2023 State of the Mortgage Industry Half-Time Report

By Dave Savage and Kristin Messerli

Looking back on this time last year in the mortgage industry is reminiscent of the painstaking first two weeks of the pandemic when the shutdown hit the nation, and we all commiserated with Zoom happy hours and check-ins. Then, a month went by and then a year, and we eventually learned how to adjust to the “new normal.”?

However, some pandemic-driven changes were not all bad. Pre-pandemic, QR codes and Apple Pay were used only occasionally. Today, they’re everywhere, making it easier and faster for consumers to pay and interact with businesses. As we adjust to a new reality in the mortgage industry, there are opportunities to create a better future for our businesses and consumers.?

“It’s not a business for the faint of heart,” said one leader interviewed. While demand remains high, mortgage applications hit a 28-year low, largely due to lack of affordability and inventory. Home sales are not likely to return to 2022 levels until at least 2025, as homeowners remain hunkered down with low interest rate mortgages.?

Undoubtedly, 2023 is a challenging year for even the most seasoned and successful mortgage lender. However, over 5,000 loan officers are still closing over 100 loans annually, and over 800 loan officers are closing over 200 loans annually. Dave Savage is interviewing loan officers weekly on the Mortgage Coach YouTube channel who are closing over 20 loans per month. The market can feel grim, but winning in today’s challenging market is possible.??

Based on interviews with over 27 leaders in the industry and data from top housing economists, we have compiled the most relevant trends and identified key opportunities and strategies for lenders and loan officers to build success in the remainder of 2023 and beyond. Interviews and additional resources are cited at the end of the article, and your comments and questions are always welcomed as we continue the conversation.?

DATA POINTS & TRENDS

Two years ago, we experienced one of the highest volume years in the history of the mortgage business, originating $4 trillion. This year, we sit at a projected $1.7T in 2023, which decreased from its original projections by MBA last year. Several factors contribute to challenges in today’s market, and we’ve divided them into market, policy, and consumer trends.

1.? State of the Market

AFFORDABILITY The biggest challenge on homebuyers' minds today is affordability, which is at its worst level since 1984. The payment-to-income ratio was a whopping 38% in July, compared to 17.1% in January 2013. A typical mortgage payment for a 30-year-fixed loan, after putting 20% down, rose by 91% over the last two years to $2,423, including principal and interest (Black Knight).

In addition, the above trends have pushed the amount of income needed to purchase a starter home up 13% over last year to $64,500. And new listings of starter homes are down 23%, the biggest decline since the start of the pandemic (Redfin).

Many young families are resolving their financial problems with multigenerational housing. NAR expects increasing demand for multigenerational housing to be a long-term trend. The shift toward multigenerational housing has increased steadily since 1971 (Pew Research), and in June 2022, multigenerational purchases made up 14% of all purchases (NAR).?

INVENTORY Related, inventory remains at record low levels. New-listing data is at its lowest in 12 months, and active listing growth has been slow with weekly active listings falling 866 homes in the last week of August (HousingWire).

“We have new listing data at the lowest levels ever recorded in history for the last 12 months. Then active listings growth has been slow, and weekly inventory has been negative year over year for the last couple of weeks, and that’s what’s driving home prices.” - Sarah Wheeler, Editor in Chief of HousingWire?

CONSUMER DEBT U.S. consumer credit card debt rose nearly 5% in the second quarter of 2023, pushing the total past the $1 trillion mark for the first time ever. Outstanding student loan debt reached $1.57T in 2Q23 (Federal Reserve Bank of New York).?

Younger-generation homebuyers who are being declined are most often turned away because of their debt-to-income ratio, insufficient downpayment, and low credit score. Expenses that delay saving for a down payment include childcare, credit cards, high rent, car loans, and student loans.

“Credit card debt crept north of a trillion bucks in the first or second quarter of this year, which is a big number… We talk about affordability issues with mortgage rates around seven or seven and a quarter percent, definitely impacting the industry, but debt everywhere is expensive, and I think that is a problem that impacts everybody, whether they own a home or not.” - Rob Chrisman, Chrisman News

MORTGAGE RATES Mortgage interest rates—which are still at a 22-year high—continue to be a challenging problem for homebuyers, lenders, and real estate agents. Experts feel the Fed will maintain its current rate, but see that trend turning around, at least slightly, by 2024.?

Further contributing to the inventory challenges, 91% of mortgaged homes hold an interest rate of 6% or below, and 63% have a rate of less than 4%. While rates remain volatile, they’re likely to stabilize between 5-7%, leaving many homeowners feeling trapped in their current homes.

