Called the Payment Supplement, the option allows mortgage servicers to decrease a borrower’s mortgage payment by using funds from a “partial claim” — an interest-free second lien from the U.S. Department of Housing and Urban Development (HUD) to help homeowners catch up on their past due payments and get back to good standing. The partial claim, which would be for up to 30% of the outstanding balance of a borrower’s FHA loan, would be paid back when the homeowner sells the home, refinances or otherwise terminates the mortgage.

Funds from the partial claim would first be used to pay any overdue payments on the original mortgage. Any remaining funds in the partial claim would then be deposited in an FHA custodial account managed by the mortgage servicer, who would use those funds to temporarily supplement the monthly payments the borrower would make.

The goal, according to the FHA, is to reduce the borrower’s monthly principal and interest (P&I) payments by 25% for as long as the partial claim payment supplement is active. Per a mortgagee letter from HUD released on Wednesday, payment supplements will be active for a period of three years, after which the borrower resumes responsibility for paying the full monthly P&I amount.

“HUD uses every tool in our toolkit to ensure we can help struggling borrowers avoid foreclosure,” said HUD Secretary Marcia L. Fudge. “Today’s new policy will enable the families we serve to get back on their feet while staying in their homes.”

The rapid rise of interest rates for more than a year provided the impetus for the new program, according to FHA Commissioner Julia Gordon. The program was first discussed and publicized last spring, coming to fruition after a lengthy review process.

“FHA developed this innovative tool because after interest rates rose, the FHA Recovery Modification could no longer reliably provide payment reduction to borrowers facing a hardship,” she said. “Payment Supplement will bring borrowers current and temporarily reduce their monthly payments for up to three years, which we hope will enable them to weather their hardship and once again begin making their full mortgage payments.”

Servicers may begin implementing the Payment Supplement option on May 1, but must implement the solution for all eligible borrowers by Jan. 1, 2025.

The new plan has drawn praise from industry stakeholders, including Scott Olson, executive director of the Community Home Lenders of America (CHLA). The CHLA has long advocated for a similar program, sending a letter to the FHA requesting one in August 2022.

“CHLA applauds FHA Commissioner Gordon for instituting a new payment supplement partial claim,” Olson said. “This will help struggling homeowners who are behind on their mortgage payments to stay in their homes.”

“Prioritizing payment relief and reducing operational complexities were imperative, and we believe the improvements made following multiple rounds of feedback will ensure mortgage servicers have a new effective and efficient way to help struggling borrowers stay in their homes,” said Bob Broeksmit, president and CEO of the Mortgage Bankers Association. “As recommended, a longer implementation period of January 2025 … will further support servicers’ implementation efforts.”

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Thirty-two percent of respondents to the survey, which more than 5,000 consumers participated in between Oct. 31 and Nov. 6, said that they could make buying a home work if interest rates slid under that threshold. Twenty-two percent — just over one-fifth — said they deem buying a home possible if rates dropped below 6%.

Mortgage rates, according to the latest Primary Mortgage Market Survey (PMMS) from Freddie Mac, are currently averaging about 6.77%. They’ve recently risen after Consumer Price Index data revealed that inflation rose more than expected in January, though their general trajectory has shown a downward bent since the Federal Reserve has eased off its rate-hiking policy late last year.

“Small changes in mortgage rates indeed have an outsized impact on monthly mortgage payments. For first-time homebuyers, if mortgage rates drop in the [5% range], that will boost their purchasing power. For a lot of repeat buyers who already own a home, the lower rates go, the less of a jump they will take in their mortgage payments,” said Danielle Hale, chief economist at Realtor.com.

“Mortgage rates are down more than a whole percentage point from their peak,” Hale added. “For the same monthly payment, you can afford to purchase a more expensive home or you have a lower monthly payment at the same home price. Either way, it’s a win for the homebuyer.”

That’s not to say that the current rate environment — or even the recent zenith of interest rates — is a deal breaker for homebuyers. Obviously, the high rate environment has made a significant impact. But 47% of millennials would still buy a home even if mortgage rates exceed 8% again, according to Realtor.com’s survey. So would 37% of Gen Z.

Young buyers are also the most optimistic, according to Realtor.com’s survey, with almost half of Gen Z buyers indicating that they expect to be able to afford a home in the next five years, compared with 32%  of millennials, 36% of Gen Xers and 26% of baby boomers.

