Mortgage credit at 6 year lows

Lenders are already starting to price in the new FHFA “adverse market fee,” which is set to take effect December 1st, leading to a spike in rates. From last week, the 30-year fixed rate mortgage increased by 15 basis points to settle at 3.03% while the 15-year increased by 9 basis points to settle at 2.50%.

current outlook:

While the stock market has started to express volatility amidst a tight presidential race and the Fed’s ambiguous plans, the real estate sector continues to perform well. Things may change, however, with the Fed’s meeting, which began yesterday and concludes today, as investors hope to hear more about the Fed’s plan for forward guidance and bond buying. In other news, lenders have tightened their requirements, more people should consider refinancing, and young adults move back home (for now and, possibly, the foreseeable future).

Mortgage credit at 6 year lows

Lenders Tighten their Purse Strings

Those looking to capitalize on low rates may find resistance in the form of strict lending requirements. This is because even though lenders continue to be profitable, and the majority of them believe they will be even more profitable come Q3 of 2020, there are still risks associated with lending such as job insecurity, low inventory, and uncertain housing prices. This translates to a lower mortgage credit availability index (MCAI). Note: the higher the MCAI, the easier it is to secure financing at a certain point in time. In August, the index was at 120.9. In comparison, in January 2019, the MCAI was at 181.9

Different loan programs have felt this to varying degrees. Government loans continue to be more forgiving as their collective MCAI dropped a mere 1.4%. However, those looking for a conventional loan may have a harder time with the Conforming MCAI falling by 8.6% and the Jumbo MCAI experiencing a significant drop-off, falling around 8.9% from July and 59% from pre-pandemic months. 

Refinancing Gets Giant (Just Watch Out for the Fees Fi Fo Fum)

With refinances up 20%, experts predict that we are in for a record-breaking third quarter, a trend which will likely carry over into 2021. This is because nearly half of all active 30-year mortgage holders are in a prime position to refinance, meaning they meet certain criteria (at least a 720 credit score and 20% equity) and could lower their rate by at least 75 basis points. This would lead to monthly savings of $299 for the average homeowner, extending to monthly savings of $500 and up for a select 2.5 million homeowners.

However, time is of the essence if you are even contemplating a refinance. Rates are almost guaranteed to go up by 0.125%—0.25% as a result of the “adverse market fee.” Most lenders, if they have not already, may start preemptively including this fee for loans expected to close on or after December 1st. For instance, for a 45-day rate lock, one lender has a cut-off date of September 27th. Considering the fact that loans now take much longer to process, your best bet is to get approved sooner rather than later.  

There’s No Place Like Home (and Nothing Like Free Rent)

As the younger members of society continue to be hardest hit by unemployment and as many college campuses lock their doors, many Gen Zs have begun heading home, leading to a record 52% of young adults who live with one or both parents. The last time something like this happened was during the Great Depression, when 43% of adults moved back in with their parents. Unlike other effects of COVID, this trend is not exclusive to any one race, ethnicity, gender, or region. However, growth was most evident in white adults ages 18 to 24.

While this trend may just lead to crowded houses in the short run, in the long run, it may have a ripple effect. As young adults postpone their careers and moving out, they may be less likely or slower to form their own households (and buy their own homes) than previous generations

“Purchase demand growth expectations for the next three months reached the highest third-quarter readings since survey inception. For the third consecutive quarter, lenders' profitability outlook has remained a strong positive. Pent-up consumer demand, continued low mortgage rates, and favorable mortgage spreads helped drive lender profitability.”

DOUG DUNCAN, Fannie Mae Senior Vice President and Chief Economist
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