Mortgage origination market should improve by 19% next year: MBA

Key Takeaways:

– The mortgage origination market is expected to rebound in 2024 after reaching a trough in 2023
– The Federal Reserve is not expected to hike interest rates further this year
– The Fed may cut interest rates three times in 2024, leading to a rebound in mortgage origination volume
– Purchase originations are forecast to increase 11% in 2024
– Mortgage rates are expected to drop, but challenges in the industry still remain
– The MBA anticipates a mild recession in the first half of 2024
– The unemployment rate is expected to rise to 5% by the end of 2024
– Mortgage rates in the 6% range in 2024 and 5% range in 2025 may lead to more housing transactions
– First-time homebuyers will drive housing demand in the coming years
– Lenders in the mortgage origination market have experienced net production losses for five consecutive quarters
– Lenders are projected to have a few more painful quarters until the end of spring 2024
– Excess capacity and low productivity levels are challenges for lenders
– Mortgage industry employment has decreased by 20% in 2023 from the peak in 2021.

HousingWire:

The trough for the mortgage origination market is nearing an end point and 2024 is shaping up to be a better year for the industry, economists of the the Mortgage Bankers Association (MBA) said at the 2023 Annual Convention & Expo in Philadelphia, Pennsylvania.

The MBA doesn’t expect the Federal Reserve to hike interest rates further this year as real rates – which are inflation-adjusted– are 2%. 

“They’re already at a place where if they do nothing, and inflation holds or falls further from here, they’re going to be slowing the rate of growth and the cumulative impact of the rate increases they’ve already made are not fully felt yet,” said Mike Fratantoni, MBA’s chief economist and senior vice president for research and industry technology.

Based on the cautious messages from even the hawkish Fed members, Fratantoni projected that the central bank will “definitely not be going to hike in November, a small chance that they would come back in December if these numbers turn around.”

The MBA’s view is that the Fed will cut interest rates three times in 2024 and inflation may come down a bit faster as a result. 

“I’m pretty confident that if this rate path precedes as we’re expecting, this is the bottom. 2023 is going to be the low-volume (mortgage origination volume) year for this cycle. So after falling 50% from 2021 to 2022, our current estimate has it falling almost 30% from 2022 to 2023. But then a rebound in 2024 — up 19%,” Fratantoni said.

Purchase originations are forecast to increase 11% to $1.47 trillion next year.

In terms of units, the MBA expects about 5.2 million units in the total number of loans originated in 2024, up from this year’s expected 4.4 million.

“It’s still a pretty challenging environment relative to if you look back historically, this is close to where we were in 2014. Maybe just below where we were in 2018 — still a challenging year for the industry,” Joel Kan, vice president and deputy chief economist of MBA, said. 

Mortgage rates will drop, but challenges linger

MBA’s baseline forecast is for mortgage rates to end 2024 at 6.1% and reach 5.5% at the end of 2025 as Treasury rates decline and as the spread narrows.

The historically high spreads between mortgage rates and the 10-year Treasury yield – which was triggered by the uncertainty about monetary policy and the direction of quantitative tightening  – will resolve in a “favorable direction over the course of the next six to 12 months,” Fratantoni added.

The MBA raised expectations of a mild recession in the first half of 2024 due to the combination of the cumulative impact of the rate hikes, the banking system tightening down on all forms of credit and the slow global environment all leading to a slowdown in the US. 

The unemployment rate is expected to rise to 5% by the end of 2024 from the current rate of 3.8%. Inflation, in return, will gradually decline towards the Fed’s 2% target by the middle of 2024, Fratantoni said.

As mortgage rates come down to the 6%-range in 2024 and the 5% range in 2025, borrowers will see less of a trade-off in moving, Kan projected. 

Kan added: “I think that’s when you’re going to see more inventory free up, that’s when we’re going to see more of these housing transactions able to take place.”

The MBA anticipated first-time homebuyers will account for a large portion of housing demand over the next few years, given the largest age cohort entering its prime homeownership ages. 

“There will still be challenges, as median purchase and interest payments remain high, for-sale inventory is scarce, particularly for entry-level homes, and credit availability is low,” Kan said.

