The housing market is now on a purchase path
The economy is growing, the unemployment rate is down to its lowest level in 18 years, and job growth remains
strong. With this growth comes somewhat higher rates, but the Mortgage Bankers Association (MBA) take is that
the net will continue to balance out toward a growing purchase market.
MBA research forecasts that 30-year
mortgage rates will be at 5 percent by
late 2018 or early 2019 — pushed up
by firming inflation (leading to additional Fed rate hikes), growing federal
budget deficits and the strong economy.
Stronger wage growth is likely to
overcome this headwind of increasing
mortgage rates, but the lack of housing
inventory remains the biggest drag to
purchase-market growth. We expect
about 5 percent growth in purchase-origination volume this year as some
growth will take place in home sales as
home-price growth abates slightly.
It is worth noting that refinance volume
this year will be down close to 30 percent
from 2017 as the rate for a 30-year fixed
mortgage continues to increase. The shift
toward purchase exacerbates another
challenging area for the mortgage
industry: lenders’ cost to originate loans.
As highlighted in MBA’s most recent Quarterly Performance Report, independent mortgage bankers’ total
loan-production expenses — commissions, compensation, occupancy, equipment, and other production
expenses and corporate allocations — increased to $8,475 per loan in fourth-quarter 2017, up from $8,060 in
third-quarter 2017. This marks the second highest level reported since the inception of our study in third-quarter
2008, with the study high at $8,887 per loan in first-quarter 2017.
The higher production costs in the fourth quarter of 2017 were driven by several factors. During this quarter,
average production volume by count per company averaged 2,059 loans, down from 2,341 loans in third-quarter
2017. Consequently, fixed sales, fulfillment, support and corporate costs were spread over fewer loans in the
fourth quarter of last year, compared with the third quarter, resulting in increased per-loan costs.
In addition, loan balances continued to rise, affecting variable-sales compensation costs. The average loan balance
for first mortgages reached a study high of $254,291 in the fourth quarter of 2017, up from $251, 109 in the prior
quarter. Because sales compensation is usually a percentage of the average loan balance for a loan, sales personnel
costs per loan generally rise with increasing loan balances. Other factors influencing production costs may include
rising compliance-related costs, technology spending and non-sales labor costs for specific skill sets — such as
MBA’s most recent National Delinquency Survey, with data from the first quarter of 2018, showed traditional
first-quarter improvement in performance. The first-quarter 2018 Federal Housing Administration (FHA) loan
delinquency rate declined by 136 basis points over the previous quarter — the largest single-quarter decline
reported for the National Delinquency Survey data series. The conventional and Veteran Affairs (VA) loan
delinquency rates declined by 41 basis points and 17 basis points, respectively, over the same period.
The strong economy, low unemployment rate, tax refunds and home-price appreciation were key factors
that helped push delinquencies down in the first quarter. As with the overall housing market, however, there
are clear headwinds that could support rising delinquencies in future quarters. Those headwinds include the
lingering impact in some hurricane-affected states, aging loan portfolios, low inventory affecting housing
affordability, and higher energy prices. To that point, it is important to note that, on a year-over-year basis,
the overall mortgage delinquency rate increased by 93 basis points for FHA loans and increased 42 basis points
for VA loans, while dropping by 26 basis points for conventional loans. n
*Data drawn from independent mortgage banks Source: Mortgage Bankers Association
Fully-loaded total production expenses per loan Average first-mortgage loan balance
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
Total Production Costs per Loan vs.
Average First-Mortgage Balance*