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Residential Department: DataDecoded: January 2018



A solid economy boosts the home-purchase market

r_2018-01_datadecoded_chart-1The Mortgage Bankers Association (MBA) projects that 2018 will bring $1.2 trillion in purchase mortgage originations, a 7.3 percent increase from 2017. The biggest reason for the increase is the continually improving economy.

The MBA forecasts that monthly employment growth will average 125,000 jobs per month in 2018 and that the national unemployment rate will drop below 4 percent by the end of 2018. The job market remains strong, demographic trends are quite favorable, mortgage credit is becoming more available to qualified borrowers and home prices should continue to rise. All the pieces are in place for stronger growth in 2018 and beyond.

The housing market, however, has been hamstrung by insufficient supply, with inventories of homes remarkably low, given the home-price growth we have experienced. As more units come on the market, home-purchase originations should increase at a faster clip in 2018, nearly double the rate that they increased in 2017.

Refinance originations are projected to decrease by 28.3 percent from 2017 levels, dipping to approximately $430 billion. Refinance originations are inversely correlated to interest rates, and those are projected to continue to increase.

The MBA expects the Federal Reserve will raise rates at least three times in 2018, and twice in 2019. The Fed has begun reducing its holdings of Treasury securities and mortgage-backed securities, and this will put additional, modest upward pressure on mortgage rates. The 10-year Treasury rate is projected to stay just below 3 percent through the end of 2018, and 30-yearmortgage rates are expected to stay below 5 percent. Although inflation remains low today, a tight job market is likely to increase inflationary pressures in the near term.

In total, mortgage originations are projected to decrease from about $1.7 trillion in 2017 to $1.6 trillion in 2018 and then are expected to increase slightly to $1.64 trillion in 2019, with purchase originations of $1.24 trillion and refinance originations of $395 billion. The positive economic outlook does not only signal stronger purchase originations, it also suggests continued strong loan performance ahead.

MBA’s third-quarter 2017 National Delinquency Survey (NDS) includes loan data from this past August and September, when a string of hurricanes caused significant damage to parts of Texas, Florida and the Gulf Coast, and Puerto Rico. While forbearance is in place for many borrowers affected by these storms, our survey asks servicers to report these loans as delinquent if the payment was not made based on the original terms of the mortgage.

With that in mind, the delinquency rate rose by 64 basis points nationwide this past third quarter, compared to the prior quarter, with the 30-day delinquency rate driving the majority of this increase. Delinquencies increased across all loan types — Federal Housing Administration (FHA), Veterans Affairs and conventional — on a seasonally-adjusted basis. FHA delinquencies saw a 146 basis-point increase, to 9.4 percent.

The storms obviously played a major role in explaining the rise in the overall delinquency rate. Although it would make sense that FHA borrowers — who are less likely to pay their mortgage through auto-draft — would see a more significant increase, it is certainly not the only factor. Other factors to consider include seasonality, rising loan-to-value and debt-to-income ratios for certain product types, normal loan aging, and declining average credit scores on new FHA endorsements since 2014.

Most of the major variances from the second to third quarter of 2017 are tied to early delinquencies for all loan types. In the third quarter of 2017, there was little movement in the seriously delinquent rate, which rose just 3 basis points and was down 44 basis points from a year earlier. Foreclosure starts were down one basis point from the previous quarter. In future surveys, we may see a temporary drop in foreclosure starts in hurricane-impacted states because of storm-related foreclosure moratoria, as was seen during Hurricane Katrina in 2005.


Mike Fratantoni is chief economist and senior vice president of research and industry technology at the Mortgage Bankers Association (MBA). He is responsible for overseeing MBA’s industry surveys, benchmarking studies, economic and mortgage-origination forecasts, industry-technology efforts, and policy-development research for the single-family and commercial/multifamily markets. Prior to joining MBA, Fratantoni worked in risk management and senior economist roles at Washington Mutual and Fannie Mae. Reach the MBA at (202) 577-2700.

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