“It makes sense that younger buyers are more optimistic,” Hale said. “There are certainly more challenges; they tend to have lower incomes and lower savings. But they’ve also got a lot of life in front of them. With incomes now outpacing inflation, we’re looking at real increases in their purchasing power.”

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According to the latest iteration of First American’s Home Price Index (HPI) report, prices increased 0.3% month over month, hitting a 10^th consecutive peak in January. But Mark Fleming, chief economist at First American, appears confident that while more new highs may be on the way, the rate of gains is cooling.

“The pace of annualized home price appreciation peaked in December, as buyers rushed to take advantage of falling mortgage rates,” he explained. “In January, the preliminary estimate of annualized appreciation cooled modestly by half a percent and is likely to slow down further in the coming months. Despite concern that house prices could decline significantly at the beginning of 2023, rate-locked potential home sellers kept supply tight, maintaining pressure on prices. Optimism that mortgage rates will fall in 2024 may incent more homeowners to sell, boosting supply and, in turn, improving affordability for buyers.”

Annual price growth in January was at a rate of 7.2% — down, as Fleming mentioned, by 0.5% from December’s 7.7% peak.

The deceleration in home price gains is evident in First American’s metropolitan-level data. None of the 30 core-based statistical areas (CBSAs) tracked by First American posted a year-over-year decrease in HPI. Of the markets within those CBSAs, Nassau County saw the largest annual HPI increase at 10.7%, followed by Anaheim, California, at 10.2%; Warren, Michigan at 9.6%; and Miami at 9.4%.

But the vast majority of those CBSAs have already left their price peaks in the rearview, Fleming noted.

“While house prices increased in all 30 markets tracked by our index over the last year, this rising tide hides the change in market prices since their peak,” he said. “Measuring the price change in each market from their post-pandemic peak reveals that house prices are below their prior peaks in 23 of the top 30 markets. Notably, house prices are currently 6% or more below their prior peak in six markets, with the largest price declines from peak in Oakland (-13.5 percent); Austin (-9.9 percent); and Seattle (-9.2 percent).”

Fleming projected hope that, after a few turbulent years, discovery of the housing market’s elusive Goldilocks price point isn’t too far at hand.

“While more supply and improved affordability should cool post-pandemic hot house price appreciation, 2024 may still be the year that house price appreciation doesn’t get too cold, but closer to just right.”

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The Seattle-based national real estate brokerage reported that investors bought 46,419 homes in the fourth quarter, down 10.5% year over year to reach the lowest fourth-quarter level since 2016. Home purchases by investors have ebbed because high capital costs have combined with a lethargic rental market to depress investment returns, with many investors instead putting their money toward lower risk, higher return arenas such as Treasury bonds.

But among homes priced among the bottom third of local sale prices, investors remain active. Real estate investors purchased 26.1% of such homes sold in the fourth quarter, up from 24% in the same period one year prior and the highest percentage on record.

The investing appeal of more affordable homes in an environment with high prices and high interest rates is obvious, but Redfin noted another advantage: the lowest price tier also offers more potential for home value increases and therefore more potential for building equity.

Notably, while investors acquired a larger share of low-priced homes in the fourth quarter, the share of low-priced homes as a percentage of all investor purchases has actually gone down. Homes priced in the bottom third of local sale prices made up 46.5% of all investor buys in Q4 2023, down from 47.2% year over year.

Investors also acquired a larger share of high-priced homes during the fourth quarter than they did one year earlier (15.9% of homes in the top one-third of local sales prices in Q4 2023, compared to 15.4% in Q4 2022). The share of high-priced homes as a percentage of investor purchases was also up, growing to 28.8% in the last three months of 2023, up from 26.5% in the same period of 2022.

Investors bought 13.6% of mid-priced homes sold in the fourth quarter, down from 14.3% one year prior. Mid-priced homes made up 24.6% of all investor buys, down year over year from 26.4%.

Carrie Caruthers, a Redfin agent in California’s Inland Empire, said that investors remain active — in fact, while the 10.5% annual drop in investor home purchases during the fourth quarter was the sixth consecutive decrease, it’s the smallest downshift since investor activity first began falling during Q3 2022.

“I get tons of emails every day from investors looking for properties, but of course, they only want homes that are under market value, which are hard to come by,” Caruthers said. “When they find those properties, they pile in. I’ve recently seen an uptick in foreclosures, which investors are interested in because they often sell at a discount.

