The Mortgage Market in 2022

Outlook

Despite a 25% decline in the size of the mortgage market year-over-year, 2022 is still expected to be a $3 trillion market when you take an average of the latest forecasts from the Mortgage Bankers Association, Fannie Mae, and Freddie Mac. That’s a healthy mortgage market, but we need to look deeper than just the headline number.

The composition of the market is going to flip in 2022 from being two-thirds refinance to two-thirds purchase mortgages. The end of the Fed tapering toward the end of the first quarter and the anticipated rise in rates will significantly reduce the refinance volume the industry has enjoyed over the last two years as rates were reduced quickly and aggressively in 2020 to record low levels to counteract the fallout from the Covid-19 pandemic.

To put it into perspective, the refinance market will decline by about $1.4 trillion year-over-year to a little more than $1 trillion, while the purchase market will increase approximately $165 billion to almost $2 trillion.

Demand for homes is little diminished because the experiences of the past two years remain fresh. Millions saw their homes become the scene of their lives, rather than as a hub for outside activities. Remote working gave workers a greater freedom to locate beyond the commute zone of their places of work, and for many that freedom is likely to remain. Continued uncertainty about how long health precautions may be called for appears likely to sustain the demand rather than diminish it.

Economy

The big variable in all of this is inflation. The Fed has been very clear that this is their immediate priority, which may lead to additional interest rate hikes in 2022, and if this is the case, affordability will start to become an issue. Buyers have been able to offset the increases in home prices over the last two years because of low rates, but at some point, rising rates combined with rising home prices will start to preclude certain borrowers, predominantly first-time homebuyers, from entering the market. Right now, however, demand for homes remains strong, which is why the purchase market is forecast to increase year-over-year.

On the supply front, homebuilders haven’t been able to keep up with demand, and this has been driven by several factors, not just the low interest rate environment. Supply chain issues around raw materials and transportation and labor shortages have also slowed the supply of new homes creating a demand and supply imbalance.

Industry Trends

While a $3 trillion mortgage market should be celebrated, it’s still a more than 25% reduction from the 2021 market. As a result, there’s excess capacity in the system, so expect some cost rationalization during the year. We’re also seeing a lot of mortgage servicing rights (MSRs) hit the market as originators look to sell into a rising rate environment to generate liquidity to fund their origination businesses. I think you will also see consolidation in the industry. In a shrinking mortgage market, not everyone can grow market share and be successful and so scale becomes even more important.

An opportunity that has been presented was the recently announced loan level pricing adjustments by the Federal Housing Finance Agency (FHFA) around high balance loans and second homes. These pricing adjustments will push more of these products toward private securitizations, so like when the FHFA implemented their caps on non-owner-occupied mortgages in 2021, expect aggregators and those with RMBS capabilities to benefit.

I would expect there to be pressure on retail margins in the early part of 2022 before they normalize, whereas I believe correspondent and wholesale margins have already normalized given the competition in these channels in 2021. As a result, margins in these third-party channels should remain relatively constant throughout 2022.

From a product perspective, we’ve already talked about the healthy purchase market, but cash-out refinance activity will likely dominate the refinance space given the increase in home prices and borrowers wanting to access their newly created equity. In time and as rates rise, non-QM activity will increase and HELOCs will be in vogue once rates increase beyond a certain threshold and there’s refinance burnout.

Technology

The capacity and competition that loan originators face in the coming year will increase the adoption of new technologies for qualification, appraisals, and closings. The expansion of technology resources that facilitate loan origination is a steady evolution that the environment of 2022 is likely to accelerate. Cost management is just one reason to expect it, and companies that welcome this evolution will harvest the resulting efficiency.

As a mortgage bank with more than 30 years of experience, we look forward to the opportunities 2022 presents. We’re proud to facilitate home ownership amongst our customers and remain dedicated to helping everyone we work with be prosperous and successful.