Mortgage Bankers Association webinar: takeaways and insights

After two years of record profitability and growth, residential mortgage lenders are facing fierce competition as rising interest rates cause origination volume to plummet. And with rates continuing to rise, institutions are searching for strategies to navigate this challenging climate.

Lima Ekram, Capital One's managing director of mortgage banking, recently moderated the Mortgage Bankers Association Webinar. Responsible for developing research on macroeconomics and mortgage industry trends at Capital One, Ekram was joined by three industry veterans to discuss their perspectives on operational efficiency, managing liquidity and lessons learned in 2022.

Stan Middleman, the founder and chief executive officer of Freedom Mortgage, contributed his hard-earned insights developed over 30 years of market cycle experience. Middleman has also served on numerous financial advisory boards, including Fannie Mae, Freddie Mac and Ellie Mae.

Of particular note was Terry Schmidt, president of Guild Holdings Co. Schmidt has experience increasing financing access and growing national market share through various economic cycles. Schmidt's past roles include chair of the MBA Financial Management Committee and board member of the California Mortgage Bankers Association.

Rounding out the panel's expertise was Marina Walsh, CMB, vice president of industry analysis at Mortgage Bankers Association and a specialist in industry performance benchmarking for residential lenders and servicers. Walsh was named to HousingWire's Women of Influence list, which highlights women who make significant contributions to mortgage banking and real estate. 

With origination volumes down, rising interest rates throughout 2022 and inflation near 40-year highs, many in the mortgage industry—and even would-be homebuyers—are wondering what needs to change before the mortgage market improves.

For Middleman, liquidity is one of his biggest concerns. Middleman shared his perspective on how the ongoing geopolitical conflict in Europe is creating economic turmoil in global markets. "Problems with liquidity could ripple down into domestic housing and lending markets," he said.

For these challenges, Middleman takes an optimistic stance, outlining scenarios where lenders originate trillions of dollars a year for three or four years, putting half to two-thirds of all mortgages at the new current rate. It's essentially a new normal.

Schmidt shares that while lenders simply have no control over macroeconomic headwinds, they—independent mortgage bankers (IMBs) in particular—need to model and stress test different economic cycles and have the ability to quickly access capital if need be. "We're constantly evaluating how production volumes and servicing values will change if interest rates rise or fall and what impact that will have on our cash and capital position," Schmidt said.

For resilient lenders who can run lean for a few years and wade through the market challenges, there could be significant opportunities on the horizon.

Walsh reiterated the extreme drop in refinancings from $2.6 trillion in 2021 to $670 billion in 2022 and a forecasted further drop to $484 billion based on MBA's revised November forecast. This means the focus for mortgage lenders needs to be on the purchase market and perhaps niche products such as home equity loans, renovation loans, buydowns and down payment assistance programs for first-time homebuyers.

"With about 50 million people in the 28–38 age cohort, the demographic trends support a robust purchase market," Walsh said. "However, there is a structural undersupply of housing which has resulted in steep home price growth and a reduction in housing affordability. At the same time, with the rapid increase in rates in 2022, some builders have slowed operations. Demographic fundamentals will continue to be a tailwind for single family demand for the next several years, but housing supply will remain constrained."

Impact of inflation

So, what about inflation and what does this mean for mortgage rates in 2023?

Middleman shares that while inflation is a concern, he believes lenders can best prepare by planning ahead for a fundamentally different environment than we’ve seen in the last four decades. 

"Today, we face cost-push inflation rather than demand-pull inflation because of supply issues and service costs," Middleman said. "The big key is unemployment. We'd have to see a rise in unemployment to see a significant change in demand to hold back inflation.

"For four decades, we've seen improvements in productivity, we've seen cost advances, we've seen demand grow and we've seen costs fall," Middleman continued. "Today, we're having inflation that's caused by cost-push inflation, not demand-pull inflation. So, the cost is not going up because there's so much demand dragging it up. There are supply issues causing scarcity."

Admittedly, supply issues from labor, material and service costs are impacting markets significantly, and the problems are much larger than any single industry. The difficulties are macro in nature, which means that the best course of action is to simply prepare.

Schmidt didn't disagree with other panelists' concerns around inflation, saying, "It seems like it's going to take longer to get that back in check. And so, it's going to be challenging for the near future. We just have to get through this next year to year and a half."

Walsh outlined the MBA's forecast for inflation and rates. The expectation is for inflation to end the year 2022 at 7.6%, then drop in 2023 to 2.8%. Lower inflation translates into lower mortgage rates for the industry. Mortgage rates should end the year 2023 at about 5.2% —which is a welcome result after rates peaked at over 7% during some periods of 2022. 

With winter comes the expectation for some that the ongoing geopolitical conflict impacting Europe's energy crisis will trigger a severe recession there.

"If those markets react, what about the domestic markets?" Middleman said. "How are they going to react to liquidity issues abroad? We're spending a lot of time thinking about that. There's the potential for big risk there, and I'm concerned about liquidity risk and how that's going to impact our organization. So, I'm trying to manage our risk without creating more risk by going too far out on the limb in origination."

At the same time, Middleman said that when property values are rising significantly and coming off a price correction, it's the perfect opportunity to get product out of the door, as long as there's liquidity for it. "I'm a little more risk-averse and a little less product innovation friendly. At this point in time, I think there are times when that opportunity is a good one."

Schmidt agreed that the European energy crisis and rising energy costs could hit home, fanning inflation even more.

Tightening liquidity—an aftereffect of the energy crisis that has prompted closure of small futures traders in Europe—is impacting access to capital and its cost. "The environment all around just isn’t as liquid as it was," Schmidt said.

Schmidt insisted that there will always be opportunities for those who know where to look. "History has a way of repeating itself, and like before, the ones with the most cash and the strongest balance sheets will be the biggest winners," she said.

She also said the risk for most lenders is access to capital and the liquidity equation, pointing out that lenders like Guild Holdings, who are 100% retail, still need to originate loans. "Those that have the ability to grow market share and at the same time operate lean will get through this downturn," she said. "And while there will be industry consolidation, lenders with strong balance sheets can afford to be opportunistic."

Schmidt said, "When you work for a company that's been through these cycles, that has value to your originators and those originators looking to make a change. We've been through these highs and the lows, and if you've got a great foundation—you've weathered these storms before—that carries a lot of weight. This kind of proven consistency matters a lot more in today's environment."

No doubt, the industry experienced major challenge in 2022 that will likely continue into 2023. Walsh noted that production profitability went negative in 2022 and lenders have no choice but to reduce expenses and excess capacity. MBA estimates a total 25%–30% decrease in mortgage employment from peak to trough.

But the bottom line underscored by participants of the panel was that lenders that operate leanly, have strong balance sheets, access to capital and are more discriminate and focused in their origination strategy can stay afloat and even capitalize on unique market opportunities that arise in these financial environments.