Home purchase transactions are increasing, but refis still dominate
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Ellie Mae (ELLI) puts out a monthly Origination Insight Report which provides monthly data and analysis from a sample of closed loan applications that flow through their Encompass 360 Mortgage Management Software. In many ways, it is similar to the way Automatic Data Processing (ADP) reports employment data: by mining the data they receive from their clients who use their solutions. The Origination Insight report is based off of a relatively robust sample – 44% of all applications that were initiated on their system. Ellie Mae reports on the characteristics of loans that were approved or denied, along with things like credit scores, loan-to-value (LTV) data, and debt-to-income (DTI) ratios. Ellie Mae estimates that their software is used on 20% of all U.S. mortgage originations.
Purchase transactions are gaining share
Refinance transactions have dominated total activity since the bubble burst. As interest rates have fallen, it has made sense for anyone with positive equity in their home to refinance. On the other hand, purchase activity has been somewhat depressed: many home owners would like to sell, but are unable due to negative equity. First time home buyers have been hit hard by the difficult job market and tight credit conditions. Student loan debt is hurting them as well. Finally, distressed sales are almost invariably cash transactions, so they don’t require a mortgage.
Purchase transactions were 42% of all transactions in April, up from 38% the month before and 27% in January. As rates have increased since the beginning of May, we should expect purchase transactions to continue to gain share. Increasing purchase activity is a sign of a healthy market, however, limited supply continues to be the theme.
Implications for mortgage REITs
The most immediate impact will be felt on REITs with origination businesses, like Nationstar (NSM), PennyMac,(PMT) and Redwood Trust (RWT). Even though purchase activity will continue to gain share, refinance activity in the future will be driven more by home price appreciation than interest rates. The Mortgage Bankers Association forecasts absolute levels of refinance activity will fall by 30% as rates are expected to continue rising. Purchase activity is not anticipated to rise by an offsetting amount, which means that mortgage activity is expected to fall in 2013 and 2014. We have already seen numerous mortgage originators lay off staff as origination activity has started to dry up. In a purchase-driven environment, originators need branch offices with loan officers working with realtors. The internet-based “refi shops” are going to have a tough go of it.