1.5.2017 Will Mortgage Loan Activity Drop in 2017?

2016 was a banner year for the U.S. mortgage industry, with nearly $2 trillion in new loan originations. But with rising interest rates and continued home price appreciation, this volume could fall in 2017 and over the next few years.

So states a recent report from Kroll Bond Rating Agency, which believes 2016 will turn out to be “the peak in terms of lending volumes for years to come.”

Rising Interest Rates and Home Prices

The KBRA report attributes anticipated falling mortgage loan volume primarily to rising interest rates and rising home prices. Mortgage rates increased sharply after the election and the 30-year fixed rate is now back above 4% for the first time since 2015.

Of course, this is still a very attractive rate from a historical perspective — the average 30-year fixed mortgage rate for the past half-century is 8.26%, or double the current rate. But homebuyers have become accustomed to rock-bottom, sub-4% rates for so long that even this historically low rate looks high in comparison.

Higher interest rates will be especially damaging to refi activity, notes the report. It points out that the Mortgage Bankers Association is projecting a sharp decline in refi volume — from $263 billion in the fourth quarter of last year to just $145 billion in the first quarter of this year. The MBA predicts a 50 percent reduction in refi volume for the entire year.

Meanwhile, the MBA projects that the volume of mortgages to purchase homes will rise to $1.1 trillion this year. But the sharp drop-off in refi activity is going to lead to an overall decline in mortgage origination volumes of 20% this year, according to the KBRA report.

Refis are more directly affected by rising rates than purchase mortgages. However, acquiring purchase mortgage customers is “a more complex and expensive process than refinancing an existing mortgage,” the report states.

By the way, the KBRA report doesn’t believe that the recent increase in the conforming loan limit for Fannie Mae and Freddie Mac for the first time in 10 years will have nearly as much impact on mortgage loan origination as rising interest rates and home prices. “Mortgage lending volume is about interest rates first and foremost,” the report states.

Rising Home Prices

As for the other component in the equation — continued home price appreciation — home prices in the U.S. recently surpassed all-time highs set nearly a decade ago, before the real estate crash.

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, which covers all nine U.S. census divisions, has risen steadily since bottoming out in February of 2012 at 134.01. In October, it rose to 185.06, topping the previous record high of 184.21 set in September of 2006.

The KBRA report sums up its mortgage lending forecast this way: “Given the regulatory environment and rising trend in interest rates, KBRA believes that lending volumes for both insured depositories and non-bank lenders are likely to fall in 2017 and beyond as relatively lucrative refinancing volumes dry up.”

We’re interested in hearing from you. What’s your outlook for mortgage lending this year? Send me an email at steven@lendtrade.com.