#MBATech23: Challenging Economic Conditions Persist

(MBA Chief Economist Mike Fratantoni (l) and MBA Director of Analytics Jenny Masoud present at #MBATech23 on Tuesday.)

SAN JOSE, Calif.—After several years of extraordinary—and unexpected—mortgage performance despite the coronavirus pandemic, 2023 is a decidedly different—and less desirable—business environment, said MBA economists.

“It’s a really tight environment for our residential lenders,” said MBA Chief Economist Mike Fratantoni here at the Mortgage Bankers Association’s Technology Solutions Conference & Expo.

The MBA forecast calls for a mild recession later this year, “and in anticipation of the slowdown, banks are starting to pull back,” Fratantoni said.

MBA expects interest rates to hold at around 5 percent by middle of 2024; inflation to slow to a rate more in line with Federal Reserve expectations; home prices continuing to fall; and mortgage interest rates to settle at or near 6 percent. “Not the 3 percent rates we saw a few years ago, but still relatively low,” Fratantoni said.

Inflation has slowed considerably from its breakneck pace last year. “And despite wages, households were still falling behind,” Fratantoni said. “That is why the Fed continues to be so aggressive in bringing inflation down; it recognizes that an inflationary environment is not good for the overall economy, if consumers continue to make hard decisions about everyday events such as food, energy and shelter.”

Fratantoni said MBA expects the Fed to hold on the federal funds rate to 4.75-5.00 percent to put continued pressure on inflation. The 30-year mortgage rate is expected to fall to the mid-5 percent rate by the end of 2023.

In this environment, home sales have become highly sensitive to mortgage rates, with flurries of activity as rates dropped even slightly. “But the purchase market is still going to be difficult, primarily because of a lack of inventory,” Fratantoni said. “There is simply no incentive for homeowners who have interest rates under 3 percent to sell their homes right now. This shifts pressure on the market to home builders, who have to get their existing inventory off the books.”

The mortgage industry—primarily independent mortgage banks—have seen declines in profitability for the past three quarters, said MBA Director of Analytics Jenny Masoud. “Production costs saw the highest increase quarter over quarter between the third and fourth quarter,” she said. “We’ve also seen a fifth consecutive quarter of production revenue declines.”

Technology expenses have increased for mortgage companies as well; MBA/STRATMOR Peer Group Roundtable data show mortgage companies have been investing more heavily in technology, such eSgnatures, digital closings, remote online notarizations. “Our members believe that adoption of digital technologies will continue to grow over the next five years—driven by customer demand,” Masoud said.

For commercial/multifamily lenders, some losses could continue, Fratantoni said. Data from Kastle Inc. show just 50 percent of office space is occupied, compared to 97 percent pre-pandemic. “With a lot of maturities coming up in the next couple of years, we could see another source of market volatility ahead,” he said.

But with employment figures continuing to show strength, delinquency rates for the residential and the commercial/multifamily markets remain low. “Delinquency rates generally follow employment rates,” Fratantoni said. “There is some evidence of softening.”

According to the MBA Loan Monitoring Survey, some 300,000 loans remain in forbearance. “Redefault rates look pretty good,” Fratantoni said. “On the commercial/multifamily side, during the pandemic the hospitality rates and retail rates rose, but they’ve really started to recover. We expect these numbers to go back up, but the starting numbers are strong, and we do not expect the kinds of delinquencies back during the Great Recession.”