Sales of existing homes jumped 14.7 percent in December compared to November, according to the National Association of Realtors, but not because the housing market is suddenly outperforming all expectations. The jump in December had all to do with the nearly 11 percent monthly drop in home sales in November, and that drop in November had all to do with something in the mortgage market called "TRID."
TRID is an acronym for TILA-RESPA Integrated Disclosure. It's a new set of rules from federal regulators, deemed "Know Before You Owe," designed to protect borrowers from hidden fees and costs in a home loan. It requires lenders to present borrowers with a simple disclosure form listing all facets of the loan three business days prior to closing. This is so borrowers can ask educated questions if they need to.
"(Friday's) data just confirms that the November drop was due to delays in closings that were pushed to December," said Lawrence Yun, chief economist for the NAR.
TRID went into effect in October, and first began to delay closings in November. Even though lenders had over a year to prepare, shifting their computer systems and adapting to the new protocol did cause problems. These delays, in addition to November having the Thanksgiving holiday, pushed a fair amount of closings to December.
"November was the first month of getting a sense of some impact. We saw a softer November in terms of closings and saw much of that activity push into December. December is going to look a little stronger relative to seasonality," said Jonathan Corr, president and CEO of Ellie Mae, a mortgage software company, which saw an average delay of three days due to the new rules.
Closings are in December took a week longer than in December 2014, according to Ellie Mae, but that may be due to factors outside of TRID. Lenders began downsizing as mortgage rates rose, expecting fewer refinance applications, but rates stayed low longer than expected, after the Federal Reserve delayed increasing its lending rate until December. That prompted more refinances.
"Things were creeping out throughout the year, and as that refi picked up, and there was more demand, they tried to accomplish it with the same labor force," Corr said.
Some lenders were clearly more prepared than others. United Wholesale Mortgage claims it actually reduced closing times by a day in December, thanks to a full year of educating its brokers.
"Closing time metrics are showing minor effects of TRID," said Tom Popik, research director of Campbell Surveys for Inside Mortgage Finance.
The share of sales with mortgage financing that didn't close on time increased, but only by a couple of percentage points, according to Popik. Seventy-two percent of Fannie Mae and Freddie Mac purchase mortgages with a down payment of at least 20 percent closed on time in November, based on a three-month moving average, down from a 73.6 percent share the previous month.
Basic math may be the best way to understand the one-time phenomenon:
"Someone might see the average closing time go from 46 to 49 days and assume that's not significant, but when you look at the amount of homes that close in a three-day time span on average (not to mention some additional unmeasured delays occurring before the loan application is taken), we can almost fully account for the massive drop in existing home sales in November," said Matthew Graham of Mortgage News Daily.
Bottom line, now that the initial TRID bumps are behind us, delays may continue but not so significantly. A bigger problem facing the housing market today is sheer lack of supply of homes for sale. That situation does not appear to be improving, and as we head toward the historically busy spring market, it throws another wrench into an already uneven housing recovery.