The long-anticipated interest rate cut has finally happened.  You might be surprised with the limited reaction by the market to the .50% cut in interest rates.  The market has been anticipating the interest rate cut for months.  The expectation that the Federal Reserve would cut short-term interest rates was one of the factors that lead to the 1.00% drop in the 30-year fixed rate mortgage interest rate over the last few months.  Going forward as the Federal Reserve continues to cut interest rates the interest rate on 30-year fixed rate mortgage may not move substantially.  The mortgage market is finally returning to normal levels.  You need to go back prior to the housing crisis to see what normal mortgage interest rates look like.  The Freddie Mac Research group generated the following graphs.  The first graph shows the historical Primary Mortgage Market interest rate. 

The graph shows that the current mortgage interest rate has returned to the interest rates offered during the first decade of the century prior to the housing market.  You can see from the graph the dip in interest rates that occurred starting in 2008 with the housing crisis.  The housing crisis was a pivotal time for both fiscal and monetary policy.  The housing crisis ushered in a time of zero interest rates from the Federal Reserve and massive deficit spending to stimulate the economy to keep the economy from tipping into a depression.  From the housing crisis until 2022 mortgage interest rates were kept artificially low because the Federal Reserve not only kept short term interest rates at zero.  The Federal Reserve also bought large amounts of long-term Treasuries and Mortgage-Backed Securities.  Since 2022 the Federal Reserve has raised short term interest rates and sharply curtailed their purchase of US Treasuries and Mortgage-Backed Securities. 

The Federal Government is still running very large deficit that will be stimulating the economy and could limit the size of future Federal Reserve interest rate cuts.  The next graph from the Freddie Mac Research group shows the relationship between interest rate mortgages, 10-year treasury yields, and Fed Funds.  You can see that mortgage interest rates and the 10-year treasury yield are very closely correlated.  The Fed Funds rate is not closely correlated to mortgage interest rates.  As you look at these graphs, keep in mind that the GSE have raised guarantee fees by over 40 basis points which will explain .40% of the widening between the spread between the Primary Mortgage Market interest rate and the yield on the 10-year treasury.  The Federal Reserve can have a great influence on short-term interest rates for credit cards, auto loans, and interest rates banks pay on deposits.  Mortgage interest rates will be affected more by the expectation for future inflation.  Federal Reserve policy decisions could have an indirect effect on the mortgage market by signaling their level of concern about future inflation.

This guest post was authored by Ted Tozer, Non-Resident Fellow, Housing Finance Policy Center, Former President and CEO of Ginnie Mae & AISLE Cross-Section Leader.

​The current state of housing in the post-pandemic carries residual overhangs left from the pandemic, combined with high interest rates and strong undercurrents of demographic shifts. A key set of highlights and challenges going forward include: ​​

• Record home equity of $32 trillion dollars for existing homeowners who have been beneficiaries of significant home price appreciation. 
• Historically low mortgage delinquency rates and a robust toolkit of loss mitigation options refined for post-pandemic use.
• Housing stock supply deficits estimated between 1.5 to 5.5 million units. 
• Stubbornness in persistent homeownership gaps for communities of color.
• Delays in homeownership attainment age. As measured by the median age of first-time homebuyers this has moved from 29 in 1981 to 36 and 35 in 2022 and 2023 respectively. 
• A shrinking stock of available low-rent units resulting in a historically high level of moderately and severely cost-burdened households. 
• Increases in unsheltered homelessness. 

What can we do to improve the current state of play for housing and shelter?
Update Government programs to reflect the current state of housing, offering more program and product innovation and use of emerging technology.  Private industry, stakeholders and government agency markets should continue to make strides leveraging source data and emerging technology to drive change in housing access. Regulators should pay close attention to innovation and rules that create a “sandbox” for the rules of the road moving forward.  And public policy will continue to have a role in driving the percentage shifts in homeownership, rental homes and addressing the chronic challenges for those unsheltered across the country.

