We have been discussing for most of the year how the current mortgage origination market is navigating a complex landscape influenced by high interest rates and changing economic conditions. As we all know the Federal Reserve's ongoing efforts to curb inflation have led to higher interest rates, making borrowing more expensive. This has resulted in the last year in a decline in mortgage applications, particularly for refinancing, as many homeowners locked in lower rates during the pandemic. The higher rates have also made it more challenging for first-time homebuyers to enter the market, as the cost of borrowing has significantly increased their potential monthly payments.
Despite these challenges, the purchase market remains relatively active, though it is more subdued compared to the boom seen during the pandemic years. Also, data showed the US economy expanded 2.8% in the second quarter, versus an estimate of 2%, but inflation subsided, leaving expectations of a September Fed rate cut intact. Having said this, in the past one of the questions we asked each other is that if there was a rate drop would it, assumed to be minor, be enough to jump start sustainable origination activity.
Well, sure enough according to the Mortgage bankers Association, mortgage applications for new home purchases saw a significant rise in July, with a 9.4% increase compared to the same period last year. Additionally, applications rose by 9% from June 2024, underscoring continued demand for new homes. Looking at this data we have to note builders are offering many incentives such as attractive interest rates and bonuses to attract buyers. The alarming statistic though is that according to Redfin about 59,000 purchase agreements were canceled in July, representing about 16% of the homes that went under contract that month.
The other variable we have examined at length is state of the housing market. Home prices have stabilized in many regions, but affordability remains a significant concern, especially in urban areas where demand continues to outpace supply. Despite the slight uptick in 2023, new housing starts continue to lag as builders show their concern about consumer demand. Lenders have responded by offering a wider range of mortgage products, including adjustable-rate mortgages (ARMs) and interest-only loans, to attract buyers who might be deterred by higher fixed-rate mortgages. These products are becoming more popular as borrowers seek ways to manage their monthly payments amid rising costs.
One of the behind influences we haven’t discussed much is how the regulatory environment is also playing a critical role in shaping the mortgage origination market. Behind the scenes lenders are facing increased scrutiny from regulators, particularly around lending practices and risk management, given the potential for economic instability. This has led to tighter underwriting standards, with lenders being more cautious in approving loans to ensure borrowers can manage their payments even in a high-interest-rate environment. The good news is that the quality of loans being issued is generally higher, with a focus on sustainable lending practices.
There have been many predictions about increased transactions, lower interest rates and more affordable housing and I welcome the optimism. I think while we all agree the desire for home ownership will continue to be high, lack of inventory, lingering inflation concerns and now moving out of the buying season are factors that are hard to ignore. I believe we are all waiting to see what happens in Jackson Hole in September and hoping for a strong market going onto 2025.
Michael Harris is Managing Director and Partner of the Servicing Practice at BlackFin Group. Michael has over 20 years’ senior executive management experience in default servicing and mortgage servicing. He and his team are subject matter in all aspects of servicing strategy, investor relations, process, compliance requirements. Prior to BlackFin, Michael was the President & CEO of Jennick Asset Management and was responsible for developing the pilot outsourced management program for Fannie Mae, Freddie Mac, and HUD while working with the top 10 mortgage servicing and capital markets firms. For more information contact info@blackfin-group.com
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