#MBATech2022: How Trends Intersect in a Changing Industry
(l-r: Mike Fratantoni, Jenny Masoud)
LAS VEGAS—Real estate finance has migrated quickly from a person-to-person business to a person-to-tech-device-to-person business. And socio-economic forces are rapidly steering technology to reshape business—even as business continues to fine-tune technology.
Jenny Masoud, Director of Analytics with the Mortgage Bankers Association, said mortgage companies continue to invest heavily in technology. From 2012 to the first half of 2021, technology investments have roughly doubled, from 4.8 percent of investments in 2012 to 8 percent in 2021; for large banks, the percentage of investment was even higher, from 8.3 percent in 2012 to more than 15 percent in 2021.
The result, Masoud said here at the MBA Technology Solutions in Mortgage Banking Conference & Expo, has been a substantial improvement in productivity—and a slight increase in customer retention, to nearly 25 percent in the first half of 2021. “Use of eNotes have seen a substantial uptick since the pandemic,” she said.
MBA released its updated economic forecast and mortgage finance forecast Wednesday, calling for slower growth and higher inflation. Fratantoni noted, however, that job growth continues to roar ahead—the forecast calls for the unemployment rate to fall to 3.5 percent by the end of 2022.
“The threat of recession is higher—but we are not talking about a recession economy,” Fratantoni said. “We’re in Las Vegas, so I would rate the odds of a recession at one-in-three; but we are not planning for a recession.”
Fratantoni noted the Federal Reserve targets inflation ideally at 2 percent yearly; it is currently at 8.5 percent. “This is why the Fed is so concerned,” he said. “The Fed has identified 2.5 percent as the federal funds rate that will harness inflation, and they will work as quickly as possible to get to that balance…the Fed is going to have to work very hard to rein in inflation.”
Last year, MBA projected the Fed would raise the federal funds rate three times in 2022; “now, we think we could see nine rate hikes this year to get to the 2.5 percent rate,” Fratantoni said, including 50 basis-point hikes at its policy meetings in May and June.
For the mortgage industry, mortgage interest rates should remain in the 4.5-5.0 percent range for the next year or so. “That’s why we’re going to look to the Fed for direction,” Fratantoni said.
The biggest impact for the mortgage industry with higher rates will be a continued sharp decrease in refinances—MBA projects refis will fall by 65 percent in 2022 from 2021 levels, to $841 billion in 2022 and down to $746 billion by 2024. Purchase originations, however, will continue to tick up—to $1.721 trillion in 2022 to $1.845 trillion by 2024.
“This represents a very significant shift for the industry,” Fratantoni said.
Housing inventories and rising home prices, which have been hamstringing the market for the past two years, are expected to improve over the next two years, Fratantoni said. “While some economists continue to forecast double-digit home price increases over the next year, we expect it to ease somewhat,” he said.
Masoud noted economic volatility has had an effect on mortgage industry profitability—the latest MBA Annual Performance Report showed while independent mortgage banks’ profitability remained high from a historic level in 2021, it was well off from 2020’s record levels.
One reason for this, Masoud said, was a sharp increase in production costs. “The main reason for this is average mortgage loan size, which reached a record high in the fourth quarter,” she said. “And as we know, when loan size increase, so to commissions.”
For the commercial/multifamily sector, the pandemic has mostly been a tale of two sectors, Fratantoni said, with substantial growth in multifamily and industrial, offset by weakness in retail and office.
“We anticipate an uptick in cap rates and a softening in the commercial/multifamily sector in 2022 into 2023,” Fratantoni said.
For the servicing sector, Fratantoni said fundamentals continue to hold strong, for now. “Delinquency rates tend to track strongly with the unemployment rate, and with the unemployment rate continuing to track down, we expect delinquencies to stay low as well,” he said.
Widespread use of mortgage forbearance during the pandemic—“never used on such a scale before,” Fratantoni said—was a success story. “We were able to move millions of homeowners through the crisis,” he said. “The mortgage industry is doing an extraordinary job of helping millions of people through forbearance. In most cases, these borrowers are exiting forbearance and resuming their mortgage payments without going into foreclosure.”
Since 2015, mortgage debt outstanding has been on the rise, to nearly $12.3 trillion in 2021. The big difference, Masoud said, is the shift from depository institutions holding the majority of mortgage debt outstanding in 2015 (90 percent) to non-depository institutions grabbing the majority share in 2021 (53 percent), while depository institution share has fallen off by nearly half.
For IMBs, servicing profitability has improved, but remains precarious.
“At the macro level, there remains tremendous volatility and uncertainty,” Fratantoni said. “The overall direction of the Fed remains unknown. The ability of technology to get lenders and servicers to a better place has never been more important.”