“Inflation trends are headed in the right direction; inflation is coming down. We’re certainly still well above the Fed’s 2% target, but all of the signs pointing to this problem that got out of hand is beginning to become manageable again. As inflation keeps dropping, we should see short-term rates moving lower as we get into 2024, probably at the end of first quarter or early second quarter. The rest of rates, whether it’s 10-year treasuries or 30-year mortgages, are going to anticipate that eventual cut in Fed rates. So we’re expecting mortgage rates to drift down over the next couple of years.” - Michael Frantantoni, Chief Economist and Senior Vice President of Research and Industry Technology at the Mortgage Bankers Association (MBA)

UNEMPLOYMENT The overall economy may avoid the previously expected recession, going into what economists are calling a “soft landing.” While there is still a perceived risk of recession, that is expected to be mitigated significantly and has already been pushed into 2024.?

Unemployment levels have returned to pre-pandemic levels and remained fairly steady. In August, unemployment rose slightly to 3.8%, but the U.S. also added 187,000 jobs that month. The spike in unemployment may be due to the influx of job-seekers in the market, rising from Gen Z-ers looking for work. Low unemployment is great news for our economy but not so great for interest rates, as the Fed is less likely to lower rates when unemployment remains low.

LENDER SURVIVAL RATE While the rest of the country is experiencing a “soft landing,” the housing industry seems to have been in a recession since last June. From 2019 to 2021, 50,000 new NMLS licenses were issued, and lenders were hiring rapidly to keep up with volume.

"By mid-2022, there were 288,267 originating loan officers, according to data from Ingenius. By the end of this year, that number is projected to drop to 202,186 - 232,514." - Jeff Walton - CEO of Ingenius

2. State of Regulatory Policy

Consumer Financial Protection Bureau (CFPB) The CFPB has reported a continued focus on fair lending and eliminating redlining (bias based on geographic location, zip code, or neighborhood), including a heightened interest in digital redlining. The CFPB and other regulating agencies reported 23 major violations in 2022 of redlining, discrimination, and other ECOA protections (Cooley).?

“Fair lending monitoring and/or reviews should incorporate marketing material and social media outlets. In addition, the marketing department should be aware of digital redlining. This is a form of discrimination where lenders restrict access to credit or offer credit on unequal terms because of a customer’s digital footprint.” (BakerTilly)

Also notable, the CFPB is being reviewed by the Supreme Court for possible dissolution this Fall.?

CREDIT SCORES The FHFA announced in October 2022 that Fannie Mae and Freddie Mac would transition away from the Classic FICO credit scoring system and approve the FICO 10T and VantageScore 4.0 models. When implemented, lenders must deliver both FICO 10T and VantageScore 4.0 credit scores with each loan sold to the GSEs (JDSupra). The traditional FICO score will sunset by Q1 2025.?

APPRAISALS Appraisal bias has been called out in a big way this year, and we can expect changes in the next few years in how appraisals are done and who does them. There will also be opportunities to use existing data to perform appraisals.?

Homes in Black neighborhoods are currently valued between 21% and 23% below parallel valuations in non-black neighborhoods (Brookings Research). Diversity training, workforce development, technology, and policy solutions are all being used to address this disparity. An FHA rule change is being considered that would allow borrowers to review their own appraisals and take steps to address racial bias if necessary (HUD).?

3. State of the Consumer

A snapshot of who’s buying…

• Millennials overall now make up 43% of home buyers—the most of any generation—an increase from 37% last year.?
• Gen Z, who range in age between 26 and 11, are rapidly entering the housing market, making up 4% of homebuyers in 2023.?
• Single women are the second largest cohort of buyers—double that of single men.
• Generation X bought the most expensive homes at a median price of $320,000 (NAR).
• Minority households are expected to contribute all of the homeownership growth between 2020 and 2040, 70 percent of which is likely to come from Latino households (Urban Institute).

“When you look at the bottom half of Gen X, all the millennials and Gen Z, it ends up being about 175 million homeowners or potential homeowners. That’s almost two and a half times larger than the baby boomer generation was when it came through. So there’s an immense demand. There are no houses for sale except for home builders. But once that demand curve equals out between buyers and sellers, rates come down some, and you add this demographic wave coming at the industry, I can't tell you exactly the day it will begin to improve, but I can assure you that the future is exceptionally bright for the origination business.” -Brian Hale, CEO of Mortgage Advisory Partners

Demographics by Cohort

Barriers & Opportunities Facing NextGen Homebuyers?

