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  • The Effect of Higher Interest Rates on the Housing and Mortgage Markets

    February 22, 2017

    Laurie Goodman, Urban Institute Frank Nothaft, CoreLogic Marietta Rodriguez, NeighborWorks America Saul Sanders, Shellpoint Partners LLC Stuart Pratt, CoreLogic

  • ©2017 CoreLogic, Inc. All rights reserved. Proprietary. ©2017 CoreLogic, Inc. All rights reserved. Proprietary.

    The Effect of Higher Mortgage Rates on the Housing and Mortgage Markets Urban Institute-CoreLogic Sunset Seminar

    Frank Nothaft, CoreLogic SVP & Chief Economist February 22, 2017

  • ©2017 CoreLogic, Inc. All rights reserved. Proprietary.

    Effect of Higher Mortgage Rates

    Housing market effects:  Affordability lessens Owner mobility may lessen, for-sale inventory remains lean Mortgage market effects:  Single-family originations: less refinance  New refi mix: more FHA-to-conventional, cash-out, longer-term  Credit risk: relatively low on debt outstanding  New loans: credit box may open up, fraud risk may increase

    3

  • ©2017 CoreLogic, Inc. All rights reserved. Proprietary. Source: CoreLogic

    Mobility Rate by Year After Purchase Percent of home buyers that sell by length of ownership, 1976-2016

    4

    0%

    1%

    2%

    3%

    4%

    5%

    6%

    7%

    0 3 6 9 12 15 18 21 24 27 30 Number of Years

  • ©2017 CoreLogic, Inc. All rights reserved. Proprietary. Source: CoreLogic

    Resell Rate Higher when Rates Move Lower Percent of home buyers that sell by length of ownership, 1976-2016

    5

    0%

    1%

    2%

    3%

    4%

    5%

    6%

    7%

    0 3 6 9 12 15 18 21 24 27 30 Number of Years

    Rates up 3% Rates up 1.5%

    Rates down 1.5%

    Rates down 3%

  • ©2017 CoreLogic, Inc. All rights reserved. Proprietary. Source: CoreLogic

    Rising Rates May Be A Hurdle for Resales Percent of home buyers that sell by length of ownership, 1976-2016

    6

    0%

    1%

    2%

    3%

    4%

    5%

    6%

    7%

    0 3 6 9 12 15 18 21 24 27 30 Number of Years

    Rates down 1.5%

    Rates up 1.5%

  • ©2017 CoreLogic, Inc. All rights reserved. Proprietary.

    $0

    $400

    $800

    $1,200

    $1,600

    $2,000

    $2,400

    2010 2011 2012 2013 2014 2015 2016 2017 2018

    Single-family Mortgage Originations (Billions of U.S. dollars)

    Purchase

    Refinance

    ---Forecast---

    Mortgage Originations: Drop in 2017 and Stable in 2018

    Source: Originations are an average of the latest projections released by Mortgage Bankers Association, Fannie Mae, Freddie Mac and Zelman & Associates. Forecast for Mortgage Bankers Association, Fannie Mae, Freddie Mac as of January 2017. Forecast for Zelman & Associates as of December 2016. 2010-2015 are benchmarked to HMDA. Originations exclude HELOCs.

    2016 to 2017: Total: - 18% Refi: - 45% Purch: + 6%

  • ©2017 CoreLogic, Inc. All rights reserved. Proprietary. 8

    Refi Booms End Quickly As Rates Come Off Lows Cash-out refi and FHA-to-conventional refi continue

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    4

    5

    6

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    8

    9

    10

    11

    10

    20

    30

    40

    50

    60

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    80

    90

    1988 1993 1998 2003 2008 2013 2018

    Forecast 1992-93 Boom

    2001-04 Boom

    1998 Boom

    Source: Home Mortgage Disclosure Act, Freddie Mac Primary Mortgage Market Survey®, CoreLogic; 2017-2018 forecast is average of MBA, Freddie Mac, Fannie Mae and IHS Markit (FRM rate only) projections.

    Refinance Share of Lending (Left) Fixed Mortgage Rate (Right)

    2009-13 Boom

    Refinance Share of Lending (Percent) 30-Year Fixed-Rate Mortgage Rate (Percent)

  • ©2017 CoreLogic, Inc. All rights reserved. Proprietary.

