Both Wells Fargo and JPMorgan Chase have reported substantially-fewer mortgage originations in their latest quarterly reports, about two-thirds lower. The results from such big lenders are not a surprise but they do raise a question: If mortgage demand is falling through the floor is this a problem for real estate borrowers -- or an advantage?
It's been known for some time that 2014 mortgage demand would slump. The Mortgage Bankers Association has predicted that refinancing activity would drop 60 percent this year while purchase money mortgage originations would grow by 3.8 percent.
The MBA estimates make a lot of sense and should not be a cause for panic. In fact, the latest marketplace realities may actually be good for borrowers.
Why Are There Fewer Mortgages?
Let's start with those missing refinance mortgages. Individuals typically refinance to get lower mortgage rates, convert from adjustable-rate financing to fixed-rate mortgages or increase loan amounts. However, the usual motivations for refinancing are largely absent from today's marketplace.
- Huge numbers of homeowners refinanced in 2012 and early 2013 when mortgage rates reached historic lows. Such borrowers have little reason to refinance again so in terms of new replacement loans they're out of the market.
- Rather than refinance ARMs there has instead been a swing toward such financing and not away from it. Ellie Mae reports that adjustable-rate mortgages represented 7.4 percent of all new loans in March 2014 -- that's up substantially from 2.5 percent a year ago.
- Real estate equity is growing in most markets, in fact the Federal Reserve says that homeowners gained $2.3 trillion in 2013. However, there's been no rush to increase real estate debt -- the Fed says that mortgage debt actually contracted 1 percent in the fourth quarter.
- Although refinancing is sharply down, purchase money mortgage originations -- the loans used to buy houses -- are expected to grow this year, but not by much.
- That $2.3 trillion in new equity reflects higher real estate prices but wages have not kept up. Figures from the Census Bureau show that household income has declined 9 percent since 1999. Logically, if home prices are rising and incomes are falling then affordability is more difficult for many would-be purchasers, thus holding down home sales.
The good news for borrowers is this: Lenders need to make loans otherwise they're out of business. How can they get more loans?
One approach is to lower loan requirements. For instance, look at credit scores for approved loans. The typical credit score for a successful loan application was 725 in March 2014 versus 750 in November 2012 according to Ellie Mae. That's a huge drop, one which says that loan standards are easing as lenders compete for your business.
How can borrowers extract the best-possible deals from mortgage lenders? Follow the old, boring advice which is actually right: Shop around.