We know the demand exists for affordable access to credit and housing.  By improving our processes and programs, we can scale into solutions to drive improved ownership metrics. Examples of technological innovation on the supply side may include leveraging new technologies like 3D printing and other prefabrication to produce faster time to market. Continued efforts to evaluate and scale effective localized changes more broadly for ADU and manufactured housing policies for development of smaller homes will also continue to drive affordability for the first time homebuyer (FTHB). 
Much shared effort and partnership were cornerstones to the pandemic response in housing to deliver new options for distressed renters and borrowers alike, a similar renewed focus and partnership should be made towards safe and creative financing solutions on the front-end, such as shared equity down payment assistance and new financing alternatives with consumer safeguards and choice to leverage new programs. Despite a period of surging refinances, overall costs to originate remained stubbornly high, re-evaluation of redundant processes and leveraging source data, utility like consortiums for tech and data, holds the potential to drive and democratize credit.  Driving these types of changes should be key aspirations for all housing market participants to forge a broader and better path forward. 

Today, VA published details on the highly anticipated Veterans Affairs Servicing Purchase (VASP) Program which is now set for launch on May 31. As a reminder, VA previously published an agency information collection activity in November 2023 on this program. In the information collection,  VA stated, “VA is initiating an expanded program using existing Refund provisions. This option will assist Veterans with VA-guaranteed loans who have defaulted on their mortgage loan and are facing foreclosure. Under this program, VA will exercise its statutory option to purchase the loan from the servicer and VA will hold the loan in VA's own loan portfolio. The servicer will prepare a modification of the loan to increase affordability for the Veteran. Servicers who participate in the program are required to document their efforts to assist the Veteran through a waterfall of existing loss mitigation options and provide that documentation to VA. Information collection is necessary to ensure that Veterans and servicers comply with VA program requirements under VASP that are not already covered by existing, approved information collections for loan servicing and loan refunding.” In addition to the Press Release and Chapter 9 published today, VA published a VA Servicer Newsflash with the below information and Appendix F on VASP.​

“Department of Veterans Affairs (VA) Manual 26-4 Servicer Handbook, Chapter 9, has been updated to include new information regarding the VA Servicing Purchase (VASP) program. In addition, Appendix F “Additional VA Contact Information” has been replaced with the new “VA Home Retention Waterfall.”  Changes are outlined on the corresponding transmittal documents dated April 10, 2024, and the policy is effective May 31, 2024. The updated M26-4 and transmittals are available here.

Accepting VASP submissions – Servicers can send VASP submissions to VA beginning May 31, 2024. VA recognizes that servicers may need time to comply, therefore servicers have until October 1, 2024, to implement. Servicers should report any IT solutions that cause extended timeframes in VASP implementation. Servicers should ensure all home retention options, including VASP, are considered prior to foreclosure. All inquiries related to this announcement are to be submitted in ServiceNow. To read VA Servicer Handbook M26-4 Appendix F: VA Home Retention Waterfall, click here. ​

AISLE submitted a letter to the U.S. Department of Veterans Affairs (VA) on the VA Servicing Purchase Program (VASP) and offered suggested recommendations for consideration.  Per the VA Press Release published in November 2023, VASP will allow VA to purchase defaulted VA loans from mortgage servicers, modify the loans, and then place them in the VA-owned portfolio as direct loans. 

AISLE’s recommendations were based on the intent to assist Servicers and Borrowers once the program is published. Specifically, requesting tools for mortgage servicers to successfully implement the program once published.  Having additional tools once the program is published will ensure a smooth implementation for both Borrowers and Servicers. Below, you will find some of the recommendations for consideration that were referenced:  

• Requested the Agency allow mortgage servicers ample time to implement the new program, including recommendations of the following:

•  a 30-day pre-program launch review period; 
• Increase from 90-day implementation period to 120-day implementation period. 

• AISLE encouraged VA to allow mortgage servicers to make the preliminary decision on whether a Veteran qualifies for VASP in order to streamline servicing and program application. 
• AISLE offered data and general feedback on the note rate, which creates a sustainable monthly payment.  

​Members can click here to request a PDF copy of the full letter. 

AISLE closed its Founding Member opportunity on Tuesday, January 9, 2024, weeks ahead of its scheduled run due to overwhelming interest from the industry. The Institute soft-launched on November 30, 2023, and offered a Founding Member opportunity through the first 24 members or January 24, 2024, whichever occurred first. 

"We are exceptionally grateful for the trust placed in AISLE and its mission to shape regulatory policy, first by our Advisory Board members and Cross-Section Leaders. And today, we're thrilled by the response from the industry and those law firms and businesses that have stepped forward as thought leaders intent on shaping the regulatory environment that binds us as collaborators more than competitors," said Co-Founder Cade Holleman, M.A. 

