Capacity constraints also play arnrole.  Although purchase originationsrnhave been subdued, refinancing originations have more than doubled from mid-2011rnto the end of 2012 and the ratio of refinance applications to the number ofrnreal estate credit employees has been at levels near those seen during thernrecord 2003 refinancing boom. At the same time, each loan takes longer tornprocess and lenders for various reasons are unable or unwilling to expand capacity.rn</p

Lenders often manage capacityrnconstraints by holding mortgage rates high relative to funding costs. Also,rnwhen MBS yields drop sharply the rate may take time to adjust as a result ofrnboth capacity issues and the need to process loans with rate locks in place. </p

Furthermore, when refinancing demandrnis high, lenders have less incentive to pursue harder-to-complete or lessrnprofitable loan applications.  Repeat refinancernapplications by high-credit-quality borrowers are likely the easiest torncomplete as are refinances under the revised Home Affordable Refinance Programrnwhich require substantially less documentation. rnIt is possible that these applications may have had the unintendedrneffect of crowding out borrowers with lower credit scores.  </p

This may be more than pure coincidence,” according to Matthew Graham, Rates Strategist at Mortgage News Daily.  “Lenders aren’t stupid,” Graham says.  “Throughout this era of all-time low rates, the group of borrowers with the best qualifications–including equity–have had little trouble qualifying for refinances.  From a lender’s standpoint, it only makes sense to fill capacity with the best-qualified borrowers who are least likely to remain interested if rates rise.  Now that rates are rising, it will be interesting to see if lenders start ramping up program availability to lower credit-quality, less rate-sensitive borrowers in order to fill capacity, or if lenders were legitimately backing away from higher risk files.”</p

As Graham alludes, Lenders may also be responding to otherrnmarket forces such as the risk that they will be required to repurchaserndefaulted loans from the government-sponsored enterprises (GSEs). Mortgagernservicing standards are more stringent than in the past due to settlementrnactions and consent orders which increase the cost of servicing nonperformingrnloans.  Combine that with uncertainty about the ultimate regulatoryrnenvironment, and lender caution is that much more of a possibility.  It will be up tornpolicymakers to find the right balance between consumer safety and financialrnstability, on the one hand, and availability and cost of credit, on the other. </p

The new Qualified Mortgage (QM) rulernissued by the Consumer Financial Protection Bureau (CFPB) in January and thernQualified Residential Mortgage (QRM) Rule being fashioned by other regulators alongrnwith other prudential rules will further shape the economics of mortgagernlending.   Duke said that loans outsidernthe QM box may become more costly for lenders and borrowers for at least threernreasons.  First, the possible increase inrnforeclosure losses and litigation costs, although expected to be small, willrnbecome known only after the initial round of ability-to-repay suits are settledrnby the courts.  Second, mortgages that dornnot meet the QM definition by definition will not meet the future QRM standard,rnand so lenders will be required to retain some of the risk if these loans arernsecuritized which may increase costs and limit the size of the market. Third, investorsrnmay be wary of investing in non-QM collateralized securities because it isrndifficult to gauge the risks.  Investors mayrnrespond to this information asymmetry by requiring a higher risk premium or byrnrefusing to purchase these securities altogether. For all of these reasons, thernnon-QM market could become small and illiquid, which would further increase therncost of these loans. </p

Duke said she is optimistic that thernhousing recovery will continue to take root and expand, helped in part by lowrnmortgage rates, but it will be the pent-up demand of household formationrnunleashed by improving economic conditions that will provide real momentum.  Whether those new households will find creditrnavailable will determine the mix of owner-occupied and rental housing and consequentlyrnthe level of mortgage originations might be quite different.

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