his piece originally appeared in the December 2021 edition [1] of MReport magazine.
Following record business levels of 2021, mortgage lenders expect the new year to continue from a position of strength. However, there are challenges on the horizon, ranging from slightly elevated interest rates to a more stringent regulatory environment. As we enter the waning days of 2021, MReport spoke with executives from Cherry Creek Mortgage [2], Churchill Mortgage [3], Homespire Mortgage [4], and more about critical takeaways from the past year, as well as what to expect from the lending landscape in 2022.
With low interest rates, increasing home prices, and a strong economy, the last 12 months were excellent for the mortgage industry and residential real estate, industry experts agree.
“The mortgage industry was surprisingly strong in 2021; there were a lot of headwinds coming out of 2020 that carried through into 2021,” said Matt Clarke, COO, Churchill Mortgage. “Even with a significant inventory issue, volumes for originators still grew nicely, and refis continued on a steady pace.”
Though the incoming business was excellent, there were still challenges, said Pete Butler, Executive Managing Director, CXO for Wipro Mortgage Digital Operations [5]/Platforms and Wipro Opus. “Because it was so busy, it also caused some problems for a number of companies. The availability of processing and underwriting talent was really tight.”
Automated underwriting can only go so far to fill this gap, Butler said. As a result, mortgage lenders had to pay premiums for this talent, driving up the cost of doing business.
The year started much like the end of 2020, said Allen Jingst, Chief Revenue Officer for LenderClose [6]. Interest rates remained at or near historic lows, prompting refinances as well as enabling many to buy their first homes.
While some of those who refinanced used the additional cash to consolidate debt or to purchase something special, others used the money to rehab their residences rather than buy a more expensive move-up property as home prices continued to rise, Jingst said.
“We never had a period where the purchase market slowed down,” said Brian Koss, EVP and Head of Production for Mortgage Network, Inc. [7] However, he noted that “it wasn’t as insane as 2020, when there was a lot of panic buying.”
It’s the American Dream … But Can We Afford It?
The affordability of housing, particularly for first-time homebuyers, became increasingly out of reach for many as home prices continued to accelerate throughout 2021.
According to the National Association of Homebuilders [8] (NAHB) report in mid-November: Housing affordability held steady at its lowest level in nearly a decade, as higher home prices offset lower mortgage rates to keep the affordability rate flat in the third quarter of 2021. However, ongoing supply chain disruptions and the prospect of higher interest rates in the future threaten to exacerbate affordability problems in the months ahead.
And according to the NAHB/Wells Fargo Housing Opportunity Index [9] (HOI):
A little more than half (56.6%) of new and existing homes sold between the beginning of July and end of September were affordable to families earning the U.S. median income of $79,900. This is unchanged from the percentage of affordable homes sold in the second quarter of 2021 and remains the lowest affordability level since the beginning of the revised series in the first quarter of 2012.
In a press release at the time of that report, NAHB Chairman Chuck Fowke said, “Persistent building material supply chain bottlenecks and tariffs on Canadian lumber and Chinese steel and aluminum continue to place upward pressure on construction costs and home prices. Policymakers must fix supply chain vulnerabilities that are disrupting and delaying construction projects and hurting housing affordability.”
Housing prices also rose much faster in some areas of the country, such as Denver, Colorado, and many cities in California—the latter of which are now the least affordable, according to NAHB.
“We are starting to see that level off a little,” said Rick Seehausen, President and COO, Cherry Creek Mortgage.
Even with the rising prices, single-family homes continued to sell quickly, with many properties receiving multiple offers, at or above the asking price, sometimes within a week of going on the market, Jingst added. “Homes were selling very, very quickly.”
Ongoing affordability issues combined with the increasing ability to perform many jobs remotely to push many consumers out of city centers and into secondary and tertiary markets. “They’re not as worried about the commute into the city,” Koss said.
Home sales volumes fell early in the fourth quarter, which Todd Sheinin, COO, Homespire Mortgage, attributed to lack of inventory and a modest increase in interest rates, pushing the listed price of some available homes beyond the financial reach of some prospective buyers.
Refinancing activity also began dropping off near the end of the year. This resulted in layoffs of some underwriters by a few lenders late in the year, Butler noted.
