A new report by Intercontinental Exchange, Inc. (ICE) found a notable shift in the landscape of the mortgage market, particularly concerning the influx of first-time homebuyers (FTHBs). Despite a year marked by a 30-year low in mortgage originations, first-time buyers made significant waves, constituting a record-breaking 47% of Government-Sponsored Enterprise (GSE) purchase loans and 39% of all GSE securitizations in 2023.
The report, compiled from ICE's eMBS agency securities database and ICE Market Trends originations data, points out that 2023 witnessed an unprecedented surge in FTHB activity within the mortgage market. In a market primarily driven by purchases, with over 80% of transactions being purchase-driven, FTHBs emerged as a dominant force, comprising an astonishing 44% of overall agency securities issuance. This shift has raised concerns among investors regarding the potential performance risks associated with Mortgage-Backed Securities (MBS).
"Looking back, last year’s market was dominated by purchase lending, with loans to buy homes making up 82% of a historically low number of originations. While it remains a tough market for prospective purchasers, our eMBS agency securities database revealed that first-time homebuyers actually made up 55% of all agency purchase mortgages last year. That’s the highest share in the 10 years we’ve been tracking the metric," Andy Walden, ICE vice president of Enterprise Research Strategy, said.
Walden further emphasizes the impact of FTHB activity on GSE securities, noting that FTHB purchase loans constituted a remarkable 39% of all GSE securitizations in 2023, a 12-percentage-point increase compared to any other vintage in the past decade. This exposure to first-time homebuyer loans amidst record-high house prices, rising interest rates, and elevated debt-to-income ratios underscores the importance of closely monitoring the performance of this cohort, particularly for investors involved in 2023 agency MBS.
Analysis of ICE Market Trends origination data sheds light on FTHB trends, revealing higher average front-end debt-to-income (DTI) ratios among first-time buyers compared to repeat buyers. However, back-end DTIs are found to be more comparable, with FTHBs allocating a greater share of their income to housing expenses while spending less on other forms of debt. Despite lower credit scores among FTHBs compared to repeat buyers, particularly evident in VA purchase loans, FHA loans show similar average credit scores among both first-time and repeat buyers.
While mortgage demand continues to closely follow interest rate movements, recent periods of rate easing have indicated a potential rebound in refinance lending if rates decrease further. January saw rate/term refinances, virtually nonexistent for some time, accounting for 24% of refinance activity, the highest share in nearly two years. However, despite predictions suggesting millions of borrowers could benefit from refinancing by the end of 2024, servicers' retention of such borrowers hit a 17-year low in Q4 2023.
As the mortgage market evolves, industry participants are urged to prioritize an exemplary servicing experience and effectively engage with potential refinancing candidates. With the potential for increased refi activity in the forecasted year, understanding the complexities of the evolving market is crucial for both capitalizing on opportunities and minimizing risks associated with changing dynamics and interest rate fluctuations.
