With mortgage rates and housing prices both expected to go up this spring, lenders are facing a tough decision on how they will adjust to the decline in refinancing and overall lending volumes.

The key question is whether they should relax their underwriting in order to approve more buyers. Some may also have extra time to work with borrowers on the margins.

Such an adjustment may be overdue, she said. We think relaxation of credit standards is a good thing because credit is way too tight. The Urban Institute estimates that single-family originations will drop to $1.6 trillion this year from $2 trillion in 2016.

Single-family originations were split nearly evenly between refinancings and purchase mortgages last year. The pace of home sales declines when interest rates go up as existing homeowners hold on to their homes longer.

But we are going to see a pickup in home sales, particularly new-home sales.

Economists at the Mortgage Bankers Association expect originations to decline to $1.56 trillion in 2017. And they expect the 30-year mortgage rate to hit 4.7% by the end of the year.

But because of mortgage rules issued by the Consumer Financial Protection Bureau in January 2014, it may be risky for lenders to relax their lending standards significantly. Those rules require lenders to ensure borrowers have the ability to repay a loan and protect them from liability in the case of so-called qualified mortgages.

The qualified mortgage rule has really curtailed the ability of lenders to expand the credit box. As volume drops with higher rates, and as we move to more of a purchase market, I would expect some modest loosening.

Lenders will shift to loans with higher loan-to-value ratios and that there will be an increase in adjustable-rate mortgages.

However, ARMs today are almost exclusively loans with initial fixed terms of five years or longer. Thus, borrowers’ ability to extend their purchasing power by moving to an ARM is relatively limited.

Many lenders remain leery of originating non-QM loans, which can open the door to litigation and repurchases if the loan ends up in default.

mostly family-owned or senior management-owned companies, do not want to put their companies at risk by engaging in non-QM lending. In addition, there is a very limited secondary market outlet for non-QM loans.

If investors started stepping up to buy non-QM loans, that might be different. But the small shops are really leery of exposing their companies to any sort of regulatory risk. They still have memories of loan repurchases coming out the financial crisis.

Bob Davis, senior vice president at the American Bankers Association, said that Fannie Mae, Freddie Mac and the Federal Housing Administration are not changing their loan purchase standards.

Are lenders going to dramatically weaken their underwriting standards to hold on to volume given that they have ability-to-repay risk? It is not obvious to me that that is going to happen. It is a new world out there with the ability-to-repay rule.

However, some banks are originating non-QM loans, according to ABA's annual Real Estate Lending Survey taken in the first quarter of 2016. About 86% of loans originated by banks were QM-compliant, compared with 90% in 2014.

The survey results show that high debt-to-income levels continue to be the most likely reason why a non-QM did not meet QM standards.

new survey results to be released in March to show a small increase in non-QM lending.

Nonbank lenders such as Shellpoint Partners LLC are active in non-QM lending. About 10% of the New York-based lender's originations are jumbo and non-QM loans, according to the company's co-chief executive.

Shellpoint will increase its originations of non-QM mortgages in 2017. Rising interest rates and home prices make it much harder for low- and moderate-income borrowers to break into the housing market.

Such borrowers are finding it difficult to obtain government-sponsored enterprise loans offered by Fannie Mae and Freddie Mac, as well as FHA loans. Lenders are still originating to a very tight standard. Much tighter than what the GSEs and others are saying they are allowing. And we are seeing that all across the country.

They are not lending to anyone close to a 620 credit score. FHA is considered a more affordable and flexible option. But the FHA has raised it insurance premiums since 2010, which has "offset" the FHA's affordability.

The FHA charges an annual premium of 85 basis points for the life of the loan. The agency also charges a 175-basis-point upfront fee on FHA single-family loans. The Obama administration recently proposed a 25-basis-point reduction in the FHA annual premium, which is now on hold and under review by the new Trump administration.

FHA lenders were reluctant to lower underwriting standards because they had been sued and fined by the Justice Department for alleged violations of the False Claims Act. The Trump administration, particularly with new leadership at the Department of Housing and Urban Development, is likely to view the situation differently.

I believe the credit box will expand. It is not unreasonable to expect HUD in the Trump administration could tackle the False Claims Act issue and high cost of servicing delinquent loans.