Calmer Seas Ahead? A Look at the Mortgage Market
Heading into 2022, we all knew that something had to give. The record ultra-low interest rates and frantic pace of loan origination and refinancing we saw during the first two years of the pandemic couldn’t last forever. But just how fast conditions changed was historic in its own right.
In the first half of the year, the interest rate on a traditional 30-year fixed loan went up 248 basis points from where we started the year. In June, the rate jumped about 55 basis points in one week, the largest weekly increase since 1987.
Interest rates continued to be volatile in the 3rd quarter of 2022, fluctuating greatly. Nationally, we were at about 5.7% at the end of June, below 5% in early August, back up to 5.8% by the end of August and then above 6% in mid-September. The rate moved up and down rapidly in this fashion all quarter.
As a result of the interest rate environment, loan production has fallen off, down by two-thirds from the beginning of the year.
On the bright side for homeowners, the Mortgage Bankers Association reported that the delinquency rate at the end of the quarter went down to 3.64%, which is the lowest since their survey began in 1979. Not only is delinquency down, but foreclosure and bankruptcy are down, as well. And, for our clients, losses resulting from delinquency and foreclosure should be down as we move forward. There’s a lot of good in those numbers.
Going forward, things will moderate.
We know bulk sales will continue. The bulk sale activity has been a big piece for Cenlar and in the market as a whole. We’ve seen lots of portfolios trading, and believe that will continue.
We’ve transferred out a substantial number of loans this year as our clients actively sell pieces of their portfolio. The economics on Mortgage Servicing Rates (MSR) have improved, and it’s a good opportunity to cash in on the improvement in values. There’s been a lot of active trading in the market, and we see that continuing in the short term, although likely not in 2023.
New loan originations are down. The last couple years featured hockey stick-like growth, but growth will be more conservative ahead. Production of new loans will outpace payoffs still, so we will continue to have some growth there.
Next year will be slow-moving, certainly much less eventful than the last year or two. As we look at 2023, we think production volumes industrywide will not grow in any major way. MBA’s latest forecast for 2023 shows that it expects originations to be basically flat year-over-year — well off the 2021 pace — with stronger growth in 2024.
MBA also expected rates to stay put, hanging around 5% through the end of 2023. That represents a hit to the buying power of homeowners, and as affordability decreases, we’ll see the popularity of certain products return.
Home Equity Lines Of Credit (HELOCs), for example, become a much more viable product for homeowners. If a homeowner refinanced in the last two years, they probably refinanced down to a 3% or 4% interest rate. They don’t want to give that up and move into a 5% interest rate, if you need money to send your child to college or buy a new car. The path then is, often, to move to a HELOC. We expect HELOCs will become very interesting and popular as we move forward.
Cenlar is very experienced managing HELOC portfolios and a variety of HELOC products. Managing the default risk with a HELOC is no different than a mortgage. There is a higher risk of fraud that comes with an open line of credit like HELOC, but we’re well experienced managing that. We have a good, strong fraud prevention program in place. And we’re very familiar with the range of HELOC loan characteristics.
But, whatever the market brings, we’re happy to work with you. Every day, we’re thankful to have the opportunity to be your trusted partner, and we’re ready to lend our strength to assist you and your homeowners, no matter the conditions.
Matt Detwiler is Senior Vice President of Client Management at Cenlar.
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