The mortgage market could be on the cusp of a bigger turnaround.
The industry, already enjoying
"An eighth of a point move, that little mini-move, gave us about 16% more refinance incentive in the market," said Walden, referring to rates recently falling from the 6.3% range to the 6.2% range. "But if rates go one-eighth lower than that, it's a 40%-plus bump in refinance."
The analyst, speaking with National Mortgage News at the
Walden also discussed
This interview has been edited for clarity and length.
It takes 30% of the median household income to make the $2,148 monthly P&I on an average-priced home according to ICE's latest Mortgage Monitor. Would a certain greater number of borrowers be unlocked at a specific lower ratio?
Walden: If you see any kind of modest movement in interest rates, you could get under that [30%] threshold. I don't think you're going to see significantly different demand at 29.5% [monthly P&I] than you are at 30%. It's very different on the purchase side than it is on the refinance side.
On the purchase side, we've seen more of a gradual return to the market. So as we've seen things incrementally get better, the mathematics incrementally improve in terms of that P&I cost, and in terms of the share of income that's needed.
On the refi side, if you cross that six-and-an-eighth threshold, just because of where loans sit in their current interest rate thresholds, you'll see a lot more jump. You saw this big pop [in refi volume] earlier this month, it's because you start to cross over these key thresholds.
That 6.875% point has been such a popular rate that folks had taken out recently. Nobody's wanted to take out a 7% rate. So everybody's bought down to 6.875%, so as you get those 6.875% borrowers to move into a refi, you get more of a kind of incremental pop when you get into the low 6s, but not as much on the purchase side.
Have you noticed origination spikes around psychological rate thresholds, like 6.5%?
Walden: When you get towards a new whole number, like if we saw rates in the high 5s, I think that would. Even though mathematically there's not as big of a difference between 6.125% and 5.875% I think psychologically, that does have an impact.
From a home price perspective, interestingly, for whatever reason, that 6.5% barrier has been a key one. When mortgage rates have been above 6.5%, the housing market as a whole, and I'm looking specifically at prices here, has really softened up.
When we cross below that 6.5% range, the equilibrium between supply and demand is firmed up, and it's kind of heated up home prices, or at least firmed out home prices. And we're starting to get some signals of that happening in the market right now, now that we've dropped below 6.5%.
ICE reports FHA delinquencies and foreclosures rising. Is there a point where they become a red flag, or a real concern for lenders?
Walden: For folks looking at Ginnie Mae health, I think you need to get materially higher than where we're at right now for folks to really start to be concerned. But certainly that's something that bears watching. If you look at it in terms of like a red flag, or a yellow flag, we're certainly still in that yellow flag zone right now.
We have been seeing FHA delinquencies grow, you're starting to see that move into foreclosures. The foreclosure story early this year had been that foreclosures are up, but it's a byproduct of [Veterans Affairs loans] being in a moratorium last year, and being out of the moratorium this year.
What you're seeing is that growth in FHA delinquencies is starting to make its way into active foreclosure activity out there in the market, and that's something that we're watching more closely. Is there enough risk to cause concern in the FHA insurance fund? We're nowhere near that right now.
So I think what folks are primarily looking at is, are we seeing enough of this growth in certain pockets of the country that it could begin to impact foreclosure activity, home price dynamics and distress sale activity in certain areas. Even on the extreme end we're not seeing anything that's extremely concerning.
But you can start to look at parts of Florida where you've already seen prices come down a little bit, and you're also seeing elevated FHA delinquencies in those areas, like those are the pockets of the country that we're watching a little bit more closely that could turn from a yellow flag into a red flag here in the foreseeable future.
What mortgage headwinds are you watching?
Walden: I wouldn't call it necessarily a headwind, but around
Is the government shutdown affecting federal flood insurance and related closings?
Walden: Yeah, certainly a little bit. The counterpoint to what we put in the Mortgage Monitor, which was effectively that 12% of single family residences have flood risk, but most of them aren't required to carry insurance is that it's not 12% of mortgage closings that would be held up. It would be 85% of that 12% or, 2% to 3% of single family residences that are actually required to have flood insurance.
So it could cause some disruption, especially for coastal areas that have flood risk, or areas that face more pluvial rainfall related flooding or river-related flooding. As a percentage of closings it would be relatively modest, just because flood insurance isn't required on a massive share, even if there are a decent chunk that actually have flood risk that's unrecognized in the market.
What other tailwinds are you watching?
Walden: The biggest tailwind for us as an industry would be even some modest improvement in interest rates. The stat that would be the most telling there would be our waterfall of what refinance incentive looks like under different rate thresholds. There are some big moves that could take place if rates drop even modestly from where they are right now.
Rates dropped from 6.375% to 6.25% [last] week, according to our data. So an eighth of a point move, that little mini-move, gave us about 16% more refinance incentive in the market. But if rates go one eighth lower than that, it's a 40-plus percent bump in refinance.
Maybe the psychological impact, if we get into the high 5s, could push that even a little bit further, because you do see when a lot of stories run about interest rates, I think it peaks public interest of folks that maybe aren't watching rates on a day-to-day basis. The simple one is rates are probably the biggest tailwind for the industry.
