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Will the Federal Housing Finance Agency's (FHFA) decision to raise conforming loan limits for the first time in a decade help to boost mortgage lending volume in 2017? A new data analysis from Kroll Bond Rating Agency (KBRA) titled “Declining Mortgage Lending Volumes Ahead” suggests that this will not be the case.
“Indeed, while 2016 has been an excellent year for the U.S. mortgage industry with almost $2 trillion in new loan originations, we believe that this year is also likely to be the peak in terms of lending volumes for years to come,” said the KBRA report, citing three key considerations to justify its pessimism. “First, the change in the conforming loan limit is insignificant compared with the double-digit home price appreciation seen over the past decade, especially in high priced markets such as East and West coasts and South Florida. Affordability is an issue in all of these markets. Second, the impact of rising interest rates and widening credit spreads is a far larger negative influence on prospective mortgage origination volumes than the relatively small increase in the conforming loan limit. Mortgage lending volume is about interest rates first and foremost. Third, the negative regulatory environment and low (or zero) risk adjusted returns in the residential mortgage sector will likely encourage the continued exodus of insured depository institutions from the one to four family loan market, reducing overall mortgage lending capacity.”
KBRA also noted that historically low interest rates coupled with today’s regulatory regime and evaporation in the refinance market will add up diminished mortgage lending by both banks and nonbanks in 2017 and beyond, with no easy fix in sight.
“Acquiring purchase mortgage customers is a more complex and expensive process than refinancing an existing mortgage,” KBRA added. This is especially true for risk-averse depositories that must deal with both the Consumer Financial Protection Bureau and prudential regulators who are actively discouraging below-prime residential lending and loan servicing by banks.”