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

3

4

5

6

7

8

9

10

11

10

20

30

40

50

60

70

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%

20%

30%

40%

50%

60%

70%

80%

90%

0 1 2 3 4 5 6 7 8 9

1 9

9 9

2 0

0 0

2 0

0 1

2 0

0 2

2 0

0 3

2 0

0 4

2 0

0 5

2 0

0 6

2 0

0 7

2 0

0 8

2 0

0 9

2 0

1 0

2 0

1 1

2 0

1 2

2 0

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

0

2

4

6

8

10

12

14

16

18

20

1 9

7 6

1 9

7 7

1 9

7 8

1 9

7 9

1 9

8 0

1 9

8 1

1 9

8 2

1 9

8 3

1 9

8 4