1. Non-Bank Lenders Are Dominating the Market
Non-bank mortgage lenders have been around since at least the late-nineteenth century. Two decades into the twenty-first century, they are now the dominant sector of the mortgage industry. In 2017, non-bank lenders accounted for 16% of the approximately 5,600 mortgage lenders in the U.S. but originated 54% of 1-4-unit mortgages, up from just 25% in 2008, according to the Mortgage Bankers Association.
Also known as independent mortgage banks, non-bank lenders are non-depository institutions that use a combination of their own cash and short-term borrowing to fund individual mortgages. The most well-known non-bank lenders include Quicken Loans, PennyMac, and Loan Depot – all of which lend mostly or exclusively through online lending platforms.
Non-bank lenders have been quicker to embrace the internet than traditional banks and lending institutions. Another factor, according to the Mortgage Bankers Association, is that they have filled the void left by depository lenders who pulled back from the market after the Great Recession. The rise of online non-bank mortgage lenders offers home buyers a genuine, streamlined mortgage option that barely existed 10 years ago.
2. Mortgage Rates Are Expected to Keep Falling
The average 30-year fixed mortgage interest rate hit 3.55% in August 2019, the lowest in almost 3 years, and 139 points lower than the 12-month high of 4.94% in November 2018, according to Freddie Mac.
At the beginning of this year, it looked like rates would rise in 2019 and beyond. In its final decision last year, the Fed raised its benchmark interest rate by 25 basis points and flagged the likelihood of 2 additional rate hikes in 2019. But the Fed has since done a full 360, first putting rate increases on hold, and later flagging the possibility of up to three rate cuts by early-2020.
As Top.10 com has reported, home buyers are better off now than they were a year ago, despite rising home prices. The median home value in the United States stood at $229,000 at the end of July, up 5.2% year on year, according to Zillow. But lower interest rates mean someone purchasing a median-value home today can save $35,000 to $40,000 in total interest payments over the duration of a 30-year fixed-rate mortgage compared to one year ago.
3. Now Is the Time to Refinance
Prospective home buyers aren’t the only people in a position to benefit from falling rates. According to the Black Knight Mortgage Monitor, 9.7 million homeowners are now likely to qualify for a refinance that reduces their interest rate by at least 0.75%. This is the largest number of re-refinance candidates since late 2016, the last time mortgage rates were as low as they are now.
The downward trend in rates means that there may be more prepayment and refinance activity on the horizon, despite a decline in June, Black Knight reported.
Black Knight publishes its monthly report at around a one-month delay. Based on its formula for the number of refinance candidates under different fixed-rate scenarios, we can report that the number of re-finance candidates probably reached around 11 million in late August. According to Black Knight, a move in the average mortgage rate down to 3.500% would bring 11.6 million people into the re-finance market. A further drop to 3.375% would bring the number of refinance candidates to 13.2 million, while a drop to 3.000% would bring that figure to 19.4 million.
4. First-Time Buyers Are Moving Toward Conventional Loans
The overall housing market saw a moderate rebound in the first half of 2019, but sales to first-time homebuyers declined. First-time home buyers purchased 559,000 single-family homes in Q2, down 4% from a year earlier, according to Gemworth Mortgage Insurance chief economist Tian Liu. For the first time in at least a decade, the year-on-year growth rate in home sales to first-time home buyers underperformed the overall single-family housing market, which was down 2% year on year.
Despite these figures, first-time buyers have reason to be optimistic. As Liu noted, income grew faster than mortgage payments between Q2 2018 and Q2 2019, leading to improved housing affordability.
Mortgages with low down payment remain crucial to first-time buyers, although buyers are increasingly moving to conventional options, according to Liu. Conventional mortgages with low down payment were the most widely used mortgage product for first-time buyers in Q2 2019, accounting for 201,000 sales, up from 6% one year earlier. The low down payment conventional mortgage has been the leading mortgage product for first-time buyers for five straight quarters, accounting for 36% of all first-time homebuyer purchases.
5. Average Credit Scores Are Rising
It’s not all good news for home buyers. One statistic that should worry a majority of homebuyers is the one that points to rising average credit scores on closed loans. According to Ellie Mae, the average FICO score on closed loans hit 731 in July, up from 724 at the start of 2019 and the highest since February 2015. The average FICO score on a conventional purchase loan stood at 754 in July 2019, up from 750 at the start of the year. The average FICO score on a government-backed FHA loan stood at 675, the same as the beginning of the year.
Loan-to-value ratio, which measures loan amount versus appraised property value, has remained steadier. The average LTV permitted on all closed loans stood at 79 in July 2019, up from 77 at the start of 2019 but and the highest since August 2017. The average LTV for a conventional purchase loan was 81, up from 80 at the beginning of 2019. The average LTV for a conventional refinance grew to 67 in July 2019 from 62 at the start of the year. Ellie Mae’s report of slightly-higher average LTVs is consistent with Gemworth’s report that more buyers are taking out conventional loans with low down payment.
The Future’s Bright... If You Have Good Credit
The mortgage market is a dynamic market in which many different factors can impact a homebuyer’s ability to get funded. Falling interest rates are good news, but only homebuyers with strong credit have a chance of securing the best rates. Average credit scores on closed loans are rising, which is why people should take care to protect and strengthen their credit score before comparing rates from mortgage lenders.