(#MBAServicing23) Market Outlook: A Few Hurdles Ahead

(MBA Chief Economist Mike Fratantoni addresses MBA Servicing23 in Orlando.)

ORLANDO—The mortgage servicing industry has seen a lot of volatility lately—and that’s not likely to ease up any time soon, said Mortgage Bankers Association economists.

“We’re seeing a lot of economic uncertainty here right now,” MBA Chief Economist Mike Fratantoni said here Thursday at the MBA Servicing Solutions Conference & Expo. He reiterated MBA’s belief that the U.S. will enter a recession this year, albeit a small one.

“With that economic slowdown, we should see a decline in mortgage rates,” he said. “The only question is the extent of the slowdown. We can’t see a hard landing or a soft landing or even no landing. And it’s not just a U.S. recession—we’re anticipating this to be a global issue.”

With inflation running at the highest rate in 40 years; but Fratantoni noted improvement in economic conditions. “We should see steady reductions in inflation over the next couple of years,” he said. “Fed Chairman Jerome Powell has noted a steady decline the rate of inflation; the Fed wants inflation back to its target range of 2 percent; the MBA Forecast doesn’t see that happening until 2024.”

Fratantoni noted job growth, following the initial shock in the early months of the coronavirus pandemic, has been remarkable; and job openings, as documented through the government’s JOLTS (Job Openings and Labor Turnover Survey) report showed a highly unusual number of job openings—but that is likely to change. “We anticipate the recession to take place in the second half of the year, which should result in job losses of around 25,000 per month,” he said. “We think the unemployment rate should be close to 5 percent by the end of 2023.”

Fratantoni said over the next year, the range of estimates for the federal funds rate has narrowed, with most expecting mortgage rates to fall into the 5 to 5-1/2 percent range. “The Fed’s next meeting is in March; we anticipate another 25 basis point increase,” he said. “We expect the same in May; by then, the economy should have slowed sufficiently to make that the last increase.”

MBA Vice President of Industry Analysis Marina Walsh, CMB.

Fratantoni noted the housing market has gone through a “rough period,” a situation that could become trickier ahead, as consumers continue to spend more than they save. “We could see the initial cracks with rising defaults in the auto sector before it affects the mortgage sector,” he said. Mortgage interest rates, currently well over 6 percent, should slow to the 5.25-5.50 percent range by year end, he said.

For the mortgage industry, refinance applications, which dominated the markets for so many years, “is not likely to come back anytime soon,” Fratantoni said. “The real star going forward is in the purchase market—so long as rates hold steady.”

That, Fratantoni observed, is a delicate matter, noting the purchase market largely dried up late last year as mortgage interest rates jumped toward 7 percent. “Rates are back down now, so we are in a better place.”

Boosting the market, Fratantoni said, is demand for housing, noting 28 million Americans are currently in prime homebuying ages, forming 1.5 million households per year. “What’s holding them back is the lack of housing supply to meet this demographic demand,” he said.

Builders are pulling back in anticipation of a recession, Fratantoni said. “They are focused on selling the current pipeline before they start building new units,” he said. “Once that clears out, we should see an uptick in building activity.”

Builders will move those properties, but new home sales are still expected to drop; existing home sales are more volatile, as many homeowners with low interest rates continue to show reluctance to sell. “Existing home sales are expected to drop by 15 percent this year—but it’s not from a lack of demand; it’s from existing homeowners pulling their homes from the market or deciding not to sell right now,” Fratantoni said.

The MBA forecast calls for essentially flat home sales over the next year. “But no one lives in a ‘national’ home market—all markets are local,” Fratantoni said. “There will continue to be markets with volatility going either way.”

For millions of Americans, the dilemma is whether to continue to rent, or stretch their budget and buy. “Affordability is really tough for the first-time home buyer right now,” Fratantoni said. “But we think the market will ease up over the next few years.”

MBA Vice President of Industry Analysis Marina Walsh, CMB, said loan performance continues to be strong; mortgage debt outstanding is near a record $13 trillion. “This is a healthy market,” she said.

Walsh also noted the latest MBA National Delinquency Survey, while showing quarterly upticks in delinquencies and foreclosures, also remained a near-historic lows reached in the third quarter. “We’ve seen that delinquency rates tie closely to jobs, and the job market is currently healthy,” she said. “While there has been an increase, it isn’t anywhere near the peaks we saw during the Great Recession or during COVID.”

Loans in forbearance also continue to drop, according to the MBA Loan Monitoring Survey. “We have just 300,000 loans in forbearance, and it’s thanks to your efforts,” Walsh said.