According to the Mortgage Bankers Association (MBA), experts predict that mortgage rates will rise in 2021 despite the Federal Reserve’s efforts to keep rates low. The MBA also asserts that the 2020 mortgage market will exceed $3 trillion – an amount not seen since the boom in 2003. However, 2021 is expected to see a drop in mortgage production between $700 and $800 billion. This anticipated drop could result in mortgage rates increasing in 2021.
These predictions run counter to the expectation that the market should stabilize or continue growing in light of the Federal Reserve, announcing that it plans to keep interest rates low through 2021. However, the MBA states that despite the low-interest rates, the number of mortgages will decline due to other market forces and commercial mortgages will see rates rise. The MBA summarizes its position in the following five arguments.
1. The Fed Will Slow Purchase of Mortgage-Backed Securities (MBS)
The Federal Reserve is the largest purchaser of mortgage-backed securities. It has purchased hundreds of billions worth in 2020 to support the economy. However, as COVID recedes and vaccines are released, there is a question about how the Fed will respond. The Fed has not stated whether it will continue to purchase large numbers of MBS’ in 2021.
2. Debt-Caused Inflation
Inflation is the depreciation of the value of money. As inflation increases, so do interest rates as loaned money loses value if the interest rate doesn’t exceed inflation. Inflation is caused by the excessive national debt. The national debt is about 100% of gross domestic product, the highest since WW2, and is expected to hit 107% by the end of 2021 – the highest in US history.
3. Higher Capital Requirements
The Federal Housing Finance Agency (FHFA) announced new regulations regarding higher capital requirements for Freddie Mac and Fannie Mae (the GSEs) as part of the plan to privatize these government-owned corporations. It is asserted that higher capital requirements will increase interest rates.
4. Market Fees
The GSEs are also tacking on a market fee which took effect December 1, 2020. The market fee will likely add 0.125% to each mortgage.
5. Released from Conservatorship
The Trump Administration is working very quickly to privatize Fannie Mae and Freddie Mac. Experts are warning that the fast-paced withdrawal (without congressional input) could be interpreted as the government ending its guarantee of MBS’s.