Mortgage Rates in January

Results from a survey administered by the Federal Housing Finance Agency (FHFA) indicate that mortgage rates rose in January 2017*. Over the month, contract rates on mortgages used to purchase single-family newly constructed homes increased by 24 basis points to 4.02 percent. Although the monthly change reported by FHFA contrasted with a report by Freddie Mac, the results of the two surveys largely move in tandem with each other.

The fourth quarter iteration of Fannie Mae’s Mortgage Lender Sentiment Survey found that over the next 3 months, the first quarter of 2017, a small percentage of lenders expect demand for GSE-eligible mortgages to purchase a home to “go down”, partly in response to higher rates**. However, the result across all respondents masks differences by lender size. On net, large and mid-sized institutions expect demand for GSE-eligible mortgages for a home purchase to decline while smaller institutions expect demand to “go up” over the first quarter***. The net percentage is the difference between the percentage of originators that believe demand will go up and the share expecting that demand will go down.

The Mortgage Lender Sentiment Survey follows up with those respondents that expect demand to fall in the first quarter with a question about the reason underlying this belief****. The top 5 answers do not sum to 100 percent because other answers were also given but not made publicly available. One-half or more of large institutions and mid-sized institutions believe demand will go down because mortgage rates are not favorable, the most cited reason. In contrast, 30 percent of small institutions hold the same expectation, equal to the percent of small institutions that have inventory and broader economic concerns.

Despite higher rates, new home sales contracts rose by 3.7 percent in January following a soft December reading. Also, sales of existing homes, both single-family and condos/co-ops, increased by 3.3 percent in January, reaching the fastest pace since February 2007. However, the National Association of Realtors’ Pending Home Sales Index (PHSI), a forward-looking indicator based on signed contracts of existing homes, fell by 2.8 percent in January to its lowest level in a year. Results from the PHSI suggest some softness in sales of existing homes over the next month or two.

* To conduct this survey, FHFA asks a sample of mortgage lenders to report the terms and conditions on all single-family, fully amortized, purchase-money, nonfarm loans that they close during the last five business days of the month.  The survey excludes FHA-insured and VA-guaranteed loans, multifamily loans, mobile home loans, and loans created by refinancing another mortgage.

** Specifically, the question is “Over the next three months, apart from normal seasonal variation, do you expect your firm’s consumer demand for single-family purchase mortgages to go up, go down, or stay the same?” Emphasis included by the survey.

*** Larger Institutions – Fannie Mae’s customers whose 2015 total industry loan origination volume was in the top 15% (above $631 million). Mid-sized Institutions – Fannie Mae’s customers whose 2015 total industry loan origination volume was in the next 20% (16%- 35%) (between $176 million to $631 million). Smaller Institutions Fannie Mae’s customers whose 2015 total industry loan origination volume was in the bottom 65% (less than $176 million).

**** Specifically, the question is “You mentioned that you expect your firm’s consumer demand for GSE eligible loans will go down over the next three months. Which of the following housing marketplace factors do you think will drive the demand down? Please select up to two of the most important reasons and rank them in order of importance. (Showing % rank 1)”



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  1. The only bad part of record low interest rates is the fact that, based on recent rates, an increase of 100 basis points increases the interest portion of the borrower’s monthly payment by 25% or more. Builders would be wise to quickly shop for a forward mortgage commitment to insure rising interest rates do not (1) destroy your backlog, and (2) shut down your sales. Rather than buying a commitment at a finite rate, it is more economical to purchase a rate cap commitment. This means the buyers interest rate will be determined prior to closing and will be the prevailing rate or the commitment cap rate, whichever is lower. For example, if the prevailing rate is 5.5% prior to closing and the rate cap commitment sets a cap of 6%, the buyer would receive a rate of 5.5%. On the other hand, if the prevailing rate was 7%, the buyer would receive the cap rate of 6%. If you lender does not understand this, find yourself another lender.

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