According to Kristin Messerli’s research with 1,000 Millennial and Gen Z homebuyers in 4Q22, sponsored by National MI, here are a few barriers facing the next generation:

• Education: 39% said lack of knowledge was a current barrier to buying a home.?
• Lack of Support: Gen Z feels less supported than millennials to reach their financial goals, with only 14% reporting they have the financial advice and support they need, compared with 26% of millennials.?
• Distrust: Gen Z were significantly less likely to say they trust their loan officer or real estate agent in comparison with millennials (58% vs 77% loan officer, 67% vs 82% real estate agent).?

BLACK AND WHITE HOMEOWNERSHIP DISPARITY Not a lot has changed in the last year (or many years before that) when it comes to the disparity in Black and White homeownership, which runs deep through the history of our industry and country. Today, the Black homeownership rate is 44% compared to 73% White homeownership rate, representing the largest disparity in a decade (NAR).?

Nearly half of Millennials are made up of racial minorities, and yet 84% of Millennial homebuyers are White.? Many white Millennials are at least in part benefiting from the decades of generational wealth built through homeownership that was systematically excluded from their Black counterparts. As a result of this and other discriminatory practices, Black consumers have an average debt level that is significantly higher, a median income that is lower, and family savings that makes it difficult to have the support needed to take on big financial purchases like a down payment. After decades of redlining, discrimination, and exclusion from financial wellness services and homeownership, it is no wonder that it is a complex problem to solve. However, there are companies and individuals making this a top priority and having a real impact.?

LATINO HOMEOWNERSHIP GROWTH In 2022, the Hispanic homeownership rate increased to 48.6%, marking eight years of consistent homeownership growth (National Association of Hispanic Real Estate Professionals [NAHREP]). NAHREP also says that Latinos are more prepared than ever for homeownership because they have higher incomes than in the past, with the median income increasing 50% over the last 10 years, they are more educated, and they are entering the market at a younger age.?

OPPORTUNITIES & STRATEGIES

Most lenders today could be profitable and accelerate their success going forward if they made a few bold leadership decisions. Based on the current trends, there are several strategies that both executives and loan officers can implement right now to increase profitability in the market today and set yourself up for a strong 2024 and beyond. We have divided these into three primary categories:?

• Profitability Management or “Moneyball Mortgage”
• High Impact Technology
• Education to Borrowers and Agents

1. Moneyball Mortgage

When we talk about profitability with many leaders in the industry today, the answer is often, “We can’t do that in today’s market.” We can’t do that with the behaviors we have normalized in the industry today. It is time that we go beyond just production to evaluate behaviors that drive performance and value to the company. This is what we’re calling Moneyball Mortgage.?

In Moneyball Mortgage thinking, lenders implement extreme transparency, going deeper with success metrics and how they use data. Lenders and loan officers become mortgage advisors, aka Mortgage Coaches, to gain the most market share and to thrive in the future.

Moneyball Mortgage Algorithm Defined

These are the 5 loan officer metrics that matter most regarding profits and effectiveness. The biggest problem in today's market is that lenders focus on #4 and #5 the most, and they need to focus on #1, #2 and #3 the most.

1. Conversion from the Credit report? to a closed loan
2. Conversion Above the funnel from records in your database -- {Closed loans vs lost loans}
3. Pricing Concessions
4. Number of loans closed
5. Volume of loans closed

MAINTAIN A PROFITABILITY SCORECARD Today’s loan officer scorecard consists primarily of tracking volume, but that’s not enough in this market. In Moneyball Mortgage thinking, you need to track the data points that lead to profitability and long-term success, including price concessions and conversion.?

Discipline is key to Moneyball Mortgage thinking and moving towards a profitable future. The formula is available, but if you don’t believe in the system and adhere to it religiously, you won’t find success.?

“It doesn't mean you're going to have top producer, top profitability every month, but discipline, consistency, and believing in the system and using that tool will put you on top over the long run” - Jim Deitch, co-founder and CEO of Teraverde

Jim Deitch makes a compelling and data-driven case for how lenders need to change if they want to thrive going forward in this video. This is a must-watch for mortgage executives and originators.

PRACTICE EXTREME TRANSPARENCY ?If you measured and started delivering extreme transparency around concessions and conversions, it would be game-changing for profits. If you built technology and training around that, you would be successful today and win tomorrow.

REASSESS YOUR STRATEGY

“Today’s business has to be based on today's reality, not what we learned 5, 10 or 20 years ago to be successful in business,” says Brian Hale.

Brian suggests asking the following questions to reassess and rebuild:

• How do I present myself in today’s reality?

• What are my skill sets?
• What training and knowledge do I have??
• What is my marketing approach?
• Who are my clients?
• If all my referral partners went away tomorrow, how would I build a new set of referral partners?
• How do I use social media??
• How do I communicate?
• How do I follow up on leads?

