This article is part of our HousingWire 2022 forecast series. After the series wraps early next year, join us on February 8 for the HW+ Virtual 2022 Forecast Event. Bringing together some of the top economists and researchers in housing, the event will provide an in-depth look at the predictions for next year, along with a roundtable discussion on how these insights apply to your business. The event is exclusively for HW+ members, and you can go here to register.
At the onset of the Coronavirus pandemic, the mortgage industry was preparing for absolute disaster. Mortgage executives held emergency meetings with their creditors over worst-case scenarios. Banks and non-banks alike discontinued programs, laid off thousands of staffers, raised credit standards for borrowers and buckled up for what they expected would be a very rocky ride.
Few in mid-March could have predicted that a perfect storm of ultra-low interest rates, new migration patterns and historic government intervention wouldn’t just save them, but line their pockets with billions of dollars and change their entire trajectory. But many of those elements are fading as the industry heads into 2022. Notably, the Federal Reserve said it would begin tapering its asset purchases starting in November. The central bank is also expected to raise short-term rates in upcoming quarters.
“Mortgage lenders and borrowers should expect rising mortgage rates over the next year, as stronger economic growth pushes Treasury yields higher,” said Mike Fratantoni, the chief economist at the Mortgage Bankers Association.
Fratantoni’s organization is forecasting mortgage rates to gradually climb over the course of 2022, ending the year at 4%. Those higher rates will force lenders to make major operational changes.
Refinancing’s represented nearly two-thirds of mortgage loan originations in the first three quarters of 2021, and total refi volume for the year was projected to reach north of $2.2 trillion, according to the MBA. In 2022, refi origination volume is expected to drop by 62% to about $860 billion. The name of the game in 2022 will be purchase mortgages, which the MBA projects will grow 9% to a record $1.725 trillion. But the boost in purchase business likely won’t be enough to prevent operational contraction: As margins shrink, lenders will likely have to lay off staff and renegotiate compensation.
Lenders will have to “manage expenses and improve customer service in a purchase market,” Tom Wind, executive vice president of consumer lending with U.S. Bank Home Mortgage, said at the MBA Annual convention. One of the ways that lenders “manage expenses” has historically been by laying off processors and loan officers.
Yearly data compiled by the MBA found that in 2014 and 2018, years with weaker origination volume, the LO turnover rate was 44% and 37%, respective-ly. Meanwhile, in 2020, LO turnover was the lowest in the survey’s history, at 21%, the MBA found. The second-lowest LO turnover rate was in 2003, at 31%.
Marina Walsh, vice president of industry analysis at the MBA, said that as production volume slumps and the market shifts toward fewer reﬁnances and more purchase activity, “competition will further stiffen.”
“In this environment, lenders can only chase market share for so long before there are substantial consequences to the bottom line,” she said. Industry experts also predict that home inventory will increase in 2022, creating more options for borrowers.
“Homebuilders will have more success overcoming current building material shortages and should be able to increase the pace of construction to meet the sizable demand for buying,” Fratantoni said.
He added, “More newly built homes and more home-owners listing their homes for sale should lead to some deceleration in home-price growth next year. This is good news for the many would-be buyers who are currently priced out or delaying decisions because of low supply conditions and steep home-price appreciation.” Moreover, Walsh predicts that in a purchase-heavy market lenders will turn “more heavily to their servicing business to achieve financial goals.”
“Higher mortgage rates mean fewer prepayments and a longer revenue stream of servicing fees combined with higher mortgage servicing right valuations,” Walsh said. “However, the servicing outlook is more complicated today, with the expiration of many COVID-19-related forbearances and the need to place borrowers into post-forbearance workouts.
“Servicing costs may rise as servicers work to meet the needs and requirements of borrowers, investors and regulators,” she added. Lenders and servicers will also need to be mindful of the new regulatory climate under the Biden administration.
In October, Rohit Chopra took over as director of the Consumer Finance Protection Bureau. He appeared in front of Congress a few weeks later and testified that the CFPB would be looking closely at mortgage servicing, monitoring the mortgage market and making sure that “ﬁrms can’t dodge fair lending laws and anti-discrimination laws under the guise of their secret algorithm.” “I am very worried about black-box algorithms that have no accountability for how decisions are made,” Chopra told the House Financial Services Committee.
Chopra has also beefed up the agency’s enforcement division and partnered with two other regulators to target lenders engaging in what was termed by the government as “modern-day redlining.” The three agencies announced a settlement with a Mississippi-based lender who allegedly engaged in the discriminatory practice, and promised that more will follow.
This article was first featured in the Dec/Jan HousingWire Magazine issue. To read the full issue, go here.