Mortgage – HousingWire

As mortgage rates skyrocketed in May, ARMs doubled
ARMs race: adjustable-rate mortgages make a comeback
Just before the shockwave, mortgage applications rose
Florida law firm to pay $4.6M to settle discriminatory claims
Credit scores dropped in May, but what does that mean?

As mortgage rates skyrocketed in May, ARMs doubled

Posted: 15 Jun 2022 09:49 AM PDT

A panel of experts assembled at a recent Mortgage Bankers Association (MBA) conference in New York predicted that adjustable-rate mortgages (ARMs) will become far more popular this year as purchase mortgages increasingly dominate a housing market contending with fast-rising interest rates.

A June market report by a major digital mortgage-exchange and loan-aggregator, MAXEX, which offers an overview of loan-trading activity through the exchange for May, confirmed the MBA panel's projections. The exchange, founded in 2016, averages ab out $1 billion per month in non-agency loan-trading volume and counts J.P. Morgan among its investors.

"There was too much 30-year [fixed-rate mortgage paper] out there in the market for a while because it was just so cheap, and it was the right thing for the consumer," said Matt Tomiak, senior vice president of nonagency originations at Bayview Asset Management.

Tomiak was one of the four MBA panel members who addressed an audience of loan originators and other industry players gathered at the New York Marriott Marquis hotel near Times Square last month. The topic of the panel discussion: "What's New in Non-Agency?"

"I think we'll be seeing a lot more ARMs shortly," Tomiak added.

That also was the consensus forecast of the four-member panel of non-agency industry experts who spoke at the MBA's Secondary and Capital Markets Conference & Expo in New York City. The recent MAXEX market report provides evidence supporting the panel's prediction of a rising demand for ARMs in the face of rising interest rates — propelled by the Federal Reserve's monetary-tightening policy.

"Adjustable-rate mortgage trading volume soared in May with nearly half of the loans locked through the exchange coming in the form of an ARM loan," according to the recently released June MAXEX report. "Interest rates on ARM loans through the exchange were as much as a full point lower than 30-year fixed rates, making them extremely attractive to homebuyers who are trying to battle ever-appreciating home prices.

"This trend is only expected to continue through June as three more MAXEX buyers are adding ARM programs and pricing, offering sellers the opportunity to take advantage of the growing market."

The network of players on the MAXEX exchange includes 320 bank and nonbank originators as well as more than 20 "high-profile investors," according to the loan-trading platform's report. Those exchange originators were behind explosive growth in ARM loans, which more than doubled in May, making up 49% of purchase volume versus 23% in April, according to the MAXEX market report.

"Spreads between fixed-rate and ARM loan interest rates eclipsed 100 basis points during the month, making ARM loans extremely attractive to borrowers,” the report states. “This is only expected to increase as MAXEX buyers implement additional ARM pricing options for lenders on the exchange."

MAXEX reported the most popular ARM was the 7-year note, which made up 54% of the exchange's ARM volume in May. ARMs sold on the MAXEX exchange have rates that adjust every six months following the initial fixed-rate term of 5, 7 or 10 years.

"What has started to salvage purchase originations is lenders and investors leaning into ARM loans," MAXEX's June market report states. "As long as ARM rates remain at least 50 basis points in rate lower than a 30-year fixed-rate loan, we can expect to see significant volume trade through the exchange as three buyers on the exchange are expanding their ARM pricing options."

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ARMs race: adjustable-rate mortgages make a comeback

Posted: 15 Jun 2022 08:27 AM PDT

In 2021, more than 90% of borrowers who closed a loan with fintech mortgage lender Neat Loans opted for a 30-year fixed-rate mortgage. But this year, as rates have crested 6%, about 70% of Neat’s originations are adjustable-rate mortgages, a product that until recently had fallen out of favor due to the role they played in the housing crash of 2008 and a decade-plus of fixed-rate mortgages under 5%.

“It’s obviously not just a flip flop, it’s a pretty big move,” said Luke Johnson, the founder and CEO of Neat Loans.

In a tight housing market with a shortage of inventory and soaring rates, many homebuyers are opting for ARMs, which carry lower rates for an initial period of fixed interest and amortize over a 30-year term.

"ARMs can be a good option for someone who's looking to get into a home, get a lower monthly payment, and gain some equity and then decide if they want to stay in the home or refinance a loan before that fixed period expires" Joel Kan, associate vice president of economic and industry forecasting at the Mortgage Bankers Association (MBA), told HousingWire.

