It should
come as no surprise that the rise in interest rates that occurred after the
November 2016 election had a profound impact on mortgage originations,
especially those for refinancing. Black
Knight Financial Services, in its current Mortgage
Monitor report, said first lien mortgages were originated during the first
quarter of 2017 at the lowest rate since the fourth quarter of 2014.
Overall,
$372 billion such loans were originated, a 9.0 percent decline from the
corresponding quarter in 2016 and down 34 percent from the fourth quarter of
that year. Refinancing plummeted 45 percent from the previous quarter and was
off by 20 percent on an annual basis.

Purchase
originations, while up 3.0 percent year-over-year, fell 21 percent quarter-over-quarter.
Black Knight noted that while purchase origins did post an annual increase it
was far below the 12 percent year-over-year gain in the fourth quarter of 2016.
Black Knight Data & Analytics
Executive Vice President Ben Graboske noted that, while the first quarter is
historically the calendar year low for such lending, this decline probably had
its roots in increasing rates.
The sharp decline in purchase originations ended a nine-quarter
streak of double digit annual increases and was the second lowest gain, following
the fourth quarter of 2013, since the housing recovery began. During that
period, the annual change was negative, down 1 percent. Graboske said, at that point in time,
interest rates had risen abruptly - very similarly to what we saw at the end of
2016 - and originations slowed considerably. "The same dynamic is at work here,"
he said.
Purchase originations
in the under 700 credit score bucket showed the sharpest deceleration and was
the only segment with a year-over-year decline, down 9.0 percent. High credit
score borrowing, originations to borrowers over 740, were least impacted and
continued to lead all credit segments in growth.

Refinances
have lost considerable market share. In
the last quarter of 2016 they accounted for 54 percent of originations. In the
following period that dropped to 45 percent.
The decline
in refinance originations was most pronounced among the borrowers with the
highest credit scores, over 740.
Activity there declined by 50 percent. There were also fewer refinances
originated at the other extreme; the volume of activity among lower score
borrowers, those below 700, declined 24 percent.
Graboske
said, "Refinance lending among higher credit score borrowers, who have largely
driven the refinance market these past several years, saw a quarterly decline
of 50 percent. As we've seen in the past, these borrowers tend to strike
quickly and often when interest rate incentives are present, but tend to hold
back when the conditions are less favorable.

The Monitor noted a net lowering of credit
score for refinancing as well. The
average score in the first quarter was 742, down from 751 in the previous
period and the lowest average since the third quarter of 2014.
There has
been much written in the last year or so about the lack of for-sale inventory
and the impact it is having on home sales and on home prices. The Monitor noted an interesting correlation
among interest rates, home prices, and for-sale listings.
First, home
prices surpassed their pre-crisis peak for the first time in February, then
indices saw their largest month-over-month gains in nearly four years in
March. That month also marked the 59th
month in which prices had appreciated on a national basis (HPA) and Black
Knight's Home Price Index (HPI) is now 1.5 percent higher than at the 2006
peak.
Washington
State leads the country in HPA, with annual appreciation of 11.6 percent,
nearly 2 percentage points higher than Oregon and Colorado, numbers two and
three. Those two states, however, have
seen a slowing in HPA over the past two months.
Wyoming and Alabama are the only two states in which annual prices have
declined slightly year-over-year.
But now there appears to be a disruption in
the correlation of HPA and interest rates.
In recent years the two have moved in an inverse relationship although a
minimal one. (The exception is the late
2013 period noted above in the discussion of purchase mortgages. At that time, the HPI decelerated rapidly as
rates rose.) However, in February and
March the HPA started to accelerate alongside rising interest rates. Forty states
saw HPA accelerate from January to February and there was further acceleration
in 30 states from February to March. That suggests, the Monitor says, that the tight inventories are temporarily
outweighing the impact of higher interest rates on affordability.

Despite
recent softening of rates, they fell by about 33 basis points from March to
April, home affordability remains near a post-recession low, and the share of
the median income necessary to make principal and interest payments on a median
priced home is at a post-recession high of 22.6 percent. The recent pull-back
of rates would have a net impact of reducing that cost by $32 per month or
adding $11,000 more in buying power with the same monthly payment. However,
rising home prices are eating into those savings, taking away about half since
the first of the year.
Still homes
remain more affordable than before the housing crisis. In 2006, it required about 35 percent of
median income to purchase a median priced home, and in the five years leading
up to that peak the average was 26.7 percent.

But back to
inventories. Black Knight says there are
mortgage characteristics that appear to be contributing to their current record
lows.
The company
found that properties with adjustable rate mortgages (ARMs) are listed for sale
at a higher rate per capita than those with fixed rate mortgages (FRMs). However, because rates have been low for so
long, the number of active ARMs are at the lowest point since 2002.

In this same
vein, among properties with fixed-rates, there is a correlation between
interest rates and the chance a house will be put on the market. Home carrying higher rates are being listed
more often. With roughly 40 percent of
active mortgages today having a rate below 40 percent, it is easy to see why
homeowners may be somewhat reluctant to sell and possibly take on a higher
interest rate.

Under the
heading of mixed blessings, a significant reduction in the number of distressed
properties available for sale is also contributing to the tight
inventories. Owners who are behind on
their mortgages are much more likely, again per capita, to put their homes on
the market. At the bottom of the market
(2009-2012) nearly 40 percent of homes for sale had delinquent mortgages; today
that has fallen to 10 percent. In terms
of volume, during that period there was an average of more than 100,000
distressed (bank owned or short sales) properties sold each month. Today that number is 25,000. The share of non-distressed homeowners who
list their homes has increased since that time, but this isn't enough to offset
the disappearance of distressed home listings.