6 key indicators for mortgage lenders to assess as market headwinds persist

To say that mortgage lenders are facing challenging times would be a considerable understatement. The federal funds rate, which is set as a range between an upper and lower limit, currently stands at 3% to 3.25%. The last time that the rate reached 3.25% was in 2005 — and we all know how that story unfolded.

Increasing rates pressure originators to lower credit standards in order to keep originating loans. While this happened during the global financial crisis 15 years ago, the aftermath produced reforms in regulatory standards that have improved underwriting standards. Amid the uncertain current environment, here are six key indicators we should look to for an accurate assessment of market conditions:

  1. Federal funds rate: While the current fed funds rate of 3.25% seems high, it also stood at more than 2% from October 2018 to September 2019. But since the onset of the pandemic in March 2020, the rate has generally been much lower. The substantial increases this year present challenges in the mortgage sector, as the note rates produced can become illiquid if not hedged. Accordingly, mortgage originators must ensure their production reflects market note rates and hedges are being actively monitored. In addition, maintaining a tight lock policy that doesn’t allow free extensions will help preserve margins.
  2. Unemployment rate: This is typically a harbinger of monetary policy since it reflects part of the dual mandate of the Federal Reserve. As of August, the rate stood at 3.7%, representing a minor uptick from the 3.5% seen in July. For reference, the unemployment rate was 3.4% in January 2020 and over 4% just before the global financial crisis. The currently low figure indicates that while borrowing rates may be high, credit risk related to borrowers’ ability to fulfill their financial obligations is less of a concern.
  3. Inflation rate: This is the other piece of the Fed’s dual mandate, and currently the focus of most conversations in the industry. The price of goods and services is rising fast, with this summer seeing the inflation rate hit levels not reached in four decades. That said, it’s still a far cry from 1980, when inflation spiked to a staggering 14%.
  4. University of Michigan Consumer Sentiment Index: This measures how optimistic U.S. consumers are about the economy and their finances. The index stood at 58.6 in September 2002. It has trended lower since 2020, but stayed around 58 for August and September of this year, which may provide some context for the Fed’s desire to continue hiking interest rates. A decline in consumer sentiment could be the indicator that allows the Fed to hold or reverse current policy. Regardless, it’s good for the mortgage industry to know that the average consumer is still relatively optimistic.
  5. Comparison of 30-year mortgage to 10-year Treasury rates: The 30-year fixed-rate mortgage average in the U.S. is closely related to movement in the 10-year Treasury rate. Meanwhile, non-agency loans typically follow the 2-year Treasury rate and spread to AAA bonds.
  6. S&P/Case-Shiller U.S. National Home Price Index: This showed a slight decline in July but has been steadily rising since late 2012. Ultimately, the information is evident firsthand to most originators, such as when borrowers lose out on potential homes because of the competition posed by multiple bids. If appraisal values experience a pronounced downturn, it could indicate serious issues and lead to another crisis similar to 2007-08.

Mortgage executives should focus on these indicators — as well as keep a close eye on their originating markets — to ensure they understand key market factors and can adjust business strategies accordingly.

Ravi Correa is Chief Financial Officer at Angel Oak Lending and responsible for all financial aspects for Angel Oak-related mortgage lending entities.

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