10-year Yield Hits Four-Month High; Mortgage Industry Full Steam Ahead
Pandemic politics continue to drive market volatility on Wall Street as investors keep up the hope of a stimulus plan before the Nov. 3 election, or at least not long after it. Positive news flowing from Capitol Hill about progress in legislation negotiation gave the major indices a much-needed boost.
Thursday night’s Presidential debate also came across as a much more civil affair which added to the positive sentiment. Dow futures rose by about 90 points early Friday with the S&P 500 and Nasdaq 100 futures gaining 0.3% and 0.2%, respectively. The 10-year Treasury note yield also continues to rise, hitting a fourth-month high Friday morning trading at 0.859%. The increase was spurred by progress in the stimulus plan negotiations.
Markets were shaken up earlier this week with a new variable in the mix: Voter registration hacks. Wednesday evening’s report from the Federal Bureau of Investigation confirmed that Iran and Russia had both obtained some voter registration information. Director of Intelligence John Ratcliffe said, “This data can be used by foreign actors to attempt to communicate false information to registered voters that they hope will cause confusion, sow chaos and undermine your confidence in American democracy.”
Investors were already pricing in uncertainty about this year’s election, and Wednesday’s report only made that sentiment murkier. Hopes were lifted Thursday as Speaker of the House Nancy Pelosi said negotiations for a stimulus bill were progressing and, according to her chief of staff, the two sides were “closer to being able to put pen to paper to write legislation.”
Another boost for the market came from strong corporate earnings reports. Tesla reported another profitable quarter, its fifth-straight. Coca-Cola, CSX, Dow Inc. and AT&T also all reported better-than-expected earnings.
First-time unemployment claims went down significantly this week, hitting levels not seen since the beginning of the pandemic-related business shutdowns. However, that data is a touch misleading. While the figure of 787,000 people filing initial claims is well below the expected 875,000, there is a less-than-ideal reason why.
Most people have been filing claims so long that their benefits have run out. You are only allowed to claim unemployment benefits for 26 weeks and many people recently maxed out. Now, most of the people who can’t file claims through traditional channels have moved to applying for the Pandemic Unemployment Assistance emergency compensation program. That program provides 13 extra weeks of benefits. The number of people applying for those benefits increased by more than 500,000 in the first week of October with the total number now well over 3 million.
2021 Mortgage Forecast
2020 has its share of issues, but it’s been the best year for the mortgage industry since 2003. That’s in the latest report from the Mortgage Bankers Association. The MBA’s forecast released this week predicts that mortgage originations will increase to $3.18 trillion in 2020. That’s the most since we hit $3.81 trillion in 2003.
2021 is slated to be even better for purchases. The MBA’s experts say “purchases originations are expected to grow by 8.5% to a record $1.54 trillion in 2021. And after a substantial 70.9% jump in activity in 2020, MBA anticipates refinance originations to slow next year, decreasing by 46.3% to $946 billion.” Because of the decrease in refinances, total origination volume in 2021 is expected to decrease. However, if the $1.54 trillion prediction holds, that will eclipse the previous high of $1.51 trillion in purchase originations that the industry hit in 2005.
It’s important to note that the 2021 forecast from the MBA assumes that a vaccine for COVID-19 will help control the pandemic, “leading to a gradual economic recovery that is aided by further fiscal stimulus.”
Meanwhile, the rush to buy has slowed a little over the last month. The MBA’s weekly survey shows a fourth-straight week of declines in home purchases. Compared to 2019, however, applications are still up by 26%. More than half of the weekly mortgage origination activity is still coming in the form of refinances, which made up 66.1% of total applications in the latest survey.
Interest rates continue to support the incredible volume as once again the average rate from Freddie Mac has moved lower. The latest average on a 30-year fixed-rate mortgage is 2.8%, down from 2.81% the week prior. According to Freddie Mac economists, “Mortgage rates today are on average more than a full percentage point lower than rates over the last five years. This means that most low- and moderate-income borrowers who purchased during the last few years stand to benefit by exploring refinancing to lower their monthly payment.”
The low interest rate environment has given purchasers more buying power, but the influx of demand with a severe shortage in supply has resulted in a rapid sale price increase. The National Association of Realtors reports that the median price of an existing home sold in September came in at $311,800. That is nearly 15% higher than home prices in Sept. 2019. Home inventory has been decimated by demand with the NAR reporting just a 2.7 month supply available.
This week the Consumer Financial Protection Bureau issued an indefinite extension to the QM patch until a new version is agreed upon. The QM patch was put into place in 2014 as an exception to the Dodd-Frank Act and is set to expire January 10, 2021. The CFPB’s QM rule created an exemption from the 43% Debt to Income cap for mortgages eligible for purchase by Fannie Mae and Freddie Mac.
Part of the reasoning set out by the CFPB is to ensure a smooth transition to the new qualifying mortgage standard. This summer the CFPB announced it was moving toward removing the DTI requirement and instead proposing an “alternative, such as a pricing threshold (i.e., the difference between the loan’s annual percentage rate and the average prime offer rate for a comparable transaction.)”
Contributed by Greg Richardson, MAXEX Managing Director
Greg Richardson is Managing Director at MAXEX, LLC, based in Atlanta, GA. He has 30 years of experience in capital markets, including trading, banking asset and portfolio management, mortgage banking secondary marketing and accounting. MAXEX is the only platform in the mortgage industry to offer a centralized clearinghouse that enables buyers and sellers to trade anonymously with multiple counterparties using a single standardized