The way ARMs work is lenders offer lower mortgage rates for the initial three, five, seven years. After that initial period ends, rates adjust periodically based on a benchmark or index, such as the Secured Overnight Financing Rate, known as SOFR, based on actual transactions in the Treasury repurchase market.

Application volume for ARMs hit a 14-year high in May, taking up nearly 11% of the entire mortgage application, according to the MBA. Compared to the beginning of the year, it rose almost three fold from 3%.

While interest in ARMs waned due to the role they played in the housing crash of 2008, borrowers' demand for ARMs are back. Whether demand for ARMs will grow largely depends on mortgage rates and liquidity in the secondary market, mortgage executives and analysts said.

Stricter regulations, new guidelines

The share of mortgage applications for ARMs is still below the historical average between 1990 and 2022 of 12.49% and significantly lower than the peak of 36.6% in 2005, the MBA said. Even if more borrowers opted for ARMs in a rising rate environment, stricter underwriting policies for ARMs and laws that keep lenders in check will prevent borrowers from being trapped in loans they could not afford, as occurred in the mid 2000s, said Keith Gumbinger, vice president at HSH Associates.

Leading up to the housing crisis, many subprime lenders provided borrowers with interest-only ARMs, which initially offered low rates. Some buyers who couldn't qualify for a conventional mortgage turned to an ARM to make lower monthly payments.

"Not only could you get a loan if you had terrible credit (in the mid-2000s), but you could get a loan if you had terrible credit and almost no down payment," said Gumbinger. "You were able to get an ARM by not even providing any documentation for your income or assets."

The mortgage industry is different from 14 years ago. New underwriting guidelines for ARMs make it harder for borrowers to find themselves in foreclosure and regulations cap rate adjustments, which limit percentage increases per period and over the life of the loan.

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, created in direct response to the financial crisis, requires lenders to check a buyer's ability to repay (ATR), which protects them from predatory lending practices.

"Not a one-size fits all"

The surprising surge in rates – up from 3% in January to over 6% in June – breathed new life into ARMs on the demand side, especially for loans with large balances. But from the supply side, there's not a lot of liquidity in the secondary market.

ARM loans are not yet showing up in significant volume in the mortgage-backed securities (MBS) private-label market "because most of the deals that we've seen so far this year are from 2021," Maria Luisa De Gaetano Polverosi, associate managing director at ratings agency Moody's Investor Services, said during a panel at the MBA's Secondary and Capital Markets Conference & Expo in New York City in May.

The difference between a 30-year fixed-rate mortgage and an ARM loan, or the spread is not wide enough, meaning "there's not enough benefit for the borrower to present it," said Paul Blaylock, CEO of Tampa, Florida-based LoanFlight said.

In the most recent Freddie Mac PMMS Mortgage Survey, which tracks purchase mortgage rates, the 30-year fixed-rate mortgage last week averaged 5.23% while the 5-year ARM averaged 4.12%. (The survey was published June 9, a day before mortgage rates soared on news of worse-than-expected inflation numbers and fears of the Federal Reserve's forthcoming rate hike response.)

"It’s not a one-size fits all thing," said Paul Blaylock, CEO at LoanFlight. "But it should make sense to most people that if the difference between an ARM and a 30–year fixed-rate mortgage is very small, then it might not be worth the risk of having a rate that could adjust and go much higher in three or five or seven years."

When ARMs do start showing up in securitization deals, Polverosi, said Moody's is well-equipped to assess the risk of the offerings. "We have a lot of data on those (ARMs), and our models are built to assess that risk," she added.

New ARM products

Lenders are taking notice of the rising mortgage rates and double-digit home price growth with lenders rolling out new ARM products.

Michigan-based wholesale lender Homepoint rolled out a jumbo ARM product in May offering a maximum loan amount as much as $2.5 million. Homepoint's jumbo ARMs have a seven- or 10-year fixed-rate period and the loan adjusts every six months. Since the launch last month, Jumbo ARMs represented 28% of its jumbo business, the lender told HousingWire.

"Homebuyers today have a stronger interest in adjustable-rate mortgages because they provide a solution to affordability issues caused by the recent increase in interest rates," Phil Shoemaker, president of originations at Homepoint, said in a statement.

Credit Union of Southern California started offering interest-only ARMs last month, in which the borrower delays paying down any principal for a period of time. Available as purchase or refinance loans, the rates are offered in five- and seven-year terms for primary residences $3 million and under, or for second homes for $2.5 million and under.

