First-time homebuyers have long faced a trifecta of high mortgage rates, low housing inventory and climbing home prices throughout much of the country, making homeownership a difficult journey.
Despite these challenges, first-time homebuyers still made up the largest share (55%) of all agency mortgage purchase securities issuance in a decade and a record 47% of all government-sponsored enterprise (GSE) purchase loans in 2023, according to the ICE March Mortgage Monitor report.
Soaring mortgage rates pushed mortgage originations down to 4.3 million in 2023—a 30-year low, ICE reported. However, ICE eMBS data shows first-time homebuyers also accounted for 44% of all agency loan securities issuance (purchase and refinance) last year. That’s the highest share in the 10 years that ICE has tracked the metric.
Let’s break these industry terms down. Mortgage-backed securities (MBSs) are like bundled mortgages that are sold in groups to investors who share the risks and rewards. Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that purchase and back most mortgages in the United States.
“Agency” figures refer to GSE-backed mortgages as well as loans guaranteed by the Government National Mortgage Association (GNMA). GNMA, also called Ginnie Mae, is a government agency that guarantees security on certain mortgages.
It’s worth noting that the GNMA first-time homebuyer share of purchase loan issuance has retreated in recent years as this group leans more decidedly on Fannie Mae and Freddie Mac homebuyer programs to compete in the tight housing market.
“Since 1995, only two quarters have seen fewer than 1 million first lien mortgages originated,” Andy Walden, ICE vice president of enterprise research strategy, said in a news release. “The first was Q1 2023, and Q4 the second.”
He continued, “Looking back, last year’s market was dominated by purchase lending, with loans to buy homes making up 82% of a historically low number of originations. While it remains a tough market for prospective purchasers, our eMBS agency securities database revealed that first-time homebuyers actually made up 55% of all agency purchase mortgages last year.”
First-time homebuyers present more risk to MBS investors
With so many loans held by first-time homebuyers in today’s purchase-dominant mortgage market, there’s a heightened risk to MBS investors. That’s because the average first-time buyer typically has a lower credit score (-9 points) and higher average front-end debt-to-income (DTI) ratio (which includes housing debt only) than the average repeat buyer, ICE found.
Their back-end DTI ratios, which factor in housing and all other monthly revolving debt, is similar to that of repeat buyers, because first-time buyers spend more on housing but less on other forms of debt, ICE data revealed.
The risk is most pronounced among GSE securities, where first-time homebuyer purchase loans accounted for 39% of all 2023 issuance. That’s a 12-percentage-point higher share than any of the last 10 vintages, ICE data found.
“The market in which these folks purchased their first home was one of record house prices, ballooning down payments, rising rates and elevated DTIs. Given record exposure to first-time homebuyer loans, it’ll be worth watching the performance of this cohort very closely moving forward, particularly for those invested in 2023 agency MBS,” Walden said.
Late 2024 could see a mini refi rebound as mortgage rates stabilize
Everyone in the housing industry is closely watching mortgage rate forecasts this year.
Mortgage rates are expected to move closer to 6% in 2024, which means millions of homeowners who took out a mortgage in 2023 (when rates were closer to 8%) could benefit from a refi if these rate projections hold true.
Although purchase lending will continue to dominate loan originations this year, January saw a 19% month-over-month jump in refi activity spurred by lower rates. This signals the potential for a refinance rebound in 2024 if mortgage rates head lower, ICE said.
ICE mortgage rate data showed that January 2024 30-year fixed mortgage rates averaged 6.6%, driving a 78% jump in rate-and-term refinance loans. Rate-and-term refis accounted for 24% of all refi activity in January—a whopping 80% jump month over month from December, and the highest share in almost two years.
“Demand is clearly there when rates cross certain thresholds and, if current rate forecasts hold true, we expect that demand to increase throughout the year,” Walden said.
