Here is what was at the top of the headlines for the mortgage industry this past week:
1. Mortgage Rates Fall to 1-Month Lows after Jobs Report
Mortgage rates fell abruptly today, following a significantly weaker than expected Employment Situation report. The data hit markets before most lenders had rates available for the day, but most of them still held back on the first round of rate sheets. As trading levels in the secondary mortgage market only improved into the afternoon, lenders released new rate sheets reflecting more of the day’s movement. Ultimately, it’s been enough to bring 4.5% back into view as a best-execution rate, though 4.625% remains at least as prevalent.
With that in mind, today’s Employment Situation report is THE most important piece of recurring economic data and the margin by which it missed expectations is among the largest ever. Weaker employment data tends to push rates lower and today was obviously no exception.
While that’s great news in the short term, the conclusion is less obvious in the longer term. The Fed has already begun tapering and it will probably take more than one jobs report (no matter how far off the mark it is) to even get markets considering a potential change in course. As of right now, this report amounts to a very welcome push back against the broader uptrend in rates though the uptrend remains intact. The question simply concerns how long the push back will last. The longer it does and/or the bigger it gets, the riskier it is to float.
2. Biggest Quartlerly Drop in Underwater Homes Since Peak
Rising home prices are returning more and more homes to a positive equity position and RealtyTrac said today that about 31 percent of the homes currently in the process of foreclosure now appear to have some value above the balances of their mortgages. The company reports that as of December homes nationwide that were seriously underwater, that is with loan-to-value ratios exceeding 125 percent, numbered 9.3 million or 19 percent of all properties with a mortgage. This is down from 10.7 million properties or 23 percent of mortgaged homes that were deeply underwater in September. At the peak, in May 2012 the numbers stood at 12.8 million properties or 29 percent.
Homeowners who retained equity during the period of plummeting prices and rising foreclosures are now also benefiting as well from rising prices and watching that equity grow. The universe of equity-rich properties, defined as 50 percent or more, grew during the fourth quarter from 7.4 million representing 16 percent of all residential properties with a mortgage in September, to 9.1 million representing 18 percent in December.
“During the housing downturn we saw a downward spiral of falling home prices resulting in rising negative equity, which in turn put millions of homeowners at higher risk for foreclosure when they encountered a trigger event such as job loss,” said Daren Blomquist, vice president at RealtyTrac. “Now we are seeing the reverse trend: rising home prices resulting in falling negative equity, which in turn is giving millions of homeowners a lifeline to avoid foreclosure when they encounter a trigger event. On the other end of the spectrum, the percentage of equity-rich homeowners is nearing a tipping point that should result in a larger inventory of homes listed for sale and give the overall economy a nice shot in the arm in 2014.
3. Mortgage Availability Tightening? QM Has Lift Off.
As of today, the QM rule is in effect. Will we see much change in mortgage underwriting practices as a result? It’s too soon to say, but lenders have been aware of the rules’ standard for some time now and have been operating with them in mind since CFPB proposed them a year ago. For that reason, lenders to an extent have already built the standards into their operations, so how much practices will change starting today is hard to know.
Under QM, lenders are required to make sure borrowers have a reasonable ability to repay before they can make what’s known as a qualified mortgage. A qualified mortgage represents what CFPB views as a safe mortgage, and thus a mortgage that is expected to cost borrowers less, because the risk is less to lenders. How CFPB defines the “ability to repay” includes a maximum debt-to-income ratio of 43 percent. Also, while Fannie Mae and Freddie Mac are in conservatorship, their conforming loans are considered qualified. Also, loans by small community banks that meet certain criteria are considered qualified, as are FHA, VA and Rural Housing Service (RHS) loans.