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Maybe low rates aren’t a panacea? Fitch throws cold water on presumed mortgage lending boom

Analysts cast doubt on positive impact of low rates on housing market

With mortgage rates holding steady near three-year lows for several weeks, some observers began suggesting that there could be a surge in mortgage lending industry driven by a combination of new buyers finding homeownership to be more affordable and homeowners refinancing their existing mortgages.

And while recent data suggests refinances are rising as expected, could low interest rates not be the cure-all that many believed they would be for a mortgage market that was expecting a down year?

One observer certainly thinks so.

In a report published this week, Fitch Ratings suggests that the current low rate environment will not be enough to “meaningfully spur” housing market activity for the rest of this year.

Why? Well, Fitch suggests there are three reasons: One, not enough new homes being built to satisfy first-time homebuyers and others who want a new home; two, lenders may be unable to properly handle the increase in refinances due to cutbacks made in anticipation of 2019 being a lackluster year; and three, the likelihood that many borrowers already refinanced a few years ago when rates were previously as low as they are now.

As for things on the home sales front, Fitch said that it is now projecting housing starts to rise by 1% in 2019, with new home sales expected to increase by more than 2% over last year.

Existing home sales, on the other hand, are expected to “decline modestly” this year, due in part to a lack of inventory, particularly at the entry level, Fitch states.

As the credit ratings agency notes, some builders have already responded to the inventory shortfall by building more affordable homes to meet demand, while others are cutting the prices on new builds.

And that’s beginning to have positive results, Fitch reports.

Among the builders that Fitch monitors, the ones that recently shifted their focus to more affordable products saw the most improvement in net orders. Included among those are Meritage Homes and MDC Holdings, which reported net order absorption growth of 19% and 12%, respectively, driven by affordable product offerings.

On the other hand, luxury builder Toll Brothers reported a 3.2% decline in net orders during its most recent quarter, including weak activity in California.

Of course, it’s getting harder for builders to focus on affordable development thanks to the rising cost of building due to tariffs and other factors.

“Affordability issues driven by price appreciation continue to constrain the housing market, with rising input costs for homebuilders further exacerbated by tariff considerations,” Fitch noted in its report.

Beyond the issues surrounding housing affordability and availability, Fitch also suggests that mortgage lenders may not be able to handle the volume of refinances due to staffing and other reductions.

“Lower interest rates historically have ushered in higher levels of fee income from mortgage originations for banks, both in purchase and refinancing activity,” Fitch writes. “However, from a practical standpoint, banks may not be staffed for a surge in refi activity, as the industry was until recently expecting higher rates.”

That sentiment was echoed in the most recent mortgage application report from the Mortgage Bankers Association and the accompanying commentary from MBA Vice President of Economic and Industry Forecasting Joel Kan.

While the most recent report showed that refinances remained at a three-year high, with nearly two-thirds of all mortgage applications in the last week being for refinances, Kan also suggested that some lenders may be overwhelmed by the refi volume, leaving the industry not able to properly handle the demand.

“The small moves in rates and refinancing are potentially signs that lenders may be approaching capacity constraints as they continue to deal with the largest wave of refinance activity in three years,” Kan said last week.

To that point, much of the narrative surrounding the mortgage business in the months leading up to this recent interest rate cycle was about layoffs due to shrinking origination volume.

That was seen at companies like Mr. Cooper, Ocwen, JPMorgan ChaseWells FargoloanDepot, and others.

And now, with demand for refis increasing, it appears that not every lender is prepared to handle the current environment.

But, Fitch cautions that there may not even be as much refi demand from borrowers as some might think.

As Fitch notes, current mortgage rates are about 100 basis points lower than the average seen in 2018, but are “not meaningfully lower” than the rates in 2017, and are still higher than the lows reached 2016, when refis previously surged to near-record levels.

And, according to Fitch, that leaves a smaller population of refi candidates that won’t spur overall lending as much as some might think. “Many households that would be considering refinancing may have done so over the past few years,” Fitch states simply.

Overall, Fitch said that the current low rate environment will merely stabilize the market after a “sluggish” end of the 2018 and first half of 2019, but added that the market’s “momentum” should continue for the rest of this year.

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