Freddie Mac, a government-run corporation that buys home mortgages and packages them into mortgage-backed securities, said Tuesday in its monthly forecast on the mortgage market that low mortgage loan rates, combined with a strong job market, “will help sustain the housing market for at least the next year and a half.”
The company sees mortgage loan rates averaging 4.1% this year, dropping to an average of 4.0% in 2020 on 30-year fixed-rate mortgages. That forecast is based on a single reduction in the federal funds rate this year and none next year. The fed funds rate is forecast to average 2.4% this year and 2.3% next year. The yield curve is expected to be positive, with one-year Treasury notes averaging 2.2% in both 2019 and 2020.
Housing starts are forecast to rise to an annual total of 1.26 million this year and increase to 1.34 million next year. Home price growth is forecast to rise 3.4% this year but dip to 2.6% in 2020. Total originations for both new and refinancing mortgage applications is forecast at $1.8 trillion in 2019 and $1.7 trillion in 2020.
There may be a catch, however, for first-time buyers. The federal Consumer Financial Protection Bureau (CFPB) has said it will eliminate in January 2021 a loophole in its “ability to repay/qualified mortgage” (QM) rule that allows Freddie Mac and Fannie Mae to purchase loans that exceed the standard 43% debt-to-income ratio established by the QM rule. The loophole (sometimes called a patch) permitted Freddie and Fannie to consider factors other than QM rule in determining a borrower’s ability to repay the loan.
In a statement cited at MarketWatch, CFPB director Kathleen Kraninger said: “Readjusting away from the patch can facilitate a more transparent, level playing field that ultimately benefits consumers through stronger consumer protection.” Approximately 19% of loans sold to Fannie and Freddie between 2014 and 2018 took advantage of the patch.
The CFPB’s policy change has larger effects black, Hispanic and low-income Americans generally. According to an Urban Institute report, African Americans were 29% more likely than borrowers overall to have a debt-to-income ratio above 43%.
Although the new forecast from Freddie Mac extends only into 2020, it seems clear that the number of mortgages will drop when the CFPB patch is eliminated.