Rising interest rates and rising prices have slumped new home sales, tightening the mortgage market for banks and credit unions.
Additionally, pandemic-related supply chain issues have strained the supply of lumber and other building materials over the past two years, making it more difficult to bring new inventory to market. .
These factors have pushed home prices to new highs in several major markets. Home prices rose 2.2% in February from January and 20% year-over-year, according to the CoreLogic Home Price Index.
As a result, many new homebuyers have been forced to sit on the sidelines. Home sales in March were 12.6% lower than a year ago.
“While soaring interest rates are undoubtedly having some impact, construction delays appear to be the main culprit,” said Curt Long, chief economist and vice president of research for the National Association of Federally -Insured Credit Unions, in a press release.
As interest rates have risen in response to inflation, refinancing activity has dried up. Freddie Mac said the 30-year fixed rate mortgage averaging 5.27% for the weekly period ending May 5, up sharply from 2.96% a year earlier and the highest since 2009. Higher rates have also begun to dampen demand for home purchases .
The $1.9 billion Hanscom Federal Credit Union asset in Massachusetts was one of many mid-sized lenders across the United States that saw first mortgages plummet from late 2020 to late 2020. ‘last year.
Hanscom Chairman and CEO Peter Rice said lenders accepting high-risk applicants and lowering credit qualification standards should probably be concerned about entering this rapidly rising market. interest rate.
“We’ve seen this play out time and time again,” he said.
Rice said that despite declining home inventories, he expects Hanscom’s prime mortgage portfolio to remain stable, although he said a “spectacular” industry-wide slowdown is certain.
“I would be very worried about mortgage brokers who, due to record refinancing numbers, have become dependent on this market,” he said. “Rising interest rates will surely bring their business – and their business model – to a screeching halt.”
Slower refinancing activity is expected to lead to a 30% year-over-year drop in mortgages for Wright-Patt Credit Union, with assets of $7.2 billion, in Beavercreek, Ohio.
Eric Bugger, director of loans at Wright-Patt, said the credit union has a team of about 45 employees in its mortgage business and the credit union is seeing some competitors doing “crazy things” with rates. interest, causing Wright-Patt to lose some loans.
“It still happens, though,” Bugger said. “We combat this by closely monitoring market rates and trying to come up with new products that meet our members’ needs. We can’t always have the lowest rate. Someone can always undermine us.
Banks, too, are warning of a sharp slowdown in mortgage activity as interest rates climb and housing supply shrinks.
Megabanks such as Wells Fargo and JPMorgan Chase reported decline in mortgage loan volumes in the first trimester. Regional banks such as Truist Financial and Citizens Financial Group provided similar results to investors for the quarter.
“The mortgage origination market had one of its biggest quarterly declines in memory,” Charlie Scharf, president and chief executive of Wells Fargo, said on the earnings call. the company last month. Rising interest rates will likely have an “additional negative impact on mortgage volumes,” he said. The $1.9 trillion asset bank confirmed last month that it was lay off a number of home loan employees due to current market conditions.
Bugger said the key will be to have a balanced loan portfolio and, in some cases, steer members toward a purchase with a payment they can afford. Otherwise, customers may have to wait a bit longer to increase their down payment to keep monthly expenses manageable.
But many potential buyers are taking a wait-and-see approach.
“The combination of rapidly growing house prices and the fastest rising mortgage rates in more than 40 years is finally affecting buying demand,” said Sam Khater, chief economist at Freddie Mac.
For the week ending April 29, home purchase loan application volume was up 2.5% from the previous week, but was 50% lower than a year earlier, according to the Mortgage Bankers Association. Its refinancing index edged up 0.2% from the previous week after falling for seven straight weeks.
“The decline in purchase requests was evident across all loan types. Prospective buyers have retreated this spring as they continue to face limited options of homes for sale as well as higher costs due to the mortgage rates and prices,” said Joel Kan, associate vice president of economic and industry forecasting at the MBA. “The recent decline in purchase orders is an indication of potential weakness in home sales in the months coming.”
Community banks that have developed mortgage operations to generate fees on originations and diversify income are also warning against the specter of a sustained downturn.
The $12.7 billion in assets FB Financial Corp. in Nashville, Tennessee, announced a first-quarter loss for its mortgage division.
“A confluence of events has created a challenging operating environment in the mortgage industry,” FB Chairman and CEO Christopher T. Holmes said in an earnings call last month.
“We expect the slide to continue for mortgages,” he added. “We are reducing our mortgage origination capacity and the corresponding size of our operating functions to operate in the current expected downside environment.”