2. High Impact Technology

Similar to the methods used to measure success internally, lenders need to utilize data and technology to increase conversion rates and efficiencies with consumers.?

DATA Top producers are receiving data-driven alerts that tell them when a client’s mortgage reaches a milestone that might result in an opportunity for a refinance, such as paying up 20% of the home’s value and eliminating PMI, or hitting a 5- or 10-year anniversary date.?

AUTOMATION The biggest technology gap in the mortgage industry today comes from lenders who haven’t adopted the tech available to automate. Top producers have fully automated the application process. Despite a challenging year, there are tremendous opportunities for all mortgage lenders to grow their business by implementing technology that automates lending documents, improves turnaround of documents, reduces redundancy and lost documents, and as a result, facilitates better relationships.?

PERFORMANCE MARKETING PLATFORMs CRM’s aren’t enough for lenders to optimize their databases and to get their loan officers to use the technology they invest in to improve sales and marketing results. Top lenders are going beyond the CRM, implementing individualization strategies and optimization methods that companies like Apple and Amazon have been using to maximize customer conversion and retention in other industries.?

The TrustEngine Borrower Intelligence Platform? is a performance marketing solution for lenders that drives superior funnel performance. TrustEngine actively monitors your database to anticipate borrower needs accurately, individualizes borrower engagement to turn opportunities into meaningful conversations, equips your team to coach, and emphasizes performance over the process through a continuous measurement and optimization loop.

ARTIFICIAL INTELLIGENCE Technology is constantly changing. We’ve gone beyond the automation of redundant tasks to having decisions made by artificial intelligence (AI). For instance, artificial intelligence is being used to read and extract data from borrower applications and supporting documentation.

Learn everything you can about AI and how it might help your business, then test it. If something works, keep growing its use. If it doesn’t work, pivot and try it differently. However, pay attention to the risks associated with new tech such as AI. This includes digital marketing, fraud screens and underwriting models reliant on artificial intelligence and machine learning, chatbots, and behavioral analytics that impact post-origination consumer interactions.

3. Education

Education is integral to all aspects of the business from lead generation to post-close. A few areas to ensure you’re investing in are listed below.?

ADVISING BEYOND THE TRANSACTION Utilizing technology like the Borrower Intelligence and Performance Marketing Platform, lenders can become known as trusted advisors beyond one transaction. Ultimately, this not only generates more leads but it builds trust with consumers, driving more referrals.?

For example, at the end of 1Q23, there was $28.7 billion in home equity across the U.S. (FRED/St. Louis Fed). Forty-two percent of Americans own their home free and clear, which translates into a lot of equity, and that equity equals opportunity for lenders to show homeowners how they can use that equity to expand their wealth through homeownership.?

FOSTER AFFORDABILITY Consider all of the available programs and products to foster affordability to your customers, and educate both them and your Realtor partners on their availability and terms.?

Down payment assistance programs rose 0.5% in 1Q23. Of 2,362 programs, 83.5% had funds available as of April 7, 2023 (Down Payment Resource).

“There are a bunch of things you can offer as mortgage products. You can offer down payment assistance and lower rates, and you can reduce fees to help them buy it and achieve it.” - Bill Dallas, Chairman of Dallas Capital?

CONDUCT IMPACT LENDING Popularized by Movement Mortgage, Impact Lending is something every lender and loan officer should consider a key part of their strategy. Impact lending involves giving back to your community through profits, education, and engagement. Young consumers, in particular, want to work with companies who align with their values and build trust in their communities. This strategy is also a great way to build referral partners and relationships with Realtors.?

“The world doesn’t need one more person just issuing mortgages. It needs passionate originators around the U.S. thinking about how they can start to solve and put a dent in some of these big persistent problems that exist in every major metropolitan city in America.” - Casey Crawford, CEO of Movement Mortgage

JOIN FIRSTHOME IQ Consider partnering with FirstHome IQ, our new nonprofit focused on educating 16-25 year-olds on the path to homeownership and financial literacy. Volunteer in your community using our content and resources, facilitate a connection with a school or nonprofit that could benefit from our curriculum, or donate.?

Note, if you are a loan officer, consider signing up for our Ambassador Program. As part an Ambassador, loan officers who donate per closed loan also benefit from publicity, content, and brand resources to promote their contributions to their community. For more information, email Kristin at [email protected].?

RESOURCES

RESOURCES

• CLICK?for last year's 2022 HALF TIME REPORT
• CLICK?for the playlist of 2022 interviews
• Check out this interview with Charlie Pratt, CEO of Homebot -?VIDEO?+?TRANSCRIPT?