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Existing Home Inventory Hits Record Low

Existing home sales finished out 2016 with a generally expected decline.  Still, the National Association of Realtors® (NAR) said today that 2016 overall was the best year for existing home sales in a decade.

Sales of existing single-family homes, townhomes, condominiums, and co-ops were at a seasonally adjusted rate of 5.49 million in December.  This was down 2.8 percent from an upwardly revised (from 5.61 million) 5.65 million units in November. The month's slide brought sales down to only 0.7 percent higher than they were a year ago compared to a 15.4 percent year-over-year increase in November.

NAR estimated that sales for the year as a whole were 5.45 million units.  This surpasses the 2015 total of 5.25 million and is the highest total since 2006 when sales reached 6.48 million.  

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Mortgage Rates Erase Last Week’s Losses

Mortgage rates fell somewhat significantly today, fully offsetting last week's rise.  Specifically, today's average rates are back in line with those seen on Friday, January 23rd (keep in mind, however, that rates were slightly lower last Tuesday before moving appreciably higher through the course of the week).  

Bond markets (which dictate mortgage rate movement) were tuned in to today's raft of headlines concerning Trump's opening salvo of policy announcements.  While specific details remain elusive, markets reacted primarily to trade-related news (i.e. border-tax).  This pushed stocks and bond yields lower.  Lower yields equate to lower rates.  Indeed, as markets shifted throughout the morning, lenders were able to revise mortgage rates lower in the middle of the day.

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2016 Saw Mortgage Distress Recede Strongly

The only loan performance metric reported by Black Knight Financial Service's December and thus year-end "first look" that rose in 2016 was the prepayment rate.  That stat, despite the rapid increase in interest rates over the previous two months, was still 19.08 percent higher than a year earlier although it fell 5.50 percent compared to November.  The prepayment rate at the end of the reporting period was 1.36 percent.

The remainder of Black Knight's reporting were all on measures of housing market distress and those shrunk gratifyingly over the course of the year.

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Mortgage Rates Remain at Recent Highs Despite Afternoon Bounce

Mortgage rates rose slightly today, on average, but performances varied by lender and depending on the time of day.  Rates were higher across the board this morning as global bond markets added to yesterday's weakness (weaker bond markets = higher rates, in general).  Investors were on edge ahead of Trump's inauguration address as there was speculation that he'd offer more details on specific stimulus plans.  When those details never came, markets reacted accordingly.  Stocks moved lower and bond markets improved.  Several lenders were thus able to offer mid-day rate improvements.  This took the average to "just slightly higher" from "decidedly higher" earlier this morning.

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FHA Premium Cut Officially Reversed; Mortgagee Letter Already Out

As was being widely rumored yesterday, the newly installed Trump Administration has indefinitely suspended a scheduled reduction in the annual premium for Federal Housing Administration (FHA) insurance.  A 25-basis point reduction in that premium was announced by then Housing and Urban Development (HUD) Secretary Julian Castro on January 9, scheduled to go into effect on January 27.

Mortgagee Letter 2017-07 was issued about an hour after Donald Trump took the oath of office as President, counteracting the earlier Mortgagee Letter 2017-01.  The new letter says "FHA will issue a subsequent Mortgagee Letter at a later date should this policy change."

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Whether Expansion or Recession in 2017, Housing will Survive

How will the economic philosophy that was altered by the last election actually evolve into policy? The is the question raised by Fannie Mae's Economic and Strategic Research Group, headed by Doug Duncan, Senior Vice President and Chief Economist say, in their January economic forecast.  With limited information available on the economic priorities of the Trump Administration, and those of the House and Senate also uncertain, "establishing reasonable estimates of the nature and sequencing, much less the magnitude, of policy changes [is] unusually challenging." Thus, the company's economic team says its theme for 2017 is "Will Policy Changes Extend the Expansion?"

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Rising Rates Reflected in Increased Purchase Share

Ellie Mae said its Origination Insight Report for December reflects the first effects of rising interest rates.  Loans for refinancing slipped from 47 percent in November to 46 percent as the reciprocal number, purchase loans, rose 1 point to 54 percent.  The company says this likely signals an upward trend in purchase mortgages that will continue throughout 2017.

Conventional loans made up 66 percent of closed loans during the month, down 2 percentage points from November while FHA and VA lending was unchanged at 20 percent and 9 percent respectively. 

Closing rates for all loans increased to 73.2 percent in December, the highest rate in 2016. Refinance closing rates increased to 69.6 percent, up from 68.7 percent a month earlier and purchase closing rates increased to 77 percent from 76.1 percent. To calculate closing rates the company reviews a sampling of loan applications initiated 90 days earlier, in this case the September 2016 applications.

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Appraisal Fails Still Causing Issues Despite Improving Markets

While it trails well behind credit history and debt-to-income levels, collateral problems are consistently the third most frequent cause of loan denials.  CoreLogic said Home Mortgage Disclosure Act (HMDA) data for 2015 show collateral issuers were the reason behind 13.7 percent of the 450,000 first-lien purchase mortgage applications that failed approval.

The share of loans turned down for collateral reasons has remained consistently in the 12-13 percent range since home prices began to recover in 2012.  But Yanling Mayer, writing in CoreLogic's Insights blog, says there is a wide variation in collateral denials on a geographic basis, ranging from 7 percent in Delaware to 22 percent in Michigan.  While lenders don't provide specific causes in their HMDA reports, Mayer says appraisals coming in below the contract selling price is common.  Data from other sources show 10 to 13 percent of appraisals nationwide come in below the contract sales price, a number consistent with HMDA data.

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Rates Break Through Important Ceiling

Freddie Mac's weekly mortgage rate survey came out this morning showing the lowest rates in 3 weeks (don't get excited). This happens due to the survey's methodology, which unfortunately relies on Monday/Tuesday rates almost exclusively. With lenders closed for business on Monday and with Tuesday legitimately being in line with the lowest rates of the year, Freddie's headline is perfectly defensible--assuming we're not talking about yesterday or today. If we are, then things are much worse.

After an abrupt increase yesterday, mortgage rates shot higher again today, bringing them even further into the worst territory of the month.  In fact, apart from December 14th through 28th, today's rates are the highest in more than 2 years.  Whether this is as dramatic as it sounds depends on your perspective.  While it's true that rates are at 2017 highs, the range has been fairly narrow so far this year.  Specifically, rates have only risen about .125% since Tuesday's 3-week lows.  That equates to roughly $21/month on a $300,000 loan.

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Probable Delay, Possible Reversal for FHA Premium Cut

Secretary of Housing and Urban Development (HUD) nominee Ben Carson said at his confirmation hearing, "Certainly, if confirmed, I am going to work with the FHA administrator and other financial experts to really examine that policy."  He was talking about an earlier announcement from the current HUD head that FHA insurance rates were going to be cut.  On January 12, when Carson made that remark, most everyone viewed it as a throw-away line.

Now not so much. 

As background, on January 9, current HUD Secretary Julian Castro announced a 25-basis point cut in the annual premium charged for FHA insurance.  The reduction, scheduled to go into effect on January 27, would return FHA annual premiums almost back to where they were before a crisis in the FHA insurance fund caused substantial hikes in both the annual and the upfront premiums.  Castro said the cut should save homeowners an average of $500 the first year.

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