So the Fed Raised Rates, Now What?

The Federal Reserve made a bold move yesterday, which most of the mortgage industry predicted would happen before 2015 comes to a close. The federal funds target rate was raised by a quarter of a percentage point from its near-zero level where it has been since 2006.

“This action marks the end of an extraordinary seven-year period during which the federal funds rate was held near zero to support the recovery of the economy from the worst financial crisis and recession since the Great Depression. It also recognizes the considerable progress that has been made toward restoring jobs, raising incomes, and easing the economic hardship of millions of Americans. And it reflects the Committee’s confidence that the economy will continue to strengthen. The economic recovery has clearly come a long way, although it is not yet complete,” said Fed Chair Janet Yellen.

So now that the rates are higher, mortgage industry professionals are now wondering how this change will be impact their business moving forward into the new year. Several executives sat down with MReport to give their thoughts on if the housing market will thrive, stall, or completely shatter in the near future.

“I applaud the Federal Reserve for making the long overdue decision to raise the federal funds rate,” said Ed Delgado, Five Star Institute President and CEO. “The housing market and the overall economy have continued to show signs of improvement throughout 2015. As the year comes to a close, this decision represents a strong statement of faith that the long-term fundamentals of the market point to a period of growth and sustainability. The cause of homeownership is well served by the Fed’s move today.”

Financial Services Committee Chairman Jeb Hensarling (R-Texas) released the following statement regarding the Fed’s decision to raise rates.

“The real question isn’t whether the Fed should be raising interest rates or lowering interest rates; it’s whether the Fed is giving our economy sustainable interest rates. Getting back to sustainable, market-based interest rates is better for consumers, investors and our economy overall. Unsustainably low interest rates clearly didn’t solve the problem or else Americans today wouldn’t be stuck in the slowest, worst-performing economic recovery of our lifetimes,” Hensarling stated.

He added, “Our economy would be healthier if the Federal Reserve was more predictable in its conduct of monetary policy, more transparent about its decision-making, and more accountable when regulating. The House-passed Fed Oversight Reform and Modernization Act, the FORM Act, accomplishes these goals. The FORM Act will help expand economic opportunity because consumers, job creators and investors will all have more confidence in making financial plans. The more Americans can understand how the Fed will act, the better they can plan for the future.”

Dave Gorman, Regional Sales Executive at Bank of America said the rate hike is a positive move for both the economy and the housing market.

“Rising rates actually reflect a strengthening economy, better job outlook, rising wages, increased consumer confidence—factors that help increase demand for housing,” Gorman explained. “Even with a rate increase, consumers will likely continue to purchase homes for the traditional reasons over the next year. However, higher rates may require them to look adapt their home choices to their budget. Getting past the initial sensitivity to news about a rate hike, home buyers will realize that lenders are experienced resources who can guide them through loan options available to fit their finances and their lifestyle.”

National Association of Federal Credit Unions (NAFCU) Chief Economist Curt Long issued a statement explaining that credit union lending is expected to continue expanding over the next year.

“Today’s announcement that the Fed will commence with liftoff confirms what NAFCU has anticipated for some time now. Looking ahead, the Fed will look to adopt a more gradual pace to rate normalization than it did a decade ago,” Long said. “As far as credit unions are concerned, our forecast is for continued growth in lending in 2016. Households are in a strong position with low unemployment, falling gas prices, low debt service costs and early signs of wage growth.”

“Regardless of the rate environment, credit unions will continue to thrive, and our forecast is for continued growth in lending in 2016,” he added.

Auction.com EVP Rick Sharga predicts that the Fed liftoff will allow housing to fight off the persistent headwinds that have been a detriment to growth.

“One of the biggest headwinds in the housing market today is tight credit,” Sharga said. “There’s virtually no non-agency lending…nothing outside of QM, other than jumbo loans to rich borrowers the banks want to grab as customers for other services. Higher interest rates would actually allow for loans to be priced in a way that accommodated some degree of risk.”

The Collingwood Group Director Tom Booker echoed the sentiment that the short-term rate increase is good news for the housing market

“For many in real estate, raising the cost of borrowing seems ill-timed, but for homebuyers, this may increase interest and activity,” Booker said. “The real calculus is a function of what the markets believe the next move is. Will we see one or two moves this year. Ultimately, if the near term target for interest rates is 2 percent, the path will be bumpy in the housing markets but affordable.”

