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Mortgage rate dip a welcome reprieve, but more industry consolidation is ahead: Piper Sandler

Mortgage origination volume to remain subdued before demand starts to pick up in 2024, the capital investment bank said

Mortgage rates have pulled back in recent weeks giving consumers and loan originators some breathing room, but headwinds in the industry are far from over.

The decline in the 10-year Treasury yield and agency mortgage-backed securities (MBS) yields — due to a soft jobs report in late October — led to a slight pick up in seasonally-adjusted mortgage application volume. This marks a “welcome near-term reprieve for originators and many mortgage real estate investment trusts (mREITs),” according to a note from Piper Sandler, a leading investment bank.  

“But this move is immaterial relative to the continued downward trend that has persisted throughout the past two years – particularly as we face the seasonally slow winter months,” the note said.

Piper Sandler forecasts further consolidation within the mortgage industry over the next few months with demand near multi-decade lows before picking up in 2024 as consumers re-adjust to higher mortgage rates.

Here are the three factors that Piper Sandler noted for continued mortgage industry headwinds:

Application demand remains low

The Mortgage Bankers Association’s (MBA’s) weekly mortgage application volume index reached the lowest levels in October since tracking the data in 2020. Application volume index declined 19% year over year as of Oct. 25 and decreased 45% below the previous trough in 2018, according to Piper Sandler.

Overall, purchase volume is now down 56% from the near-term peak in January 2021 and 9% below the previous trough in 2014. 

Prepayment speeds continue to trend lower

Mortgage prepayment speeds on 30-year fixed rate pools of agency and government mortgages in October dropped 15 to 40 basis points from the previous month to 4.8% for Fannie Mae and Freddie Mac pools, according to Piper Sandler.

The drop in prepayment speeds indicates mortgage servicing rights (MSR) amortization expense should continue to decline, a positive development for mortgage companies with large servicing fee revenue streams.

Piper Sandler expects a drop in prepayment speeds to continue despite the near-term dip in mortgage rates, because very few borrowers have mortgage rates above current levels.

The industry would need to see a more persistent mortgage rate decline to near 6% for a more meaningful pickup in prepayment speeds, the note said.

Affordability remains a problem

Affordability has declined for nine straight months in October as median home prices have increased 8% and mortgage rates have increased 123 bps during this time period.

Piper Sandler estimates the median monthly payment is now $2,313 as of October 2023. That’s a 12% year-over-year increase and a 130% increase from the pre-pandemic levels in October 2019.

The median mortgage payment exceeds 30% of the median household annual income while home prices are 4.2 times the median annual income, Piper Sandler said. This finding is in line with the financial crisis high and well above the 2000-2022 average of 3.4x.

The industry would need to see a more meaningful decline in home prices and/or mortgage rates before home sales will start reverting back to pre-pandemic levels, Piper Sandler projected.

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