Applications for home mortgages, including both new purchases and refi’s are at the lowest levels in more than a decade. While many observers blame rising interest rates for the paucity of new loan applications, factors such as a poor job market, flat to down consumer income and excessive regulation are probably more important. Commercial banks are fleeing the mortgage lending and loan servicing businesses, in large part because of punitive regulations and new Basel III capital requirements which demonize private mortgage lending.
"Rules enacted last year appear to be steadily forcing banks to exit the mortgage servicing business, transferring such rights to nonbanks," Victoria Finkle writes in American Banker. "The situation is stoking fears on Capitol Hill and elsewhere that regulators went too far." Those fears are well founded.
The latest data from the Federal Deposit Insurance Corp. confirms that the loan portfolios of commercial banks devoted to housing are running off. For example, the total of 1-4 family loans securitized by all U.S. banks fell almost 5% in the fourth quarter of 2013 to a mere $610 billion. Real estate loans secured by 1-4 family properties held in bank portfolios as of the fourth quarter fell to $2.4 trillion in the last quarter, the lowest level since the fourth quarter of 2004. The FDIC reports that the amount of 1-4 family loans sold into securitizations exceeded originations by almost $30 billion.
As 2014 unfolds, look for lending volumes in 1-4 family mortgages to continue to fall as a lack of demand from consumers and draconian regulations force many lenders out of the market. While leaders such as Wells Fargo have indicated that they will write loans with credit scores in the low 600s range, there are not enough borrowers in the below prime category to make up for the dearth of consumers seeking a mortgage overall.
The Treasury Department has directed mortgage servicers to notify borrowers 120 days in advance of upcoming increases in monthly payments on loans previously reworked through the Home Affordable Modification Program.
Some borrowers' monthly bills could rise by as much as $1,700, although the increases will be gradual and the national median increase will total around $200, the department says. Treasury officials want to ensure borrowers have plenty of advance notice of a reset and counseling will be available if necessary.
"Treasury will maintain its oversight of participating servicers," Mark McArdle, the chief of Treasury’s Homeownership Preservation Office, said in a March 12 note to servicers. "We will monitor the interest rate resets to ensure that if signs of homeowner distress arise, servicers are ready and able to help by providing loss mitigation options and alternatives to foreclosures."
Many distressed homeowners saw their interest rates reduced to 2% and the median monthly payment cut to $773 under the HAMP program, which was launched in 2009.
There are currently 782,748 HAMP active mods that are slated to complete a multiyear reset process by 2021.
An estimated 30,126 HAMP mods will start to reset this year and the interest rate will go up one percentage point per year until it adjusts to the rate agreed upon at modification. The reset rates will range from 4% to 5.4%, according to aTARP Inspector General report. That is lower than 6.4% median interest rate that the borrowers had before the modification.
The multiyear median monthly payment increase will be $196 when the HAMP reset process is complete. However, the maximum payment increase could be $1,724 in places like California, compared to $789 in Arkansas.
Ten states and the District of Columbia will "face mortgage payment increases that are more than the $196 national median," the inspector general's report says
But Banks Will Start to Raise Rates Soon.
Economists expect the Bank Rate to rise in early to mid 2015 – but economists’ predictions have consistently missed the mark.
Mark Carney, governor of the Bank of England, has indicated repeatedly that interest rates will not rise until people and businesses begin to share in the economic recovery. This has not helped bring clarity, either.
But there are signs that banks are already starting to price a rate rise into their deals, particularly fixed-rate mortgages. There are two main reasons for this. Firstly, cheap loans through the Government's Funding for Lending scheme (FLS) can no longer be used for mortgages. Secondly, the pricing of fixed rate mortgages is influenced by markets that reflect future interest rates, and today they price in a greater chance of rate rises than they did a few months ago.
Five-year fixed rate mortgages have edged up from their record lows of 2.44pc in July 2013, to just under 3pc now.
Savings rates are also slowly edging higher, although so far by disappointingly little. Savers have a long way to go before rates return to pre-crisis levels.
Capital Economics believe rates will remain fixed at 0.5pc for at least a year. It is a forecaster worth listening to: most economists took years to grasp that the era of low rates was with us, repeatedly since 2009 predicting "rates to rise next year", but Capital Economics was far more dovish than the rest.
Samuel Tombs, Capital's UK economist, said: "The MPC’s decision to leave interest rates on hold, marking five years since they reached their record low, is likely to be repeated many more times. With recent news suggesting the MPC’s estimate of spare capacity is too conservative, we think the sixth anniversary of 0.5pc rates will be marked next year.
"While we do not like to blow our own trumpet too often, forgive us for recalling that we argued in 2009 interest rates could stay at 0.5pc for as long as five years in response to prolonged fiscal tightening, weak bank lending and a sluggish recovery. Indeed, we are one of the very few forecasters that never predicted a rate rise in this period. For instance, at the start of 2010 we were one of only two forecasters predicting that rates would still be at 0.5pc at the end of 2011."
He says divisions are emerging on the Monetary Policy Committee with Martin Weale, a member, wondering whether pay growth may return meaning the need for a rate rise in the next year. But Mr Tombs says the recent rise in unemployment and the fall in inflation to 1.9pc are meaningful ammo for rate doves.
He concluded: "The case for thinking that the recovery can continue for some time without prompting inflationary pressures to build has been strengthened by recent news. As a result, we continue to think that the MPC will be able to leave interest rates on hold until late next year."
Trevana Properties is a placement company working with a variety of hedge funds, REIT's, commercial banks, specialty boutique lenders, private investors and other funding sources not widely known to the general public.