Another contributing factor, according to Koss, was prospective sellers seeing sales prices commanded by other sellers earlier in the year and then trying to push their asking prices beyond what buyers could or would afford to pay.
While the industry felt the strain of needing more underwriters, those same pressures also hit the sector when it comes to appraisers. Clarke pointed out that the number of real estate appraisers has been declining for years, and the volume of originations and refis meant increased demand for their services. That’s even despite the GSEs having relaxed the rules for mortgages requiring physical appraisals, meaning more can be done via automated systems.
“It’s a supply and demand issue,” Clarke said. “There is far too much demand for appraisers and far too little supply.”
The underwriting and appraisal professions are both suffering from an aging workforce, with fewer new professionals than retiring ones, Butler said.
The Flood Insurance Factor
FEMA’S National Flood Insurance Program (NFIP) began using “risk-informed” rates beginning October 1. According to FEMA, the new rates are designed to better reflect a property’s flood risk. As such, those in areas where flood insurance is required may wind up paying higher rates upon policy renewal. New policies will also reflect those higher rates. Those in lower-risk areas will pay lower rates.
“The NFIP’s new rating methodology is long overdue, since it hasn’t been updated in more than 40 years,” said David Maurstad, an NFIP senior executive, upon the unveiling of the new rates. “Now is the right time to modernize how risk is identified, priced, and communicated.”
The legacy pricing system increased rates annually. According to FEMA, nearly one-quarter (23%) of homeowners in flood zones will see their rates decrease as a result of the new rules.
Tech Takeaways
Lenders, particularly community financial institutions and other smaller organizations, turned increasingly to technology in order to handle the crush of mortgage and home equity demand, Jingst said. “Three to five years ago, most financial institutions looked at fintechs as competitors. Now, they’re realizing there are technology companies out here who want to work with them, to help them leverage technology to help their borrowers move quickly to take advantage of the low rates.”
“The only way we were able to keep up with the crush of volume was with our [proprietary] technology,” Koss said. The biggest advancement in the technology, driven primarily by the COVID-19 pandemic, was the continued embrace and evolution of remote capabilities, Jingst said. “The borrower experience has been redefined. It’s no longer ‘I want free toasters’ or ‘popcorn in the lobby’; now it’s ‘I want to be able to get a loan from my couch.’ The next big evolution is going to be user experience.”
One of the lenders that’s most prominently promoted the ease of technology when it comes to obtaining a loan is Rocket Mortgage. In late October, the company partnered with Salesforce to make the company’s loan-origination technology available to banks and credit unions through Salesforce Financial Services Cloud.
Licensed mortgage loan officers working with financial institutions will be able to use Rocket Mortgage’s technology direct in Salesforce Financial Services Cloud as their point-of-sale loan origination system and loan origination system. Additionally, the combined technologies will enable lenders to offer the loans without the need for underwriters, processors, or compliance or closing personnel, since Rocket Mortgage will handle all of those details.
“This will be the first time that a home lender will provide an end-to-end ‘mortgage-as-a-service’ solution through the Salesforce Financial Cloud, said Jay Franer, Rocket Companies CEO and Vice Chairman, in a prepared statement. “Financial institutions can now combine those relationships they’ve already established, while leveraging Rocket Mortgage’s transformational platform.”
“It’s an interesting thing,” Clarke said of the partnership. “So many people have looked at Salesforce as a platform to work with. And technology is one of those things that Rocket clearly has a really strong leg up on. It could be exciting to see what they develop and what they do together. That said, there are a lot of platforms that are extraordinarily effective, that don’t necessarily have all of the same firepower that Salesforce/Rocket combination.”
Rocket has already been disrupting the industry, so the combination may not have much of an effect beyond demonstrating that technology will continue to transform the mortgage/real estate industry, Clarke added.
Moving the Mortgage Market Forward
While there are some differing views for the 2022 market, one item all in the mortgage and housing markets agree on is that there will be continued inflation and that interest rates will rise. Experts interviewed by MReport expect mortgage interest rates to increase by 25 to 50 basis points by the end of the year, with most leaning toward the higher end of that range.
Even if rates rise a little higher than that range, any amount above 50 basis points would likely be short-lived. Rates remaining at those elevated levels for a protracted period could result in some recessionary pressure, Koss noted.
