The U.S. housing finance market may be poised for a historic shift away from a long trend of primarily refinancing existing real estate loans to primarily funding new real estate purchases.
In its May forecast, the Mortgage Bankers Association estimated that the market shift would take place sometime in the middle of this year. The Washington-based association has forecast refinance loans at 74% of the mortgage originations in the first quarter of this year and 67% in the second quarter, but only 46% in the third quarter and falling to 42% by the end of the year.
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Mike Fratantoni, MBA vice president of research and economics, rooted the association’s opinions in observations of interest rates and the economy in general.
“Interest rates are the number one driver of refinances, so as rates continue to climb, there will be less incentive for homeowners to refinance,” Fratantoni observed. “Additionally, as real estate fundamentals, the labor market and the broader economy improve, more Americans will make the decision to purchase a home. These movements will shift the current refinance market into a purchase market.”
The question is key because some real estate experts have long considered purchase money loans more valuable than refinanced loans because they tend to bring with them a harvest of cross selling opportunities as well as more loan origination fee income.
But they also require skill sets that many credit union housing finance executives and programs have not developed as fully as they should.
As noted housing financed consultant Tracy Ashfield, executive vice president with consulting firm Strategic Mortgage Solutions in Madison, Wis., has previously told credit union executives, a purchase money loan program has to be sold to both real estate professionals and real estate buyers in a way that a refinance program does not. Some other consultants agree, saying that a purchase money program often requires a credit union to reach out to real estate professionals in ways that it might not have before as well as having streamlined its underwriting process.
“It’s a very real question [whether credit unions will be able to compete on purchase money loans],” said Robert Dorsa, president of the American Credit Union Mortgage Association in Las Vegas. “Because that will be the proof that credit unions have staying power as players in the housing finance market.”
But while all housing finance executives agree that the market will shift from refinance to purchase money lending eventually, some credit union economists and other market observers are not convinced the shift will take place this year for several reasons.
First, interest rates will be a factor. The MBA’s calculations are based in part on the idea that interest rates will continue to rise and while CUNA Chief Economist Bill Hampel acknowledged that interest rates have come up recently, he is withholding an opinion on whether they will continue to rise.
“Obviously, if someone knew what interest rates were going to do they would know what’s going to happen,” Hampel said. “And, I don’t claim to be able to do that.”
Hampel did point out that the rates for 10-year Treasury bills, which are closely linked to mortgage interest rates, have hit five significant down points in a long downward path since 1988 and that it is unlikely that they will go any lower. The catch is to figure out when they might head up again.
If they do, Hampel said he can see some of the power draining from refinance demand, but he stressed that simply slowing refinances is not the same as increasing demand for purchase money loans.
Paradoxically, increasing demand for purchase money loans needs something that might seem counter intuitive: rising home prices. They can lead potential home buyers and sellers wanting to get into the market before prices rise further. However, Hampel doubts that home prices, which are up around 10% nationally from their floor, have increased enough to make much of a difference in the market.
“If you have a property which has lost about 30% of its value from its high, you are happy it’s back up 10%,” Hampel said. “But it’s not clear that you won’t keep holding onto it to wait for prices to go higher.”
In addition, rising home prices may also breathe a bit more life into the refinance market as real estate owners who might have tried and failed to refinance their properties at the lowest point in the market try again now, Hampel noted.
Combined with a low volume of new home starts, Hampel said he doubted whether there was enough inventory of real property available on the market to really drive the sort of shift from refinance loans to purchase loans.
NAFCU Chief Economist David Carrier agreed that inventories of real property are low but he declined to comment on MBA’s numbers. He did agree with the observation that rising home prices have enabled previously frustrated refinances to go forward.
“This is something I have seen in my own life,” Carrier said, relating how a refinance attempt a couple of years ago ended in failure due to property worth, but had succeeded a second time around after the home’s value had risen 10%.
Carrier noted that neither the NCUA nor NAFCU break credit union home financing data out by refinancing versus purchase money, but suggested that NAFCU would begin to survey its members on that question.
Jerry Haley, CEO of CU/America, a mortgage CUSO headquartered in Lombard, Ill., declined to comment on what might be happening nationwide, but said that his roughly 30 participating credit unions, all in Illinois, were definitely seeing the volume of purchase money lending catch up to refinancing.
Haley took this as an indication of how local real estate markets continue to appear. In 2012, of the roughly 300 housing finance loans the CUSO originated with its member credit unions, about 75% of them were refinances, he said. This year, the CUSO expects to see a similar loan volume with expectations of 50% of the new loans to be purchase money loans.
“I wouldn’t say that the overall demand for refinances is necessarily falling off as much as the demand for purchase loans is catching up,” Haley said.
CU/America has become so convinced that enough of that purchase money demand is here to stay, at least in Illinois, that is has entered in a partnership with CU Realty Services, a national CUSO based in Scottsdale, Ariz., which specializes in helping credit unions improve their purchase money lending.
“The more I learned about the CU Realty program, the more it made sense for our organizations to work together,” said Haley. “It helps credit unions build stronger purchase mortgage programs by providing the tools their members need to buy or sell a home from start to finish. Now, our client credit unions can help their members in every aspect of the process, from finding a home to financing one.”
CU/America said it plans to actively promote CU Realty Services and its benefits to its credit unions, as well as others across the state.