    “In the Money” Refinanceable Loans Has Dwindled 11% have rate >5.25%, but 1-in-5 of these are in default

    0%

    20%

    40%

    60%

    80%

    100%

    0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

    Interest Rate on Mortgage Debt Outstanding

    11% of Active UPB Has a Rate > 4.25% + 100 bps

    9

    Cumulative Share of Active Balance by Interest Rate

    Current Rate +100 bps

    or higher

    Source: CoreLogic TrueStandings

  • ©2017 CoreLogic, Inc. All rights reserved. Proprietary.

    0%

    2%

    4%

    6%

    8%

    10%

    12%

    -

    10,000

    20,000

    30,000

    40,000

    50,000

    60,000

    2000 2002 2004 2006 2008 2010 2012 2014 2016 FHA to Conventional Refinances - Left Axis FHA to Conventional Refinance as a Share of Refinance - Right Axis

    FHA-to-Conventional Refinancing A Bright Spot 250,000 FHA to Conventional Refinances Expected in 2017

    10

    FHA Drops MI Cancellation

    Number of Refinances Share of Refinance

    Source: CoreLogic

  • ©2017 CoreLogic, Inc. All rights reserved. Proprietary.

    Effect of Higher Mortgage Rates

    Housing market effects:  Affordability lessens Owner mobility may lessen, for-sale inventory remains lean Mortgage market effects:  Single-family originations: less refinance  New refi mix: more FHA-to-conventional, cash-out, longer-term  Credit risk: relatively low on debt outstanding  New loans: credit box may open up, fraud risk may increase

    11

  • ©2017 CoreLogic, Inc. All rights reserved. Proprietary.

    The views, opinions, forecasts and estimates herein are those of the CoreLogic Office of the Chief Economist, are subject to change without notice and do not necessarily reflect the position of CoreLogic or its management. The Office of the Chief Economist makes every effort to provide accurate and reliable information, however, it does not guarantee accuracy, completeness, timeliness or suitability for any particular purpose.

    CORELOGIC and the CoreLogic logo are trademarks of CoreLogic, Inc. and/or its subsidiaries.

    Where to find more information Look for regular updates to our housing forecast, commentary and data at http://www.corelogic.com/blog @CoreLogicEcon @DrFrankNothaft

    12

    http://www.corelogic.com/blog

  • Laurie Goodman

    CoDirector, Housing Finance Policy Center

    Urban Institute

    @MortgageLaurie

    February 22, 2017

    Sunset Seminar

  • 14

    The Effect of Higher Interest Rates on the Housing and Mortgage Markets

    • Higher rates lead to a choking off of refinancing activity • Higher rates lead to mortgages trading with longer durations than models would

    predict, due to secular decreases in mobility.

    • History indicates that, rising rates have been associated with increases in nominal home prices, despite decreased affordability. And, while less affordable than we were several months ago, payments are still affordable by historical standards. Moreover, a supply/demand imbalance gives a further boost to home price appreciation.

    • We would expect some loosening of the credit box, both because of higher rates and less enforcement of the false claims act. In addition, this administration may be amenable to changes which make mortgage origination and servicing less cumbersome.

    • FHA modifications will become more difficult to execute

  • 15

    Rising rates have choked off refinancing activity

    0

    1000

    2000

    3000

    4000

    5000

    6000

    7000

    3.00

    3.20

    3.40

    3.60

    3.80

    4.00

    4.20

    4.40

    4.60

    4.80

    5.00

    2011 2012 2013 2014 2015 2016

    PMMS MBA Applications Survey: Refi Activity Index

    PMMS rate vs. Refi Activity Index

    PMMS rate Refi Index

    Sources: Freddie Mac Primary Mortgage Market Survey (PMMS), Mortgage Banker Association (MBA), and Urban institute

  • 16

    As rates have risen, most of the mortgage universe has become non-refinanceable

    0%

    10%

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    30%

    40%

    50%

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    70%

    80%

    90%

    0 1 2 3 4 5 6 7 8 9

    1 9

    9 9

    2 0

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    2 0

    1 2

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    1 3

    2 0

    1 4

    2 0

    1 5

    2 0

    1 6

    wac %refinancable

    Percent Refinancable vs. WAC

    WAC Percent

    Sources: eMBS, Freddie Mac Primary Mortgage Market Survey (PMMS), and Urban institute

  • 17

    There has been a secular decline in interest rates since 1981

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