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GSE loan volume dips in first half of the year

Demand has slowed this year for the nation’s most popular home loans — those approved for purchase by Fannie Mae and Freddie Mac.

Through the first two quarters of 2016, Fannie’s volumes declined by 1.7 percent, to $237.2 billion, compared to the same six-month period in 2015, and loan counts declined by 3 percent, to 1.05 million, the government-sponsored enterprise's (GSE's) quarterly earnings report indicates.  

Fannie Volumes Q2 '16(1)Freddie’s volumes were down by 11.6 percent, to $160 billion, and counts dropped by 12 percent, to 706,000, over the first two quarters of this year, its earnings report shows. 

The GSEs do not originate loans, but rather purchase and securitize home-purchase and refinance loans. Their sizeable footprint — the GSEs finance more than 40 percent of all single-family loans — can reveal greater origination trends. 

Freddie and Fannie’s loan-purchase activity suggests that the mortgage market is shifting to a purchase-loan dominated business, as predicted by analysts at the beginning of the year. In the past two quarters, refinance activity has declined despite low interest rates, while home-purchase business is up. 

Freddie Vol Q2 16(1)Over the past two quarters, Fannie and Freddie’s refinance loan counts have fallen 14.6 and 23 percent, respectively. Meanwhile, Fannie’s purchase-loan counts rose by 15 percent, and Freddie’s were up by 7 percent. 

Freddie and Fannie’s second-quarter reports didn’t fully capture the mini-boom in refinances that came after Britain’s June 23 Brexit decision to leave the European Union, however. Mortgage rates fell steeply at the end of June, prompting a surge in refinances in July. For months, analysts have been expecting refinances to drop off as the pool of borrowers who might gain from a refinance shrinks.

However, the near historic low mortgage rates have kept refinancing viable, said Mark Fleming, chief economist at First American Financial Corp. The 30-year fixed rate averaged 3.43 percent last week, according to Freddie Mac's survey, well below the level predicted by analysts at the beginning of the year. 

"Refinances have been surging recently on low rates thanks [to] Brexit and the Fed," Fleming said. He also noted that recent studies suggest that first-time homebuyers are more active this year.  

"The first-time homebuyer is back and their demand will only grow as Millennials age into homeownership,” Fleming said.  

Fannie Mae analysts have forecast that refinance activity will drop to 39 percent of overall loan purchases at the end of the year, down from a high of 47 percent in the first quarter. Fannie Chief Economist Doug Duncan expects overall single-family origination volume for the entire market to end the year at around $1.74 trillion, which is slightly ahead of the 2015 volume.

Fannie Count Q2 '16(1)During his second-quarter earnings call with reporters, Freddie Chief Executive Officer Donald Layton was upbeat about the housing market. He noted that Freddie’s purchase-loan volumes were up substantially from the first quarter, driven “by the best spring homebuying season in a decade.”

“We continue to fund record levels of mortgages for first-time homeowners,” Layton said. “Forty-two percent of our [home-purchase loan] volume in this second quarter was to fund loans to first-time homebuyers. This is the highest percentage in 10 years.”

Layton said rising home prices and lower inventories are hampering home sales in some markets, however.

Freddie Loan Counts Q2 16(1)

The GSEs also have been losing market share to other major investor types.

The Urban Institute reported in July that the GSEs were responsible for funding 44 percent of all first-lien, single-family mortgages in the first quarter, which is down 2 percentage points from the first quarter of 2015. Portfolio lenders grabbed more of the market share.   

“With credit risk so benign, and g-fees [loan-guarantee fees charged by the GSEs] relatively high, banks are willing to hold more of the risk,” the Urban Institute wrote.  


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