“I just sold one foreclosed house to an investor for $400,000. It probably would’ve sold for around $500,000 if it hadn’t been a foreclosure, but the investor got a deal because foreclosure purchases come with risks.”

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According to a statement from the company, Guild would rise from the 10^th largest nonbank retail mortgage lender to the eighth largest upon completion of the acquisition. The purchase would give Guild’s origination volume roughly a 25% boost, based on results from both companies through the third quarter of 2023.

Both Guild and Academy are licensed to originate loans in 49 states, as well as the District of Columbia.

“Guild and Academy share a commitment to the purchase mortgage market and believe in local sales and fulfillment that builds on our customers for life strategy,” said Terry Schmidt, CEO of Guild. “Our aligned core values attract employees dedicated to serving their communities and delivering on the promise of homeownership.”

Per Guild’s statement, Academy has about 200 branches, which will transition to the Guild brand and operate as a division within Guild.  More than 1,000 employees, including over 600 mortgage originators, will transition to Guild, including Academy CEO Adam Kessler, who will join the newly combined company’s senior leadership.

“Joining forces with Guild Mortgage will allow us to accelerate our collective desire to preserve and promote [our] vision as we work together to become the nation’s best independent mortgage lender,” said Kessler. “I’ve known Terry and the Guild team for a long time, and our common mission, vision, and values made it clear joining forces would be a win-win for both companies.”

“This transaction represents two like-minded organizations joining forces to continue to grow stronger together,” Schmidt added. “Each acquisition we’ve completed has brought new talent to Guild, making us a better company. We’re excited to extend a warm welcome to our new Academy teammates and build on their talent with the support of Guild behind them.”

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Optimal Blue attributed the surge in rate locks, which included a seasonal 38% uptick in purchase lock volume, to the ongoing trend of interest rate relief. Mortgage rates fell from 7.22% in the week ending Nov. 30 to 6.63% in the week ending Feb. 1, per Freddie Mac’s interest rate tracker, spurring more would-be homebuyers to leave the sidelines and lock in a rate for a home loan.

“We also saw the smallest year-over-year decline in purchase lock counts since May 2022, which may foreshadow a stabilizing market and friendlier lending environment in 2024,” said Brennan O’Connell, Optimal Blue’s director of data solutions.

Refinance activity saw a monthly bounce as well, with locks for cash-outs and rate-and-term refis increasing 30% and 20%, respectively.

All 20 of the nation’s largest metropolitan statistical areas saw a notable increase in rate-lock volume. Las Vegas saw the most prominent surge, with locks vaulting 90.8%.

The growth in rate-lock activity was concurrent with an increase in average credit scores across all loan purposes and products in January. The average credit score for a purchase loan was 736 in January, up three points month over month. Credit scores for rate-and-term refinances and cash-out refis were 726 and 692, respectively; that’s up 2 points on both counts from credit scores in December.

Average purchase prices increased as well, up from $435,900 in December to $444,900 in January, halting a six-month skid. Consequently, average loan amounts rose as well, up from $349,500 to $355,600 month over month.

Optimal Blue’s data also revealed that conforming loan products gained market share to start the year, growing to 57.3% of total volume, an increase of 72 basis points. Non-conforming products, including jumbo and non-QM loans, also saw higher share, climbing 27 basis points to reach 9.7% of total volume. Government loans saw the needle move the other way, with FHA share falling 87 bps to 20.7% of total volume and VA share falling 13 bps to 11.7%.

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Gen Z borrowers accounted for 13.2% of all mortgage originations in third quarter of 2023, up from 9.6% in the same period the year prior, according to the Transunion’s Credit Industry Insights report released on Thursday. While millennials remain the largest cohort obtaining mortgages, Gen Zers are aging into traditional homebuying ages. All the generations except for Gen Zers saw their share of the market decline in the quarterly report.

Overall originations, however, continued a decline from the heady days of the COVID-19 pandemic. Transunion reports that only 1.2 million mortgages, both purchases and refinances, were originated in Q3 2023. That’s a 22% decline from the 1.5 million mortgages originated in the same quarter 2022.

“Persistently high mortgage rates remain a significant headwind in the mortgage market, particularly affecting demand for refinance,” said Satyan Merchant, a Transunion senior vice president, in a press release. “Purchase originations will continue to drive the mortgage market over the next several quarters, as demand for refinance will depend on mortgage rates falling significantly below current high levels.”

