mortgages into Q2 of 2019. Fannie reported that ARMs should climb quarterly from the current 3.6 percent until they hit 4 percent next year, then stay put. Mortgage originations are the only category that looks to keep dropping, according to Fannie Mae. In 2017, the GSE reported, originations totaled $1.84 trillion; 2018 is expected to close with about $1.7 trillion, and 2019 with slightly less. Fannie expects full-year 2018 economic growth to come in at 2.7 percent, "even as downside risks stemming from trade policy have risen," the report stated. That's one- tenth lower than its previous fore- cast of 2.8 percent, and it follows a greater-than-expected slowdown in first-quarter growth. "Lackluster consumer spending in January and February, following an unsustainable fourth-quarter pace, drove the slight downgrade, though tax refunds and reduced withholdings are expected to boost consumer spending in March and the months ahead," the report stated. "Elsewhere, economic fundamentals remain strong, with healthy income growth, optimistic consumer and business sentiments, and fiscal stimulus stemming from tax reform and the federal spend- ing bill likely to lift demand." Doug Duncan, Chief Economist at Fannie Mae, said "Increasingly heated rhetoric on trade" was the reason why the GSE was being more guarded about what the future will bring. "If rhetoric becomes reality, a trade war could reverse much of the upside from the recently passed fiscal stimulus, or it could trigger an even worse outcome: recession," Duncan said. However, he added, "Threats and counter-threats aside, eco- nomic growth should pick up this quarter amid a rebound in consumer spending and business investment growth, in addition to a healthy labor market. Soft residential investment last quarter should prove temporary, as home sales resume their slow upward grind, with inventory shortages playing friend to prices but a foe to affordability and sales." Balancing Mortgage Risk and Access Loosening credit criteria has unintended consequences. S triking a balance between default risk and credit access can be an onerous—if not impossible—task to undertake, Urban Wire reports. Take some recent, well-intentioned efforts by Fannie Mae, which tweaked its underwriting criteria to loosen access to mortgage credit. That move caused several private mortgage insurers (PMIs) to stiffen their guidelines for insuring mortgages for borrowers with debt that is 45 percent or more of their income. Some will insure mortgages for these borrowers only when their credit scores are 700 or above, while others will charge steeper fees for insuring these mortgages, Urban Wire notes. First, the backstory. Effective July 29, 2017, Fannie Mae eased underwriting criteria by increasing the maximum debt-to-income ratio a borrower could have while still qualifying for a Fannie-backed loan from 45 percent to 50 percent. The PMIs quickly realized that Fannie's adjustment actually upped the risk that these mortgages would default, Urban Wire says. Beforehand, the share of the GSE's monthly issuances with DTI ratios eclipsing 45 percent was routinely 6 or 7 percent. But by September, this share shot up to nearly 8 percent. By February, it had practi- cally tripled to around 20 percent. "Fannie Mae's move eased credit availability and increased the vol- ume of high-DTI (debt-to-income) loans, many of which also had high loan-to-value (LTV) ratios," Urban Wire reported. "This forced the PMIs to react." In response, Fannie recalibrated the risk assessment criteria within its Desktop Underwriter to partially temper the risk of high-DTI loans. "We would expect PMIs to re-evaluate their overlays as the new loans roll in," Urban Wire said. "We also expect the number of high-DTI loans to eventually settle in at a higher volume than before the change but lower than we have today." Missteps like these are a good reminder that loosening access without tolerating more risk is an iffy proposition, Urban Wire says. "Despite widespread agreement that credit is too tight, this episode reminds policymakers how well- intentioned efforts to improve credit availability can be complicat- ed to enact and have unintended consequences," the company said. "As we work to reform the hous- ing finance system, transparency and careful analysis will be critical to our success." "Despite widespread agreement that credit is too tight, this episode reminds policymakers how well-intentioned efforts to improve credit availability can be complicated to enact and have unintended consequences."

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