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Mortgage lending set to top $3 trillion as mortgage rates tumble

Next year, rates are heading even lower, says Fannie Mae’s Duncan


Mortgage lending is set to reach $3.14 trillion this year, the highest since 2003, as the annual average rate for a 30-year fixed home loan falls to a record low of 3.2%, according to Doug Duncan, chief economist of Fannie Mae. Next year, rates are heading even lower, he said.

In 2021, the annual average rate probably will fall to 2.8%, said Duncan, who spoke to HousingWire via a video conference call on Monday in an exclusive interview. That would be the lowest ever recorded.

Duncan said his forecast is based on the open-ended commitment by the Federal Reserve to purchase $40 billion a month in mortgage-backed securities, coupled with the expectations that “margins” – meaning the difference in the yields for 10-year Treasury yield and mortgage bonds – will continue to shrink as the lending industry adjusts to doing business amid the COVID-19 pandemic.

Mortgage rates are set by bond investors who decide what yield, or return on investment, they’re willing to accept. Market-watchers compare rates between long-term Treasuries and MBS to see what kind of “risk premium” lenders are adding, meaning a buffer to protect profits in case some loans go bad or other problems arise.

In April, when COVID-19 first began slamming the U.S. markets, the average margin widened to 265 basis points, the widest since the financial crisis more than a decade ago. In 2019, it was 180 basis points, Duncan said.

“We saw the risk premium widen and we had problems in the mechanics of closing a loan,” Duncan said. “All those things add up to wider spreads.”

The share of mortgages that are refinancings in 2020 probably will increase to 60% from 44% in 2019, according to Duncan’s forecast.

In 2021 the refi share probably will fall to 45% even though rates likely will be lower, he said. That’s because so many Americans will rush to lock in the cheaper financing costs this year, and the rate difference in 2021 won’t be enough to make it worth the cost of securing a new loan.

Broken into three-month periods, the average fixed mortgage rate probably will be 3% in the third and fourth quarters of 2020, down from 3.2% in the second quarter and 3.5% in the first three months of the year, according to Duncan’s forecast.

Next year, the annual average mortgage rate probably will be 2.9% in the first and second quarters before dropping to 2.8% in the third and fourth quarters, Duncan said.

“Some people will get a 2.5% mortgage if they have pristine credit and are bringing 50% equity to the table,” said Duncan, emphasizing the forecasts are averages.

The COVID-19 pandemic is exerting downward pressure on rates as investors flee to the perceived safety of the bond markets. The health crisis has worsened in recent weeks as some of the nation’s largest states, such Texas, California and Arizona, hit record highs for new infections.

The U.S. has recorded 3.85 million COVID-19 infections and 141,118 deaths, according to data on Tuesday from Johns Hopkins University. That means a nation with about 4.2% of the globe’s population has 26% of the world’s infections and 23% of fatalities.

“The movement of the virus is to the south,” Duncan said. “We’re not calling it a resurgence. That’s different than it moving to a different geography.”

The challenges of buying and selling homes during a pandemic coupled with a jump in unemployment will cut into home sales, according to the forecast. Sales of existing homes probably will decline 7.5% this year to 4.94 million and increase 4% in 2021 to 5.14 million, the forecast said.

New-home sales probably will fall 2.4% this year to 667,000 and decline another 1.6% next year to 656,000, Duncan’s forecast said.

The U.S. unemployment rate probably will average 8.6% in 2020, the highest since 2011, and likely will drop to 6.9% in 2021, according to the forecast.

The economy probably contracted 35% in the second quarter as states shuttered businesses to try to stem the spread of the virus, according to the forecast. GDP probably will grow 27% in the current quarter and 6.6% in the final three months of 2020, Duncan said.

Measured annually, the economy probably will contract 4.2% in 2020 and likely will expand 4% in 2021, he said.

Those who have jobs and qualify for mortgages will be paying higher prices for homes this year as the cheap mortgage rates and a shortage of inventory supports property values, Duncan said.

Prices probably will gain 4.4% this year, a slower pace than 2019’s 5.3% increase, according to the estimate based on changes in the Federal Housing Finance Agency price index.

Forecasting mortgage rates and home sales in the midst of a pandemic carries more uncertainty than during normal times, Duncan said.

“There is a much wider uncertainty because the causal factor is not an economic phenomenon – it’s a health issue and the fear of that health issue,” he said. “It’s reasonable to expect the recovery will have unusual aspects to it.”

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