The good news is Q3 2023 saw the smallest year-over-year decline in the past seven quarters, indicating the mortgage origination market may be near its bottom. And Q3 2023 numbers nearly mirrored the second quarter of 2023 numbers, both just about 1.2 million originations.

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The credit will be extended to families who qualify for the company’s Home Possible and HFA Advantage products. The program is scheduled to begin March 1.

“This new effort continues the progress we made in 2023 and is particularly important in today’s housing market, where elevated rates and low supply have created affordability challenges for many families,” said Sonu Mittal, head of Freddie Mac’s single-family acquisitions division, in a statement. “We look forward to announcing additional ways to support low-income borrowers in the months ahead.”

Fannie Mae announced last month a similar $2,500 loan-level price adjustment for very low-income borrowers who are purchasing a home. Fannie’s credit can also be used for downpayment and closing costs.

Freddie Mac financed about 800,000 home purchases last year. First-time homebuyers represented approximately 51% of those purchases, the highest number since the company started tracking that statistic three decades ago.

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A homebuyer with a monthly budget of $3,000 has gained nearly $40,000 in purchasing power since rates hit their recent Zenith, the Seattle-based real estate brokerage reported. In October, when 30-year mortgage interest rates averaged 7.8%, a $3,000 monthly budget would have bought a $416,000 property. With the current rate hovering around 6.7%, the same budget will buy a $453,000 home.

Put another way, assuming the current 6.7% rate, the monthly mortgage payment on a typical home, valued at approximately $363,000, is $2,545. With an interest rate of 7.8%, the monthly payment swells to $2,713. That’s nearly $200 of relief in just three months.

Even with mortgage rates around three points higher than the lows they slid to during the height of the pandemic housing boom, homebuyers are definitely noting the rate cut and coming to terms with the new norm.

“Bidding wars are picking up as mortgage rates decline and inventory stays low,” said Shoshana Godwin, a Redfin agent in Seattle. “I’ve seen a few homes get 15-plus offers recently, and one got more than 30.”

“Late last year, many listings sat on the market as buyers sat on the sidelines, hoping for rates to drop,” she continued. “Now, buyers are snapping up homes because even though rates haven’t plummeted, people are realizing that the longer they wait to buy a home, the more competition they’re likely to face.”

“Trying to time the market around mortgage rates is probably a waste of energy, as affordability is unlikely to change meaningfully in the next several months,” echoed Daryl Fairweather, chief economist at Redfin. “Instead, buyers should consider their own personal and financial circumstances: What matters most is whether the home meets your needs long term and whether you can afford it. Timing the market mattered in 2021, when we were in a golden window of record-low rates — but that window is closed.”

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AVMs are software-based pricing models that often use public records to estimate the value of a home or other real estate. Commonly known AVMs used by consumers are Zillow’s Zestimate and Redfin’s Estimate, but there are many more of these sophisticated AVMs on the market.

“The difference in predicted home values that consumers see and the accurate values that often take them by surprise could be due to a disconnect between marketing and underwriting goals.”

Today, it’s an accepted norm to show homebuyers or sellers an automated home value that is accurate enough to get their attention. But these values often fail in the level of accuracy needed to be usable for a consumer’s financial transaction. This results in a rude awakening for a seller who expects to list their home at the value they’ve grown accustomed to — or a homeowner who is dreaming about the project they can finance with their current level of equity, only to be approved for a lower loan amount.

Misleading information

The difference in predicted home values that consumers see and the accurate values that often take them by surprise could be due to a disconnect between marketing and underwriting goals. There are many business reasons why marketing and underwriting operate in silos. Highly accurate AVMs built for underwriting purposes cost more to produce than a marketing-first approach.

Marketing-based AVMs are often displayed for free to consumers in order to generate leads. Some companies may even go as far as showing a less accurate value as clickbait, hoping the homeowner will become a lead just to fix what they know to be true about their home.

It’s time to rethink this current norm, especially in today’s market where affordability is a challenge for so many. AVM providers have a larger opportunity to reduce friction in housing finance and provide viable alternatives to labor-intensive processes.

“AVMs that harness large amounts of data can perform more calculations than a human in a matter of seconds, and they provide an objective approach to value.”