Becky Walzak, President of Looking Glass Group and rjbWalzak Consulting told MReport that she believes that business within the housing market will begin to operate at a slower pace, while refinancers hesitate to move forward.

“I don’t see this as a long-term impact since rates would still be lower than many original mortgages. Another incentive are those whose initial fixed period–either from an interest-only (“IO”) or an adjustable-rate mortgage “ARM” loan—is expiring and people will want to take advantage of that,” Walzack said. “As for the purchase market, it is normally slow over the holiday season and into the early part of the year so I don’t see that much of an impact.”

“How the U.S. economy responds to [the presidential election and terrorist threat] of will be major drivers of the economy. If we go into isolationist mode, then it is likely that the economy will suffer, so people will become more unsure about the future and will be less likely to invest in real estate. On the other hand, with the strong dollar, real estate may be seen as the only safe place to invest,” she added.

MiT National Land Services President and Chief Counsel Marc Israel feels otherwise in his response to Fed’s decision. He told MReport that the rate increase is not going to have any “marketable effect on the mortgage market.”

“To say that this is the most over discussed, over analyzed, over predicted rate increase in history is an understatement. As such, I think the market has long ago baked in its response to the increase and I do not think you will see any great effect on mortgage applications or on the title industry,” Israel said. “In fact, I think any movement in the mortgage application market will continue to be driven more by TRID than on the long-anticipated Fed rate increase.”

He continued, “I expect that after some learning curve bumps and bruises with TRID, the mortgage and title industries will have steady, continued growth in 2016. And then as we get toward the end of the year all eyes will be on the Presidential election and how that will affect CFPB as many of the Republican candidates have indicated that they will declaw CFPB while it can be expected that a Democrat will continue the CFPB policies of the Obama Administration.”

A.W. Pickel, President and CEO of LeaderOne Financial Corp., also agrees that the effect of the hike will be minimal on the housing industry.

“With this slight increase in mind, I do not foresee any changes to the housing market and the mortgage industry. If the language of the Fed Minutes is strong in addition to a slight hike, this then could cause a sell-off, but again I think this would be short-lived and the market would stabilize fairly quickly to where rates are today,” Pickel noted.

“Depending on the slowly growing economy and the fact that it is an election year, I do not foresee any dramatic moves in Fed rate increases. Remember, the Fed only can change short-term rates. The market will take its cues from the Fed, and then supply and demand will rule the day on future increases,” he added.

LERETA, LLC CEO John Walsh is yet another executive on the list that feels that the rise in interest rates will not completely shake up the mortgage industry right away, but the real concern rests in 2016.

“Our view is that a rate increase this week should have little impact on the mortgage market. An increase has been anticipated for some time and most recently the markets have been assuming that an increase is now imminent. An increase has already been built into mortgage prices so although there may be a short-term additional bump, our view is that mortgage rates should remain relatively flat for the next several months,” Walsh explained to MReport.

“The real question is how fast the Fed will increase rates in 2016 and what the Fed chooses to communicate about 2016 in this week’s announcement,” Walsh said. “Lenders are clearly concerned that rapidly increasing rates could curtail refinance volume, although there is a strong argument that cash-out refinances could become a more important part of origination volume as more of the country sees continued home appreciation. Regardless, almost all lenders believe that the purchase market will be the primary focus. The challenge will be the distribution of a slowly recovering purchase market as almost all lenders focus on the channel.”

Joey McDuffee, Director of Wipro Gallagher Solutions believes that the “impact to homebuying power will be nominal” with the small rise in rates.

“Borrowers may look to purchase a slightly smaller or more affordable home to offset the increased payment. And, typically, mortgage interest rate increases lag the movement of the Fed’s target funds rate. Increased employment and wages, a stronger economy, and consumer confidence played into this uptick. Homebuyers will, however, keep this in the back of their mind as this gradual ‘liftoff’ may be an indication of further incremental increases over the next 1-2 years.”

Another trend that McDuffee pointed out was the return of HELOCs again from mortgage lenders. “Since many HELOCs are tied to a variable rate that can change more frequently, the impact on borrowers leveraging and applying for HELOCs for home improvements and other needs may be impacted sooner since many of these are tired to the prime rate,” he said.

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