Government Lending in Focus - 10.4.23

by Ryan Schoen , Sr. Insight Analyst

Quick Hit Summary

30-year fixed mortgage rates continue to drift higher, hitting a new 23-year high of 7.74% on the back of a stronger-than-expected Job Openings data release. We should brace for continued volatility in the market as traders now position themselves for the timelier and more impactful upcoming Jobs Report released this Friday to see where rates are headed next. The rise in mortgage rates is creating increased popularity among media outlets to comment on the topic of assumable (government) mortgages as a potential solution for lenders and homebuyers searching for answers. As outlined below, while there are many hurdles to overcome for assumable mortgages a strategy discussion is certainly warranted by industry participants. Outside of assuming government mortgages, government lending to facilitate the financing of a home purchase remains a bright spot for the industry.

Key Points and Stats

1. 30-year fixed mortgage rates continue to drift higher, hitting a new 23-year high of 7.74%.
2. Job Openings jumped to 9.61 million openings in August from the previous level of 8.92 million.
3. As of Q2 2023, there were 11.07 million active government-backed loans (23% of all loans) with a total outstanding balance of $2.2 trillion.
4. The non-assumable share has risen to $132.8 thousand or 40% of the average government-backed home value in the U.S.
5. Both FHA and VA have trended higher as a share of total agency dollar volume with FHA the only product up on an annual basis and growing to account for a 23% share of the agency market.
6. Third-party originators have grown to 29.3% of the FHA purchase market through August 2023, up from 23.7% just six short months ago.
7. FHA hotspots which historically have been concentrated in Southern markets, have become an increasingly popular option in the more expensive Western markets as well, as homebuyers adjust to seeking low downpayment options to counteract declining affordability.

30-year fixed mortgage rates continue to drift higher, hitting a new 23-year high of 7.74% according to today’s latest update from Mortgage News Daily (highest since November 2000). The move higher comes on the back of a stronger-than-expected Job Openings data release which jumped to 9.61 million openings in August from the previous level of 8.92 million. Since the Fed continues to reiterate its “data dependent” stance any news indicating a stronger economy implies higher rates and is being taken as such by traders. We should brace for continued volatility in the market as traders now position themselves for the timelier and more impactful upcoming Jobs Report released this Friday to see where rates are headed next.

Assumable Mortgages

The rise in mortgage rates and limited existing homes coming on the market has caused the industry to search for answers. One of the topics that continues to increase in media popularity is mortgage assumptions. Recently a new startup Roam, appeared on CNBC pitching their sole focus on assumable mortgages highlighting the substantial savings that a homebuyer could achieve by assuming the home seller's current government-backed mortgage at their lower rate.

Despite declining during the pandemic as many homeowners with a government mortgage refinanced into Fannie/Freddie loans to take advantage of the lower rate environment and increased equity positions allowing for the removal of lifetime mortgage insurance on most FHA loans, there are still a massive number of homeowners with government-backed loans that could take advantage of the opportunity. As of Q2 2023, there were 11.07 million active government-backed loans (23% of all loans) with a total outstanding balance of $2.2 trillion.

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The barriers holding back mortgage assumptions from taking off is that many homeowners don’t realize that this is a possible benefit to note when listing their home for sale, many homeowners (7.4 million) with an attractive rate below 4% are first-time homebuyers that have recently purchased and likely aren’t ready to sell their home, and the biggest hurdle of all is that the homebuyer would need to produce the non-assumable share (home value minus mortgage debt) to make the home seller whole.

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With home prices rising the barrier to producing the non-assumable share has risen to $132.8 thousand or 40% of the average government-backed home value in the U.S. With saving enough for a downpayment of 5-20% already being difficult for many would-be homebuyers to achieve, this non-assumable share seems like a big stretch for household finances to attain outside of repeat buyers selling their existing home and essentially swapping their current low mortgage rate for the home sellers. One possible solution is to finance the non-assumable share that would come with a higher interest rate to compute a blended rate that hopefully achieves a lower payment than the market going rate.

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Although the hurdles are high for assumable mortgages to work now is likely the most attractive market environment for them. Solving the barriers outlined above could be a great servicing retention and secondary transaction play (for the home seller looking to buy as well) that lenders should consider in their arsenal of product offerings.

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Current State of Government Lending

When it comes to government lending the opportunity doesn’t just exist for assumable mortgages. Since the start of 2022 government lending in the purchase space has continued to be a bright spot for the mortgage industry on a performance basis relative to the GSEs. Both FHA and VA have trended higher as a share of total agency dollar volume with FHA the only product up on an annual basis and growing to account for a 23% share of the market.

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When it comes to the FHA (the largest slice of government/Ginnie Mae loans) volumes are not only up in FHA hotspots which historically have been concentrated in Southern markets, but also now have become an increasingly popular option in the more expensive Western markets as well, as homebuyers adjust to seeking low downpayment options to counteract declining affordability.

This newer development has been a source of market share growth for third-party originators (TPOs) as they have grown to 29.3% of the market.

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The biggest TPO winner to take advantage of the shifting market landscape in favor of FHA loans to purchase a home has been United Wholesale Mortgage (UWM). They have expanded their market share in the two biggest FHA markets of California (19.2% in August 2022 to 27.0% in August 2023) and Florida (13.7% in August 2022 to 21.4% in August 2023) while only seeing their market share decline in nine states.

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For more details on FHA Purchase market share see the table below highlighting some stats for August 2023:

Locating and Sizing The Current Government Opportunity

Now that we’ve looked at the past (active loans) and the present (recent originations) it’s time to move on to discussing the future (active listings) to gain some insight into the best areas across the country to focus efforts and capture government market share. While the mix of government lending has assuredly shifted since 2022, we will be using 2022 Home Mortgage Disclosure Act (HMDA) data as a proxy to estimate the share of mortgages that government lending is likely to account for in combination with active listings for the 4-week period ending September 17th from Redfin.

Through the combination of government mix, active listings, and median sale price we can arrive at a dollarized potential market size for Government, FHA, and VA loans. Based on the analysis of these data points Houston, TX jumps to the top of the government lending overall and FHA list, while neighboring San Antonio, TX takes the top spot for VA. Outside of those two locations, other billion-dollar markets include Dallas, Phoenix, Tampa, Riverside, and D.C. which despite having fewer active listings than NY and Chicago, make up for the difference in government lending concentration while LA cracks the list thanks to its outsized median sale price.