Rising interest rates could also cool the home purchase market somewhat, Jingst said, but home values should hold up, so refinancing will continue to be attractive for many.
However, Clarke expects refis to drop off as much as 40% to 50%, with the origination market
possibly seeing an increase of 10% to 15%.
Koss mostly echoed those figures, even though he also expects a drop-off in refis. Homeowners who haven’t already done so will look to take advantage of their high equity levels in 2022, Koss said. “Our past borrowers have come back to us frequently for business, which means we get a lot of good, solid, repeat refi business.”
“It remains to be seen as we move into 2022 if the rapid home price appreciation will continue or if we will see a slight decline,” Seehausen said. “I think interest rates will remain relatively low. Margins may contract a little bit, but certainly not to 2018 levels.”
“Companies that have not lost sight of the purchase market will do very well in 2022,” Butler said. “If you focused too much on the refi market, you’re going to be hurting.”
The new year will also bring a renewed push from lenders currently offering non-qualifying mortgages (non-QM), as well as some first-time entrants into the market, Butler predicted. “Certainly, it’s higher risk, but not anything near where it was in 2008. With the number of people who have lost their jobs or have taken a hiatus for whatever reason, non-QM is going to have a larger role.”
Technology will continue to progress, and perhaps, so will some users’ acceptance of digital capabilities. As of the end of 2021, several states still required “wet signatures” on loan documents, even though many government entities moved to acceptance of electronic signatures during the pandemic.
With technology enabling many people to work remotely, Jingst expects people to continue moving away from high-cost areas to lower-cost areas since they can earn as much and afford that much more home.
While the change in flood insurance rates is unlikely to cause a great concern where the very affluent choose to live, the higher rates for the highest-risk properties could push some people out of lower-lying areas in Louisiana, Houston, and other less-affluent areas with high flood risks, Seehausen noted.
Innovation and Consolidation
Clarke told MReport that he anticipates the trend of mergers and acquisitions—something that has been a key part of the industry landscape in 2021—to continue into 2022.
“A lot of the larger companies have done a good job taking building up reserves over the last couple of years,” Clarke noted. “They’ve also become accustomed to enormous volumes. As volumes shrink, they’re going to look for ways to feed this enormous beast that they’ve created. If they don’t have a high level of refis, that means they’re going to have to increase their purchase volume by acquiring other companies.”
Cherry Creek Mortgage added 26 branches in 2021, and expects more expansion in 2022, according to Seehausen. He also expects the company’s consumer-direct business to continue to grow. “We expect the mortgage market to contract in 2022, which is why we are so focused on growing market share.”
“There will be more consolidation in the industry, which will create some acquisition opportunities,” Seehausen said. “We are also looking for other financial services-related businesses in real estate and property and casualty insurance. We think there may be some M&A opportunities for diversification into those areas. I would expect us, and others like us, to benefit from that.”
Continuing the theme of “more with less,” several areas of tech innovation may see increased realization of their potential in the new year, including robotic process automation (RPA) and artificial intelligence (AI). Sheinin anticipates these areas of tech will become “incredibly impactful” for the industry in 2022, particularly when it comes to purchase advice reconciliation, with the bots taking in the data in real time and reconciling it. Underwriting will likely also make more use of RPA and AI in 2022.
However, Sheinin warns that mortgage lenders can sometimes fall into the trap of relying too much on RPA and other technology solutions. “You have to be careful with it, you can’t just jump on every little thing that comes along. You have to be careful that it fits with your business model and that it’s going to get you the most bang for the buck.”
Depository institutions will be looking for ways to drive new loans in 2022, Jingst said. While depository institutions will still limit risk, he expects them to do a few creative things, such as playing closing costs, to generate additional loan volume.
Despite being honest about the challenges the industry must tackle in 2022, the experts MReport spoke with remained generally optimistic about 2022, seeing those challenges as opportunities to grow and excel rather than insurmountable obstacles.
“We don’t see anything that would really surprise us,” Koss said. “We’re expecting a drop of about 20%, but that’s from a very high spot, so that makes us optimistic. We’re at a good place to start. We’re really looking forward to 2022.”
This piece originally appeared in the December 2021 edition of MReport magazine, online now [1].