Mortgage Lenders Remain Pessimistic Though Some Positive Signs Emerge
Written By: Joel Palmer, Op-Ed Writer
Mortgage industry forecasts and lender sentiment have changed little in the last few years.
The main challenge for mortgage processors and underwriters continues to be the inability to sell what doesn’t exist.
“The supply of existing homes is near the 2009 crisis low, and it's showing no signs of easing,” said Doug Duncan, Senior Vice President and Chief Economist for Fannie Mae.
Fannie Mae’s Economic and Strategic Research (ESR) Group released its July 2023 commentary last week, while Fannie also published its annual Mortgage Lender Sentiment Survey® (MLSS).
“Since the housing market boom of 2021, the mortgage industry has faced a number of challenges, including high home prices, multiple and significant interest rate hikes, elevated inflation, tight inventory of homes available for sale, and a slowdown of global economic growth,” states the summary of the MLSS. “Not surprisingly, the consensus among mortgage executives seems to be that both purchase and refinance origination activity will continue to slow this year.”
Lack of inventory has remained the leading challenge. Fannie Mae cited statistics from Redfin showing that, at the beginning of July, active listings of homes for sale were down 14.4 percent from the previous year.
With the lack of volume, mortgage lenders have for the past two years cited cost-cutting as their top business priority in the MLSS. Business process streamlining, which was the overwhelming top priority for lenders in 2020 and 2021, is now the second most important priority.
Lenders have reported that loan origination has yielded a loss since the second quarter of 2022. The average production cost per loan reached a new high in the first quarter at over $13,000 per loan.
However, the survey also suggested differentiated business priorities based on the type of institution. Depository institutions are more focused on talent management and compliance, while mortgage banks are putting more effort toward cost-cutting and new products/services for additional revenue streams.
In addition regulation and compliance reached its highest share of business priorities in six years, suggesting lenders are facing increased regulatory pressures.
Overall, surveyed lenders exhibited a pessimistic outlook toward the economy. Seventy-three percent believe the U.S. economy is on the wrong track. Notably, the vast majority of lenders (93 percent) believe the U.S. economy is "very likely" or "somewhat likely" to enter a recession in the next two years. Among them, 68 percent expect the recession to start in the second half of this year.
Fannie Mae is a bit more optimistic about the overall economy. The company said inflation data is a bit more favorable in its latest commentary, but noted that year-end inflation would still likely be above the desired 2 percent threshold.
The ESR Group now expects the Consumer Price Index, on an annual basis, to end the year around 3.1 percent, with the core index around 4.3 percent. The ESR Group also upgraded its expectations for economic growth in 2023 by a full percentage point to 1.1 percent. However, Fannie Mae continues to expect a modest recession beginning in the fourth quarter of 2023 or the first quarter of 2024, similar to lender sentiment.
“The recent difficulties in the banking sector have led to some credit constraint, usually a harbinger of slowdown in economic activity,” said Duncan. “As we noted in our April 2022 forecast, whether there is a mild recession (our base case) or a soft landing, the supply issues in housing will provide a downside cushion for economic activity. That is playing out quite close to forecast on existing homes, but new construction has been even more supportive than we expected.”
Fannie said if the current rate of growth is maintained for the remainder of the year, 2023 will be the slowest pace of existing home sales since 2011.
Fannie made a slight upward adjustment to its forecast of single-family purchase originations, driven by higher home prices and increases in new home construction. Its latest forecast calls for purchase originations to be $1.35 trillion in 2023 and $1.44 trillion in 2024, representing upward revisions of $34 billion in 2023 and $29 billion in 2024.
For refinance originations, Fannie revised downward its projected 2023 and 2024 volumes by $6 billion and $28 billion to $264 billion and $465 billion, respectively. The downward revision can be attributed to continued limited refinance application activity.
About the Author
As an NAMP® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