Board Chair Marissa Yaker, Esq. added, "As we wrap up our very exciting launch, I am eager to turn our attention to the work ahead of us: focusing our combined energies on regulatory policy, meaningful and impactful change at the agency, servicing, and legal levels, and working to improve the broader housing industry for all market participants." 

AISLE Founding Members are listed below, in order of commitment. ​

Founding Members will have a role in shaping the AISLE Member Code and have a closed-door Founding Members session annually, as well as other membership perks. Additionally, AISLE's initial offering of annual sponsorships sold-out during the same November 30, 2023 to January 9, 2024 window.

​Top-level 2024 sponsors at LV4 are a360inc, McMichael Taylor Gray, and LOGS Legal Network. LV3 annual sponsors include McCabe, Weisberg & Conway, Ghidotti | Berger, Quintairos, Prieto, Wood & Boyer, McCalla Raymer Leibert Pierce, and Codilis & Associates. Additionally, Steele, LLP and the Council for Inclusion in Financial Services are LV4 digital sponsors for 2024. 
​
While the Founding Member opportunity has closed, general membership in AISLE is still available to interested law firms and businesses intent on shaping the industry's regulatory environment and operating climate. If you are interested in contributing to the Institute's work on these critical, forward-looking policy improvement goals, you can learn more about how your business can become an important member of the AISLE community by clicking here. 

The OCC has published its Mortgage Metrics Report for the Third Quarter of 2023.  The Report presents performance data for the third quarter of 2023 for loans that the reporting banks own or service for others as a fee-based business.  The data in the report reflects a portion of first lien mortgages in the country, excluding junior liens, home equity lines of credit, and home equity conversion mortgages.  For perspective, “the reporting banks serviced approximately 11.8 million first-lien residential mortgage loans with $2.7 trillion in unpaid principal balances.  This $2.7 trillion was 22 percent of all residential mortgage debt outstanding in the United States.”
 
​Daren Blomquist, Vice President, Market Economics, Auction.com, and AISLE Cross-Section Leader for Trends + Technology, also reviewed the data noted the below.   

Marissa Yaker, Deputy General Counsel of Regulatory Affairs, Padgett Law Group and Chairperson of AISLE,  adds her thoughts on the Report's data.

Within the Report, the OCC includes a chart that highlights the Number of Re-Defaults for Loans Modified Six Months Previously Modified Loans 60 or More Days Delinquent Six Months After Modification by State.  It is interesting to review, due to all the loss mitigation in light of the pandemic. Some of the key points from the OCC Report:
 
Summary of Delinquent Loans:

• The number of foreclosures in process decreased from the third quarter of 2022. The number of seriously delinquent loans has trended down since the third quarter of 2021.
• The percent of seriously delinquent loans has trended down since the third quarter of 2021. The percent of 30–59-day delinquent loans has trended up since the first quarter of 2023.
• Servicers initiated 8,965 new foreclosures in the third quarter of 2023, an increase from the prior quarter: however, a decrease from a year earlier.  Home forfeiture actions during the third quarter of 2023—completed foreclosure sales, short sales, and deed-in-lieu of-foreclosure actions—decreased 17.3 percent from a year earlier to 2,244. Events associated with the COVID-19 pandemic, including foreclosure moratoriums that began March 18, 2020, and were extended to July 31, 2021, have significantly affected these metrics.

Summary of Modifications:

• Servicers completed 7,436 modifications during the third quarter of 2023, a 13.8 percent decrease from the previous quarter’s 8,623 modifications.
  • Of these 7,436 modifications, 6,367 or 85.6 percent, were “combination modifications”— modifications that included multiple actions affecting the affordability and sustainability of the loan, such as an interest rate reduction and a term extension. Of the remaining 1,069 loan modifications, 1,045 received a single action and 24 were not assigned a modification type.
  • Among the 6,367 combination modifications completed during the quarter, 5,549, or 87.1 percent, included a term extension; 5,422, or 85.1 percent, included capitalization of delinquent interest and fees; 2,059, or 32.3 percent, included an interest rate reduction or freeze; 1,805, or 28.3 percent, included principal deferral; and 10, or 0.1 percent, included principal reduction.

 
Link to the OCC Report:
Mortage Metrics Report Third Quarter 2023 (occ.gov)