Fannie Mae lowered his interest rate forecast in his July economic outlook and now forecasts slightly more purchases and refinancing for this year than it was expected in June.
The improved outlook does not take into account the Federal Housing Finance Agency’s cancellation of its 50 basis points unfavorable market compensation government-sponsored companies for most refinancing, announced last Friday. When the FHFA announced the fee last August, the industry feared that higher costs could dampen refinancing activity, but volume figures up to the first half of this year indicate a limited impact.
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Fannie Mae expects production of more than $4.2 trillion this year, up from June’s forecast of $4.1 trillion. The outlook is more optimistic than that of Freddie Mac, whose forecast third quarter third asks for $3.9 trillion. Freddie Mac’s forecast was published on July 15, two days before the FHFA canceled the unfavorable market fee.
The Mortgage Bankers Association has yet to release its forecast for July, but it has always been lower than the GSEs — in June, it forecast a volume of $3.4 trillion in 2021.
Lowering the fee could have an effect on refinancing volume, said Mike Fratantoni, the MBA’s chief economist, noting that the 50 bps translates to 10 to 12 bps higher on interest rates. The fee ended up being “just some sand in the gears that certainly wasn’t helpful.”
But there are still some other factors to consider when it comes to the impact of this latest change.
“It will be difficult to parse exactly what effect this change has had on what is happening in the market right now. We see this downward movement in terms of [10-year Treasury] returns and so you know the extra 10 or 12 basis points from the fee will certainly help, but I think it will be packed into this market move and could benefit refi volume overall,” Fratantoni said.
In recent weeks, the organization’s data reported declines in both applications for purchases and refinancing. The amortization of the fee should help to maintain the refi volume for the rest of the year.
More immediately, if the loan isn’t closed by the date the fee ends, on Aug. 1, there’s evidence that some lenders will extend that rate relief to their borrowers, he noted.
Fannie Mae estimated that originations hit a record high of $4.5 trillion in 2020. Freddie Mac estimated the total at $4.1 trillion and the MBA at $3.8 trillion.
“We expect the increase in housing demand we’ve seen over the past year to ease as the impact of unique recent factors diminish, including adjustments to allow for pandemic-related remote work appointments, incentives that drive household savings, and record-low mortgage rates,” Mark Palim, Fannie Mae’s deputy chief economist, said in a press release.
“However, demographic trends remain favorable for a strong housing market in the coming years, and coupled with the chronic undersupply of homes built over the past decade, upward price pressures are likely to continue over the forecast period – just not at the pace seen. this spring,” he added.
The yield forecast has been revised due to the downward trend in the benchmark 10-year Treasury yield in recent weeks. After starting June at 1.62%, it ended the month 17 basis points lower. The 10-year yield closed on July 16 at 1.30%. On July 19 at 12:30 p.m. eastern time, it fell another 11 basis points to 1.19%.
Fannie Mae now expects the 30-year fixed-rate mortgage to remain at 3% in the third quarter (unchanged from the second quarter), then rise to 3.1% at the end of 2021 and 3.3% the following year . In the June forecast, the 30-year FRM stood at 3.2% in December and 3.4% a year later.
By comparison, Freddie Mac’s latest forecast expects the FRM to reach 3.4% in the fourth quarter over 30 years and 3.8% in 2022.
House price increases will moderate in the future as supply-side problems disappear and homebuilders bring more products to market as supply chain and labor problems resolve themselves. “Nevertheless, we expect house price growth to become one of the more persistent drivers of inflation going forward as other more transient factors decline,” Palim said.
Fannie Mae also raised his 2022 outlook from $3.05 trillion in June to $3.23 trillion.
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