"As rates get higher it might make sense for certain borrowers who are in the right financial situation to get ARMs to be able to enter into homeownership and sort of utilize that home equity building," said MBA's Kan. Borrowers need to understand that they may need to refinance before the fixed-rate period expires, sell the home, or be prepared to make higher payments, said Kan.

It’s important for clients to see their options between ARMs and a fixed-rate mortgage and see what the differences are, Neat Home Loans’ Johnson said. The difference in cash required to close a loan, the difference in loan payment based on how long borrowers plan on living in the home, and the tax write-offs based on the borrower’s tax bracket are all things loan officers will need to inform borrowers.

"For the next six months, we expect ARMs to have some popularity," said Johnson. "It's not a bad thing for borrowers, lenders, and loan investors. For loan officers that didn't grow up in the subprime crisis, they might need to dust up the ability to explain these (ARM) programs, do the calculations for clients to introduce the new programs."

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Just before the shockwave, mortgage applications rose

Posted: 15 Jun 2022 04:00 AM PDT

Before the volatility wrought by high inflation and speculation about a rate hike by the Federal Reserve, mortgage applications increased 6.6% from the prior week, according to the latest Mortgage Bankers Association survey for the week ending June 10.

Refinancing applications increased 4% from the prior week but were still 76% lower than the same week a year prior. The seasonally adjusted purchase index, meanwhile, ticked up 8% from the prior week but was 16% down from the same week a year ago.

“Mortgage rates increased for all loan types, with the 30-year fixed rate last week jumping 25 basis points to 5.65% – the highest level since 2008. Mortgage rates followed Treasury yields up in response to higher-than-expected inflation and anticipation that the Federal Reserve will need to raise rates at a faster pace," said Joel Kan, associate vice president of economic and industry forecasting for the trade group. "Despite the increase in rates, application activity rebounded following the Memorial Day holiday week but remained 0.29% below pre holiday levels."

For the week that ended June 3, mortgage applications fell 6.5% to its lowest point in 22 years.

Multiple loan officers told HousingWire on Monday — after the MBA survey for the week had closed — that mortgage rates moved beyond 6% for even the most credit-worthy of borrowers. Several said that mortgage rates had increased about 30 basis points for several consecutive days, eroding demand.

The gradual uptick in mortgage rates and a declining stock market have contributed to fewer home sales this year. And although inventory showed big signs of a rebound in a number of metros in May, brokerages and mortgage lenders alike are shedding staff in preparation for greatly reduced volume compared to 2021.

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Due to the rapid rise in mortgage rates since January, adjustable-rate mortgages — which have a fixed rate for part of the 30-year term and then are adjustable — have grown in popularity with borrowers. But last week, the share of activity decreased slightly to 8.1% of total applications. The average interest rate for a 5/1 ARM rose to 4.57% from 4.51% a week prior, according to the MBA.

The FHA share of total applications increased to 11.8% from 11.3% the week prior. The VA share of total applications increased to 11.7% from 11.4% the week prior. The USDA share of total applications increased to 0.6% from 0.5% the week prior.

Mortgage rates on jumbo loans on average jumped to 5.25% for the week ending June 10, up from 4.99% the prior week.

The post Just before the shockwave, mortgage applications rose appeared first on HousingWire.

Florida law firm to pay $4.6M to settle discriminatory claims

Posted: 14 Jun 2022 03:42 PM PDT

Owners of a Florida-based law firm were ordered to pay close to $4.6 million to settle claims that they allegedly ran a mortgage loan modification and foreclosure rescue scheme that targeted Hispanic homeowners.

The consent order puts an end to a lawsuit originally launched by the Department of Justice in 2018 against law firm Advocate Law Groups of Florida P.A. and its owners, Jon Lindeman, Jr and his wife, Ephigenia Lindeman.

The DOJ’s lawsuit claimed the couple violated the Fair Housing Act (FHA) by discriminating against Hispanic homeowners when they were running their predatory rescue services.

According to the DOJ, from 2009 through 2015, Lindeman and his wife targeted Hispanic homeowners' through Spanish-language advertising that promised to cut mortgage payments in half. The DOJ said some of the homeowners targeted had limited English proficiency.

The settlement, which was announced last week, also includes a third defendant, Haralampos "Bob" Kourouklis, who is Ephigenia Lindeman's father. Kourouklis ran a company called Summit Development Solutions USA, LLC, which provided mortgage modification services to clients of ALG. Kourouklis’ name was added to the lawsuit in an amended complaint in 2021.

