Heading into the fall, the health of the mortgage market in 2015 has trended in line with their initial expectations at the beginning of the year and above consensus estimates, but how strong is that really?
FBR & Co. says that things are looking good.
“This has largely been a result of a gradually improving purchase market and a renewal in strong refinancings as rates fell sharply in the first half of this year,” FBR says. “The Mortgage Bankers Association estimates originations as of the end of September 30, 2015, of $1.1 trillion. This level would have largely met original investor expectations heading into the year, with three months remaining.
“The next step is where the industry heads from here. With TILA-RESPA set to come on line in the fourth quarter, we do not believe there will be a QM-sized disruption in the market,” they write. “Mid-tier originators should continue to show strong growth, as market share gains will likely continue as larger players remain cautious on credit standards and very small mortgage lenders struggle with implementation costs.”
Looking at mortgage debt and mortgage app, analysts at Compass Point Research & Trading say that strength in the housing market through the first half of 2015 helped push mortgage debt outstanding at the end of the second quarter to the highest level seen in nearly two years.
“Mortgage application volumes remain elevated in 3Q15 relative to the year ago period and purchase applications indicate increasing momentum heading into the close of the quarter,” they say in a client note. “Despite the Y/Y increases, average application volumes have declined in 3Q15 compared with the prior quarter while mortgage credit hiring continued to move higher through July.
“The combination of lower volumes and increased market capacity have pressured gain on sale margins thus far in 3Q15. We anticipate the pullback in margins will pressure earnings for mortgage originators in 3Q, and could persist in 4Q15 if capacity remains elevated during the seasonally slow period for the housing market.” Compass Point says.
Mortgage debt outstanding grew 0.5% from the first quarter following the strong origination volumes seen in the first half of 2015. Mortgage debt is now at its highest level since the third quarter of 2013, while homeowners equity is now just 3% below its all time high.
Compass Points information shows that, on average, mortgage applications have declined 7% in third quarter compared with the prior quarter. Purchase apps have led the decline, falling 9% from the prior quarter, while refis are tracking 5% below second quarter levels.
Another measure, real estate credit employment, was up around 5% in 2015 through the end of July on the back of one of the strongest selling seasons seen in years.
Meanwhile, purchase apps have gained momentum in September, holding above 20+% annual growth.
“We expect the increased capacity will pressure margins in the second half of 2015 as overall mortgage application volumes declined on in 3Q15 from the prior quarter,” Compass Point says.
But at least one mortgage finance analyst says that the numbers aren’t as strong as they look at first blush.
Logan Mohtashami, senior loan officer at AMC Lending Group and a prolific mortgage pundit, notes that mortgage purchase applications have been a consistently low throughout this economic cycle even though mortgage rates have been below 5% since early 2011.
And he points out something else troubling.
“When adjusted to population growth, purchase applications are at the second worst level ever recorded in American economic history,” Mohtashami says. “The only time purchase applications to population has been lower was in 2014.
“We had a slightly lower headline number in 2011 and 2012 put employment to population metric has grown as has population from those years,” he says.
And looking forward, Anthony Sanders at Confounded Interest doesn’t see a good trajectory for home sales in general, based on the Federal Reserve’s current policy and the impact it has had.
“One measure of the effectiveness of Fed interest rate policy is the disparity it creates in terms of home prices relative to median family income,” says Sanders, a distinguished professor of finance at George Mason University. “As a reminder, The Federal Reserve started lowering their Fed Funds target rate in September 2007, then followed with asset purchases in late 2008 ... The third round of QE was announced in September 2012 under Chairman Ben Bernanke.
“Janet Yellen, the current Federal Reserve Chair, continued her predecessor’s policies. To what end for American families?” he asks. “…(R)ising home prices since 2012 and declines in median family incomes. The common theme among these bubble state cities is the rise in home prices along with declining median family incomes.”