Known low-quality values ultimately erode consumer confidence, particularly if no context of value accuracy is provided. To make confident decisions involving real estate, both accuracy and transparency are needed to understand a property’s value. AVM solutions need to provide a precise indication of confidence that allows someone to act upon the value with an expected outcome. It matters not only to real estate professionals but to consumers, financial institutions and investors.

Transparent approach

When consumers are shopping for homes or checking the value of their own home on their favorite site, an expectation has been created that an answer will always be available. This helps to create loyalty and confidence for return visits.

Imagine if you typed questions into Google and the searches frequently turned up zero results. Chances are, you would look for a different search option. It’s better to see something — even if it’s irrelevant to your original search — than to see nothing. The human brain wants to see results.

The problem comes when these results are not accompanied by some context of how accurate the model’s prediction actually is. AVMs are typically designed to predict a fair market sales price or an appraised value for a given property. Predicting the outcome before a sale or appraisal has happened can be a powerful tool for gauging the timing of getting a loan, listing a home or making a purchase. Knowing with certainty that a value is accurate, and that there’s a high likelihood it will be within a margin of error for a future sale or appraisal, is what actually empowers consumers to act upon the data.

Telling a friend you are 50% sure you will arrive at their house on time for dinner, versus being 98% sure, will probably change their expectations and actions. A homeowner equipped with the knowledge about the accuracy of an AVM can make informed decisions about their finances. They can better choose the timing to take advantage of their home equity, which might enable them to renovate their home, consolidate debt or send a child to college. Potential buyers with this context can ensure they are financially prepared to purchase a home. This reduces friction in the process and ultimately leads to fewer failed transactions.

With a transparent approach to communicating confidence, there will be an increased need for highly accurate AVMs to be used directly by consumers, instead of today’s two-tiered approach. Valuation accuracy can be the difference between a frustrated, discouraged homebuyer and a well-informed one. The combination of cloud-computing power, more available property data and modern technologies such as machine learning make it possible for AVM providers to increase accuracy while providing confidence in the value prediction.

Increased usage

AVMs are being increasingly used in home equity lending. With increased accuracy, instant results and lower costs compared to an appraisal, AVMs are especially suited for underwriting these loans.

When lenders market to consumers using a highly accurate AVM, they present consumers with realistic expectations. When an AVM is sufficient to satisfy underwriting requirements — typically on smaller loan sizes — it creates a more streamlined lending process and leads to better borrower outcomes.

For conforming mortgages, AVMs are not currently accepted as a replacement for an appraisal, but they can be used by underwriters in tandem with an appraisal to verify a home’s value and flag for overvaluation or undervaluation. AVMs that harness large amounts of data can perform more calculations than a human in a matter of seconds, and they provide an objective approach to value.

Historically, AVMs have been blind to a property’s current condition, which is why pairing them with a physical inspection has been key for using AVMs in lending decisions. Recent advances by innovative AVM providers and AI photo technologies have evolved the approach to include property condition as an input to the model, which produces a more accurate result. As AVMs become more accurate over time, underwriters will be able to rely on them further, and they will be used to determine whether an appraisal is required for the level of risk tied to a specific loan.

Accurate picture

Accurate AVMs can also change the way mortgage servicers interact with borrowers. AVMs help to determine when a homeowner can remove their mortgage insurance, assuring that borrowers aren’t paying for it longer than necessary. Removing the insurance requirement can help a borrower reduce their monthly payment and better understand their current equity position.

The low cost of AVMs also means that the values of properties in a servicing portfolio can be updated more frequently. This provides better tools that enable servicers to deliver the right options to current borrowers and inform them of additional opportunities to make use of their equity.

Close to 90% of mortgage holders have interest rates lower than 6%. This has created a lock-in effect where homeowners are prone to focus on improving their current property using available equity rather than moving to a different home. Servicers that use accurate AVMs can play a big part in empowering homeowners to understand all of their options and make good decisions.

●●●

It’s understandable that some would see benefits to providing consumers with mediocre information all of the time, rather than great information some of the time. The recent evolution in AVM innovation means that there is no longer a need to compromise.

Machine learning, data availability and low-cost, massive computing power provide the ability to move past today’s two-tier system and focus on giving consumers direct access to underwriter-quality AVM values. This is an exciting development for homeowners and prospective buyers alike. Whether you’re a lender, originator, underwriter, servicer, investor or consumer, it’s OK to raise the expectation of accuracy rather than deal with the norm of missed expectations. And that is good news for everyone. ●

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