A couple more painful quarters ahead

The mortgage origination market for banks and independent mortgage banks was painful given that they all saw five consecutive quarters of net production losses. 

While production losses were less severe in Q2 2023 from the previous two quarters, lenders are projected to have a few more painful quarters until the end of the spring of 2024 – mainly due to the traditionally slow winter season, Marina Walsh, CMB and vice president of industry analysis, anticipated. 

For lenders, excess capacity continues to be a challenge with low productivity levels and high expenses per loan.

“Lenders have reduced their head counts and gross expenses, but the record-low volume is a primary driver of these escalating per-loan costs,” Walsh said. 

The MBA previously estimated that a 30% decrease in the mortgage industry employment from peak to trough will need to occur, given the decrease in production volume.

The MBA estimated that the industry is roughly two-thirds of the way there from the previously mentioned 30% overcapacity in the industry. 

Mortgage industry employment dropped 20% in 2023 from the peak in 2021 and the number of active MLOs for state-licensed companies dropped 29% from the same period, according to the MBA.

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Property Chomp’s Take:

Hey there! Let’s talk about the mortgage origination market and what’s in store for the industry. According to economists at the Mortgage Bankers Association (MBA), the trough for this market is coming to an end, and 2024 is shaping up to be a better year.

First off, the MBA doesn’t expect the Federal Reserve to hike interest rates further this year. Real rates, which are inflation-adjusted, are currently at 2%, so there’s not much room for further increases. Mike Fratantoni, the MBA’s chief economist, believes that if inflation holds or falls from its current levels, the Fed will be slowing the rate of growth. He thinks the cumulative impact of the rate increases made so far will not be fully felt yet.

Based on cautious messages from even the hawkish Fed members, Fratantoni predicts that the central bank will not hike in November and there’s only a small chance they would do so in December. The MBA expects the Fed to cut interest rates three times in 2024, which may result in a faster decline in inflation.

Fratantoni is confident that 2023 will be the low-volume year for mortgage origination, with a 30% fall from 2022. However, he anticipates a rebound in 2024, with a 19% increase in origination volume. Purchase originations are forecasted to increase by 11% to $1.47 trillion in 2024, and the total number of loans originated is projected to reach around 5.2 million units.

While the industry outlook is improving, it’s still a challenging environment. Joel Kan, the MBA’s vice president and deputy chief economist, believes that it’s comparable to the market conditions in 2014 and slightly below those in 2018.

Now, let’s talk about mortgage rates. The MBA’s baseline forecast is for rates to end 2024 at 6.1% and reach 5.5% by the end of 2025. This decline is expected as Treasury rates decrease and the spread between mortgage rates and the 10-year Treasury yield narrows. Fratantoni believes that the historically high spreads will resolve in a favorable direction over the next six to twelve months.

However, the MBA also raised expectations of a mild recession in the first half of 2024 due to the cumulative impact of rate hikes, tightening credit, and a slow global environment. The unemployment rate is expected to rise to 5% by the end of 2024, and inflation will gradually decline towards the Fed’s 2% target by the middle of that year.

As mortgage rates come down, borrowers will have less of a trade-off in moving. This is expected to free up more inventory and facilitate more housing transactions. The MBA anticipates that first-time homebuyers will play a significant role in housing demand, given that the largest age cohort is entering its prime homeownership ages. However, challenges remain, such as high median purchase and interest payments, limited for-sale inventory (especially for entry-level homes), and low credit availability.

On the lender’s side, the mortgage origination market has been tough. Banks and independent mortgage banks experienced five consecutive quarters of net production losses. While the losses were less severe in Q2 2023, lenders are projected to face a few more painful quarters until the spring of 2024 due to the traditionally slow winter season. Excess capacity continues to be a challenge for lenders, leading to low productivity levels and high expenses per loan.

In summary, the mortgage origination market is expected to improve in 2024. Mortgage rates will decrease, but challenges will linger. The industry will face a mild recession, rising unemployment, and a slow global environment. However, as rates become more favorable, borrowers will have more opportunities, and first-time homebuyers will be a driving force in housing demand. Lenders will need to navigate through excess capacity and high expenses to stay afloat.

Overall, things are looking up for the mortgage origination market, but there’s still work to be done.

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