Fannie Mae expects lower rates to boost mortgage originations in 2H

Fannie Mae cut its interest rate forecast in its July economic outlook and now predicts slightly more purchase and refinance originations for this year thanit had expected in June.

The improved outlook does not take into account the Federal Housing Finance Agency’s cancellation of its50 basis point adverse market fee at the government-sponsored enterprises for most refinancings, announced last Friday. When the FHFA announced the fee last August, the industry was concerned that the increased cost could reduce refinance activity, but volume numbers through the first half of this year indicate a limited impact.

Fannie Mae now expects over $4.2 trillion in production this year, versus its June prediction of $4.1 trillion. Its outlook is more bullish than Freddie Mac’s, whosethird quarter forecast calls for $3.9 trillion. The Freddie Mac forecast was released on July 15, two days before the FHFA moved to cancel the adverse market fee.

The Mortgage Bankers Association has yet to release its July forecast, but it’s consistently been lower than the GSEs — in June, it predicted $3.4 trillion in volume in 2021.

Dropping the fee can have an effect on refinance volume, the MBA’s Chief Economist Mike Fratantoni said, pointing out that the 50 bps translates to between 10 to 12 bps higher on the interest rate. The fee ended up being “just some sand in the gears that certainly wasn’t helpful.”

But some other factors must be considered when it comes to the impact of this latest change.

“It is going to be tough to parse out exactly what effect this change has given what’s happening in the market right now, we’re seeing this downdraft in terms of [10-year Treasury] yields and so you know that the additional 10 or 12 basis points due to the fee is certainly going to help, but I think it’ll be wrapped into this market move and may benefit refi volume generally,” Fratantoni said.

In recent weeks, the organization’s data reported declines in bothpurchase and refinance applications. Taking out the fee should help to prop up refi volume the rest of the year.

More immediately, if the loan hasn’t closed by the date the fee is discontinued, Aug. 1, indications are some lenders are going to be extending that rate relief to their borrowers, he noted.

Fannie Mae estimated that originations reached an all-time high of $4.5 trillion in 2020. Freddie Mac put the total at $4.1 trillion and the MBA at $3.8 trillion.

“We expect the increase in housing demand we saw over the past year to ease, as the impact of unique recent factors lessens, including adjustments to accommodate pandemic-related remote work arrangements, stimulus checks bolstering household savings, and record-low mortgage rates,” Mark Palim, Fannie Mae’s deputy chief economist, said in a press release.

“However, demographic trends remain favorable for a strong housing market over the next few years, and, combined with the chronic undersupply of homes built over the last decade, upward pricing pressure is likely to remain through the forecast horizon — just not at the rate seen this spring,” he added.

The interest rate forecast was revised due to the benchmark 10-year Treasury yield’s downward trend in recent weeks. After starting June at 1.62%, it ended the month down 17 basis points lower. The 10-year yield closed on July 16 at 1.30%. As of 12:30 eastern time on July 19, it fell a further 11 bps, to 1.19%.

Fannie Mae now expects the 30-year fixed rate mortgage to stay at 3% in the third quarter (unchanged from the second quarter), before rising to 3.1% at the end of 2021 and 3.3% the following year. The June forecast had the 30-year FRM at 3.2% by December and 3.4% one year later.

In comparison, Freddie Mac’s latest forecast calls for the 30-year FRM to reach 3.4% in the fourth quarter and 3.8% in 2022.

Home price appreciation will moderate going forward as supply side issues dissipate with homebuilders bringing more product on to the market as supply chain and labor issues work themselves out. “Nevertheless, we expect home price growth to become one of the more persistent drivers of inflation going forward, as other, more transitory factors diminish,” Palim said.

Fannie Mae also increased its 2022 outlook to $3.23 trillion from June’s $3.05 trillion.

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