Fed official: The low interest rate era will make a comeback

Good morning! This is Mortgage Nuggets, the newsletter that brings you the best of the mortgage industry so you're always the smartest one at the table.

1. New-home lending increases for third straight month

According to the MBA, mortgage applications for new residential homes rose on an annual basis last month, with the segment currently showing greater promise than the rest of the housing market.

Joel Kan, MBA’s vice president and deputy chief economist, said the string of year-over-year increases is a sign of improving demand for newly built homes, “at a time when the broader housing market is leaning more on new construction to boost for-sale inventory levels.”

The volume of applications increased 4.1% in April from a year earlier, the third consecutive month with a year-over-year increase.

2. Fed official: The low-interest rate era will make a comeback

In an era marked by significant economic disruption, a key feature of the past decade may resurface: low interest rates. New research, presented at a recent Federal Reserve conference, indicates a possible return to the historically low interest rates seen prior to the pandemic.

New York Federal Reserve President, John Williams, suggested that there's no evidence to show an end to the era of very low "natural rates of interest." These rates, also known as r-star, signify a balanced economy that neither stimulates nor slows, featuring stable employment and inflation rates.

Post the 2008 financial crisis, there was broad consensus among economists that r-star had significantly decreased, leading to a sustained period of lower rates. The New York Fed's latest publication suggests r-star remains akin to pre-pandemic levels in the US; therefore, the Federal Reserve may revert to the pre-COVID interest rate levels once inflation returns to target.

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3. More Nuggets

🏠 Built-to-rent housing is on the rise and could help solve America’s home shortage. (Axios)

🏦 Fannie Mae: Recession remains likely as credit conditions tighten. (ESR Group)

4. Mounting repurchase costs prompt call for new policy

The Community Lenders of America (CHLA) has written to the FHFA to consider indemnification as an alternative to expensive loan repurchases, as lenders face significant losses due to increased demands from government-sponsored enterprises, to repurchase loans with defects. Indemnification would allow lenders to cover the loss without needing to repurchase and resell at a discount.

"A policy of automatically offering an indemnification on these performing loans with defects is fairer to the lender, more efficient overall and provides more protection for consumers so they don't lose their loss mitigation rights," Scott Olson, CHLA's executive director said.

With the recent increase in interest rates, losses from reselling defective loans have risen sharply. The average member of the CHLA is losing around 30% of the value of each loan, which would be about $100,000 on a $335,000 loan.

Thanks for reading. See you on Wednesday!

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