Supply and Demand: Still Driving Mortgage Rates

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There is often a tremendous amount of speculation in the mortgage industry regarding supply and demand, the foundation to any market. While mortgage activity remains a sticking point for the economic and housing outlook, recent data indicates that lending standards are easing and supply is increasing in the mortgage market. Many research and economic departments have recently begun writing about residential mortgage debt, which has fallen to historically low levels while the housing recovery continues to remain sluggish. If you look at institutional investment, mortgages as a percent of total assets have fallen to 30.7%, which is far below the 40-45% historical range seen prior to the recession. Also, mortgage debt continues to decline on a year-over-year basis. This brings us to question the fundamentals of our market, specifically, what is holding down stronger growth in the mortgage market?
When we ask, “Who is the primary driver of supply?” the GSEs are a good place to start. Government-sponsored enterprises have made up the majority of growth in the mortgage lending market; Fannie Mae, Freddie Mac, and (indirectly) Ginnie Mae, have surged in mortgage originations compared to private institutions. Mortgage originations from private entities, like insurance corporations and affiliate institutions, have fallen to historical lows, mainly as a function of their inherent risk premiums; it’s hard to compete with the GSEs’ daily rates.
In 2013, private securitization and other purchases had the highest average rates on first lien mortgage loans, which were about 1.5 percentage points above the average rate for GSEs. It’s important to note that the current lending environment remains relatively inexpensive (compared to only a decade ago) and that the percent of loans approved but not accepted has fallen in recent years. This traditionally indicates that borrowers are likely not turning down loans because of any “rate barrier.”
As some will note, the Dodd Frank Act and the Volcker Rule place limitations on the risk level associated with mortgage originations for some lending institutions, and certainly is suppressing mortgage lending growth to a point.
Demand by borrowers for mortgage products could be parsed into a hundred categories, as there are substantial differences among loan applications by income, gender, race and ethnicity. It’s no shock that the highest income bracket has consistently applied for more mortgage loans than any other bracket. This difference peaked in the 2004-2006 period when the top income bracket applied for more than four times as many loans as any other bracket; the top income bracket tripled the applications submitted by any other bracket in 2013. The second-highest number of loan applications came from the income bracket that was 50-79% of their metropolitan area’s median; it’s intuitive that the lowest income bracket applied for the least number of mortgage loans.
With shifting socio-economic responsibilities in today’s world, demand for loans by gender has shifted over the past few years. Historically, applications have been primarily led by males although there was a brief period from 2005-2007 where females led the number of mortgage loan applications. During this time the percent of loan application denials by gender was fairly even, leading many to believe that the surge in female loan applications was likely due to increased confidence in loan approval rates for females. Since the past recession, however, males have applied for more loans and have been denied for fewer. Joint applications for loans have consistently had the lowest denial rates.
Recently, minorities have driven demand for home mortgages. This is a reversal from the recession period, where this group saw one of the largest declines in mortgage applications. White/non-native population has consistently applied for the highest number of loans; however, there has been a switch in demand between the Black/African-American population and the Asian population. There has been a decrease in demand among the Black/African-American population, which, until 2008, had applied for the second-highest number of mortgage loans, while the Asian population has increased demand to surpass the Black/African-American population for the second-highest rank.
The mortgage market recovery has been a slow, and progressive, growth campaign. Popular opinion appears to support an increase in activity over the next several quarters as the market gains momentum, which of course is dependent on many macro factors yet to be determined. Mortgage supply is a relatively lopsided affair, as it has shifted towards GSEs, which have received the highest number of applications over the past couple years and have originated the largest number of mortgage loans. Mortgage demand has seen some shifts by income, gender, race and ethnicity over the past few years, which could be due to multiple factors including denial and lending rates offered. Higher income individuals, usually males, and some minority populations have shown the largest increase in mortgage demand since the credit tightening. As lending standards continue to ease, expect demand to pick up across other categories and spur further growth in the mortgage market.

By: Rob Chrisman,

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