The department alleges that during that six-year period, Lindeman and his wife promised hundreds of Hispanic homeowner's lower monthly payments in exchange for thousands of dollars of upfront and monthly fees.

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Despite charging high fees, the defendants did little or nothing to help clients obtain loan modifications, the DOJ said.

Homeowners who opted for the loan modification services were supposedly instructed to stop making monthly mortgage payments and to stop communicating with lenders. In turn, some of the defendant's clients went into default or lost their homes.

Kristen Clarke, assistant attorney general at the DOJ, said in a statement on Friday that targeting homeowners with limited English proficiency is "reprehensible and illegal."

"Homeowners of color and other protected groups must be safeguarded from discriminatory targeting that can lead to grave financial loss, including loss of one's home. We will continue to use our federal civil rights laws to protect the rights of homeowners," Clarke said.

The DOJ filed the suit in 2018 after three homeowners and members of their families' filed complaints of discrimination with the Department of Housing and Urban Development.

After investigating the matter, HUD issued charges of discrimination and referred the case to the DOJ for litigation.

Per the consent order, the defendants must pay close to $4.6 million to compensate homeowners impacted by the alleged scheme. Out of the sum, defendants must pay a total of $95,000 to three intervenors and a civil penalty of $5,000 to the United States.

Most of the monetary judgement, however, is suspended because the defendants are unable to cover the sum, the DOJ said.

For the next five years the defendants are required to submit updated financial statements and if there are any material misrepresentations the entire judgement will be reinstated, the DOJ said.

Defendants are also barred from providing any mortgage relief assistance services and are required to implement nondiscriminatory policies in all future real estate-related businesses, the department noted.

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Credit scores dropped in May, but what does that mean?

Posted: 14 Jun 2022 03:30 PM PDT

The average borrower’s credit score trended down in May, led by a significant drop in cash-out refinance scores — a move attributed to higher-credit borrowers exiting the cash-out refi pool over the past two years.

Average credit scores for cash-out refis came in at 698 last month, dropping seven points in the last three months and 33 points year over year, according to Black Knight‘s originations report released Monday. Meanwhile, average credit scores for purchase locks fell marginally by two points to 732 and rate/term refinance dropped by one point to 731 in May from the previous month.

"It's historically typical behavior for high credit score borrowers to exit the refi market when rates rise; we've seen it time and again," Andy Walden, vice president of enterprise research at Black Knight told HousingWire. "When the higher scored borrowers leave the total pool, it results in lower overall credit scores among refinance transactions."

Riskier lending habits and borrowing options led to the housing crash 15 years ago, but Black Knight said credit scores for purchase locks have held strong and the average current credit score of 751 for existing mortgage holders is the highest dating back to 2000.

The drop in credit scores may indicate borrowers are shifting toward home equity line of credit (HELOCs) and second lien home equity loans, which have tighter lending standards, Walden said, adding: "Those high credit borrowers who qualify may be moving to those products while those with lower credit scores may not qualify and may be utilizing cash-out refinances to access equity."

A brokerage owner in Brooklyn, Kevin Leibowitz, said he hasn't seen enough lenders expand the credit box to get more borrowers, but he expects loans will be loosely underwritten compared to two years ago.

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"Lenders are finally getting to the difficult loans and difficult loan-profile (non-standard income) borrowers that weren’t getting ample love during the refi boom,” Leibowitz, president of Grayton Mortgage, said. “Your average refinance would probably look riskier because if they didn’t refinance two years ago, why are they refinancing now?”

With refi volume lower this year by more than 70% from 2021, "lenders are opening the credit box to more riskier borrowers," Selma Happ, deputy chief economist at CoreLogic, told HousingWire.

It’s worth monitoring the trends with credit scores, but equity gains homeowners saw over the past two years are a good buffer for riskier loans, Happ added. An average borrower has seen a gain of $63,000 in the first quarter of this year, a 32% increase year over year, according to CoreLogic's report.

The borrower’s credit score does not reflect everything about the health of the mortgage market, Leibowitz said, adding: "What would be concerning is when the loan-to-value (LTV) is going up."

A high LTV means more risk because if a borrower defaults on a loan, it’s less likely that the lender will get enough money by processing and selling the asset to cover the remaining loan amount and the costs associated with the process.

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Wednesday, June 15, 2022