3 mortgage-related takeaways about the Fed rate hike

The rising rate environment is likely to increase incidents of fraud

Historically, purchase loans are considered more at risk for material misrepresentations in mortgage applications. Although certain risk product types that used reduced or no verification of applicant's information are no longer available in the marketplace, this is reminiscent of what happened starting in 2008, when the chickens came home to roost over lax underwriting practices.

This could happen especially within the wholesale and mortgage broker channel, said Josh Migdal, a partner with the Miami-based law firm of Mark Migdal & Hayden, who added that “they need to remember that they're the gatekeeper of the transaction.”

Mortgage lenders might become soft in their underwriting and quality control practices as they look to keep volume up, particularly in light of the sharp decline in refinance activity. Fannie Mae's March forecast expects just over $1 trillion in refis this year, compared with $2.6 trillion in 2021.

Mortgage companies, particularly those that have gone public over the past two years, "have a demand to meet revenue targets and things of that nature and as a result, to meet those targets, certain things may be overlooked in the application and approval process," Migdal said.

There’s another echo of mid-2000s today: that rising home values are obscuring situations where a misrepresentation led to a loan being made. Even in a worst-case scenario, a property sale would be at an amount to cover potential losses.

Minus the no doc loans, "you do have symmetry to the Great Recession in the fact that you have exponential growth of home pricing that's driven by cheap money and what seems to be infinite money supply," Migdal said.

Values are still likely to rise for this year, but eventually they will stall, and "then what happens from there [regarding misrepresentation related defaults] will be dependent on a whole host of other economic policy issues," Migdal said.

The nation's largest wholesale originator, United Wholesale Mortgage, said it "will always focus on high quality, low risk loans in the guidelines and the processes that we have from our operational perspective and overall risk, [which doesn't] make those [potential underwriting issues] about a concern from our perspective," said Alex Elezaj, its chief strategy officer.

To meet consumer needs from rising interest rates, the company has added several loan products to its menu, including one that uses bank statements for underwriting.

"Consumers are being a lot more cautious these days, I think they're thinking about things a little bit deeper, and making sure that they get the right product and rate," Elezaj said. "The best way to do that is to allow an independent [mortgage broker] to shop on their behalf and get the best product for them."

Increased consumer debt burden will be the biggest impact

The Fed's move has affect credit card interest rates and that debt burden is factored in with higher costs overall for consumers. More interest rate increases are likely in the coming months with investors worried about inflationary stresses given continued supply chain disruptions and higher energy prices from the Russian/Ukraine situation.

"Markets will monitor the Federal Reserve and future economic data releases for any signals of whether the economy will withstand rate increases and continue to grow," Zillow's vice president of capital markets, Paul Thomas, said in a statement. "Geopolitical developments could also influence rates in the near term based on the potential impacts to prices, supplies and global economic activity."

But the mortgage rate jump was not a direct result of the Fed’s move

The Federal Reserve'smove was already baked into mortgage loan interest rates several months ago, so Freddie Mac's findings the following day, that put the 30-year fixed at 4.16%, up 31 basis points from the prior week, was not wholly tied to the Fed's decision.

It’s more the case that both the Fed and the mortgage market have been watching the rate of inflation, which has been well above the target of 2%. The mortgage rate increases seen since January have been driven by the market's expected rate of inflation, said Patrick Sheehy, the CEO of Hamilton Home Loans, which is based in Sunrise, Florida.

Mortgage-backed securities prices are rallying at this time. "So, in theory, if the Fed funds rate was going to have an impact on the market, we probably would have seen a huge sell off yesterday after the announcement, which we did not see," Sheehy said. "And we're actually seeing a little bit of a rally this morning, again, because it's already been baked into the pricing of the MBSs."

Also, rates today are substantially lower than in the boom period of 2006, when the 30-year fixed was over 5%, he noted.

Finally, Sheehy, who has held a number of executive positions in the industry over the past 40 years, pointed to data gathered during his time at Freddie Mac, which found there is a greater correlation with rising household income and home purchase activity than with mortgage rates movements.

"The Federal Reserve raising short-term rates and signaling further increases means mortgage rates should continue to rise over the course of the year," Freddie Mac Chief Economist Sam Khater said in a press release. "While home purchase demand has moderated, it remains competitive due to low existing inventory, suggesting high house price pressures will continue during the spring home buying season."

Still, inflationary pressures from supply chain issues and the Russia-Ukraine war, caused Fannie Mae to revise its total annual home sales forecast to a decline of 4.1% this year from last month's 2.5% drop. The government-sponsored enterprise dropped its expectations for 2022 volume to $2.98 trillion from $3.17 trillion in January. Its purchase mortgage projection was cut to $1.195 trillion from $2.38 trillion.