Dramatic changes in mortgage lending

The housing market has been one area where higher interest rates have been impactful. Sales of existing and new homes have fallen dramatically as higher interest rates, combined with higher prices, have reduced affordability.

The volume of mortgage origination in February slowed to the lowest level since 2017. As we look at data on mortgage issuance, we can see a dramatic shift in the sources of new mortgages. As interest rates fell during the pandemic, we saw a boom in refinancing activity while home sales also increased. Higher home values also allowed homeowners to tap accrued home equity with “cash-out” loans. However, with 30-year fixed mortgages now approaching 7%, the ability to lower payments by refinancing has all but disappeared. Stable to declining home values have reduced the percentage of cash-out mortgages too. Today almost 87% of new mortgage originations are from home purchases.

Government-sponsored entities (GSEs), Fannie Mae (FNMA) and Freddie Mac (FHLMC) have also recently moved to limit the ability of newer homeowners to do cash-out refis. Beginning April 1, homeowners whose mortgages are less than 12 months old will be unable to access their home equity in this manner. There are some risk management reasons for the GSEs to do this, but even though home mortgage rates have increased, they pale in comparison to the increase and absolute cost of other forms of consumer debt. Automobile lending rates are higher, and credit card rates are now approaching an average of 20%. Historically, accessing home equity has provided an opportunity to borrow at lower rates to pay off higher-rate credit.

Going forward, home affordability will be driven by consumer incomes and rates. While consumer incomes have been increasing, they have done so at a much slower pace than house prices have appreciated. And the latest data on inflation has only added to the idea of rates staying higher for longer. Hence, it may be that home prices will go lower and mortgage volume will remain depressed in the coming months.

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