The Mortgage Bankers Association (MBA) has forecast that purchase mortgage originations are expected to grow 9% to a new record of $1.73 trillion in 2022. After a 14% decline in 2021, the MBA expects refinance originations will further slow next year, decreasing by 62% to $860 billion from $2.26 trillion in 2021.
MBA forecasts mortgage originations to total $2.59 trillion in 2022—a 33% decline from this year. In 2023, mortgage originations are expected to decrease to $2.53 trillion. Purchase originations are forecasted to reach new successive records in 2022 and 2023, while higher mortgage rates and fewer eligible homeowners will lead to further declines in refinance volume.
"The economy and labor market rebounded in 2021, but overall growth fell short of expectations because of stubborn supply chain issues that fueled faster inflation, slowed consumer spending, and presented challenges in filling the record number of job openings available," said Mike Fratantoni, Chief Economist and SVP of Research and Industry Technology. "With inflation elevated and the unemployment rate dropping fast, the Federal Reserve will begin to taper its asset purchases by the end of this year, and will raise short-term rates by the end of 2022.”
The baseline forecast is for mortgage rates to rise, with the 30-year, fixed-rate mortgage expected to end 2021 at 3.1% before increasing to 4.0% by the end of 2022 according to the MBA.
"Mortgage lenders and borrowers should expect rising mortgage rates over the next year, as stronger economic growth pushes Treasury yields higher," said Fratantoni.
Late last week, Freddie Mac’s latest Primary Mortgage Market Survey (PMMS) found the 30-year fixed-rate mortgage averaging 3.05%, with an average 0.7 point, up from the previous week when it averaged 2.99%.
“Historically speaking, rates are still low, but many potential homebuyers are staying on the sidelines due to high home price growth,” said Sam Khater, Freddie Mac’s Chief Economist. “Rising mortgage rates, combined with growing home prices, make affordability more challenging for potential homebuyers.”
Demand from millennial households, households seeking more space, and still-low mortgage rates are favorable tailwinds for the housing market in 2022, and are behind MBA's expectations of record purchase originations over the next two years.
"The year 2022 should be another strong year for the housing market. Home builders 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," said Fratantoni. "More newly built homes and more homeowners 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."
According to the latest Housing Affordability Index from the National Association of Realtors (NAR), housing affordability declined from a year ago in all the four regions, with the Northeast experiencing the biggest decline of 10.7%. The Southern Region experienced a weakening in price growth compared to a year ago of 7.1%, followed by the West with a dip of 4.9%. The Midwest had the smallest decrease of 4.8%.
“Housing affordability was up modestly in all four regions from last month, except in the West where there was no change,” said NAR Research Data Specialist Michael Hyman. “The South had the biggest gain of 0.4% followed by the Midwest, which rose 0.3%. The Northeast region had the smallest increase of 0.2%.”
With home prices reaching record highs over the past year, and more recent new construction being larger and more expensive, average loan sizes have also grown and affordability has weakened—especially for first-time buyers. Kan does expect some of the affordability challenges to ease as for-sale inventory grows and home-price growth moderates.
The current supply chain issues impacting home builders are being passed onto buyers, as the National Association of Home Builders (NAHB) reported that the change in price of softwood lumber products that occurred between April 17, 2020 and July 8, 2021 added $29,833 to the price of an average new single-family home.
"Credit availability is still around 30% lower than pre-pandemic levels,” said Joel Kan, Associate VP of Economic and Industry Forecasting for the MBA. “Mortgage supply will need to increase modestly so that qualified buyers can get access to financing for their home purchase. This will be important for the wave of potential first-time homeowners who are approaching prime homeownership age.”
Marina Walsh, CMB, VP of Industry Analysis for the MBA, noted that the industry is moving away from the record-high production profits of 2020. As production volume declines, 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.
"Many lenders will rely more heavily on 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," said Walsh. "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."
According to the MBA’s Quarterly Mortgage Bankers Performance Report for Q2, independent mortgage bankers' profits declined since Q1 of the year, but remained above average. Independent mortgage banks, along with mortgage subsidiaries of chartered banks, reported a net gain of $2,023 on each loan they originated in Q2 2021, down from a reported gain of $3,361 per loan in Q1. That made for the lowest net production profits since Q1 of 2019, but the totals remained above their historic quarterly average.
"Competition stiffened, production volume declined, and the market began to shift toward more purchase activity and less refinances,” said Walsh. “The result for mortgage lenders was a combination of lower revenues and higher expenses."
Walsh also noted a decline in servicing profitability, resulting from mortgage servicing right (MSR) markdowns, and increased operating expenses. Combining both production and servicing operations, 85% of firms posted overall profitability for Q2, compared to 97% in Q1.