2022 mortgage industry predictions

By NMN Staff, Brad Finkelstein, Spencer Lee, Bonnie Sinnock

December 17, 2021 2:24 PM

Fortune Teller Predicting Future Using Crystal Ball

The second calendar year of the COVID-19-era found those in the mortgage industry making hay while making way for shrinking margins as the number of new rate-and-term refinances started to decline from record highs.

While Arizent survey respondents offered their 2022 forecast earlier in the month, we also invited industry figures to have their say. Apart from the buzz around more mergers and acquisitions ahead, leaders from all sides of the business offer their best predictions for the market conditions that we can expect in the next 12 months.

Refis will be stronger than first thought

Even when mortgage rates are high, there are refinance transactions in the market, primarily when a borrower has a need for the cash. The inventory shortage will add these transactions to the market.

"I expect to see a rise in the number of people taking cash out as the current inventory of homes on the market is very slim," said Ellen Steinfeld, executive vice president and head of consumer lending at Berkshire Bank. "Lack of inventory means prices [and] home values are rising; therefore many will likely consider refinancing, taking cash out and renovating their homes."

It will not only be existing homeowners needing funds for renovation. The inventory shortage will also lead investor purchasers to acquire aged properties that need to be fixed up and either flipped or rented, said Andrew Pollock, CEP of Anchor Loans, a provider of fix and flip financing.

"People now realize that you can repurpose a home," Pollock said. "You can bring in new appliances, you can add more square footage and bring together an opportunity for a retrofitted home that is alluring."

Another trend in 2022 that could help reduce the inventory shortage is the building of infill housing, properties on vacant lots in urban or suburban areas located between existing homes, Pollock said.

"There's already power, there's already sewage, there's already cold water," he continued. "We just got to draw the plans and build the homes and they sit in areas that the large builders wouldn't go after."

Home equity offerings will take off

As home prices have increased over the past several months,

tappable equity also set records

. Homeowners are likely to take advantage.

“The biggest trend that I'm seeing is that 2022 will be the biggest year for home equity accounts opened in the history of the mortgage market,” said Jeff Taylor, managing partner at mortgage processor and risk compliance consulting firm Digital Risk.

Home equity lines of credit, or HELOCs, and junior lien home equity loans will “come back into vogue” with more competition in the space, said Dale Baker, president of home lending at KeyBank.

“If a client already has 2.5% on their mortgage, and they need to borrow $100,000, do you refinance the whole thing at 3.5% or 4%? Or do you just go get a home equity loan or home equity line of credit and leave your 2.5% alone over the last several years?” he said.

But lenders will need to keep an eye on the reasons behind the forthcoming spike in home equity loans. “What are people going to use the money for if they have home equity? Is it to improve their home or potentially on lifestyle stuff?” Taylor said, noting similar conditions in the lead-up to the Great Recession. “I think that's going to be a big storyline we see going ahead,” he added.

Baker also sees adjustable-rate mortgages volume increasing, especially if buyers only intend to be in their properties for a few years.

“We're doing a fair amount of ARMs right now and have been for a while but I think you'll see that there will be more demand for adjustable rate mortgages as interest rates go up,” he said.

Prices — not rates — could derail originations

Consumers are still going to look for homes in 2022, "but I also believe that the housing market will end up becoming flat because people are increasing asking prices on homes to a degree that is just pushing [buyers] away," said Richard Pisnoy, a principal at Silver Fin Capital, a mortgage brokerage. "Ultimately things will start to stay on the market a little longer."

As a result, home price growth is likely to slow down in the near-term, said Rick Thornberry, CEO at Radian Group, who expects things to moderate going forward.

"We won't see 18 to 20% annualized home price appreciation, but we'll see it move back to a much more normal level," he said. "In that market I think you continue to see the demand exceeds supply of homes, we don't have the housing stock and we're not building homes fast enough for a whole variety of reasons to meet demand."

Meanwhile, even if mortgage rates rise to the mid to high 3% range, "I just don't think there's going to be a huge amount of discouragement [of home buying] there," Pisnoy said.

Layoffs are likely to continue

Following the news of mass layoffs at

Better

and

Interfirst

, it’s no surprise that some see turbulent waters ahead, including KeyBank’s Baker.

With the Mortgage Bankers Association expecting originations to fall by at least $1 trillion in volume next year, “there will be layoffs,” he said. To meet the booming demand over the past 18 months, both banks and IMBs

set hiring records

over the past year.

“What's going to happen to all these lenders? That means we’ve got excess operational capacity baked in of an extra trillion? Well, you're not going to need that.”

Should originations shrink as much as the MBA forecasts, the largest companies will bear the brunt of the impact, Baker said. “After the holidays, you're going to see big layoffs. 5000 here, 10,000 there,” he said.

More third-party lending channels and Ginnie MSRs will be up for sale

The coming year will hold opportunities for investors interested in buying certain industry assets as consolidation occurs, according to Tom Piercy, president of national enterprise business development, Incenter LLC.

“I think generally speaking, it’s the monoline origination channel that's tied to third parties, whether it's correspondent or wholesale, that’s at risk,” he said. “The reason I say that is you've got some pretty significant players who have multiple channels out there and the retail channel creates the largest margin, the second is correspondent, and wholesale tends to be

extremely competitive.”

Monoline players might be looking to sell as industry profitability

comes under pressure

, and companies with more than one channel might be looking to buy if they can subsidize third-party originations with retail, he predicted.

“I think the subset of originators that are not multichannel, or not as well capitalized as others, are going to face some difficult times,” Piercy said. “So it’s been a great run for everybody, but I think you’re going to see adjustment among the players, with merger and acquisition activity picking up to offset production declines.”

Also, sales of Ginnie Mae mortgage servicing rights already are occurring and more lie ahead, he said.

“Some people are getting out. I think part of it was just the [proposed] capital requirements for nonbank servicers. The other part of it is that people look at...the risk with forbearance over the last year and may think, ‘We don't deal with that. We're stronger in other areas,” he said.

As with third-party origination channel sales, Piercy expects buyers will pick up the slack.

“I will say this, for those who do service Ginnies and are in it for the long haul, the yields are better than for conventional servicing,” he said. “That’s actually driving some new interest in Ginnie Mae MSRs.”

The fate of Ginnie Mae’s proposed nonbank requirements is resolved - or not

The wild card in this market will be the question of whether the request for input that contains Ginnie’s new capital requirements for nonbanks moves forward or not. At the time of this writing

they were on hold indefinitely

, but Piercy was expecting them to re-emerge in some form.

Ginnie could potentially address the concern capital requirements create for some nonbanks by focusing more on liquidity instead and facilitating MSR financings as a means of providing it.

“One thing to keep an eye on is to see what this creates as far as the collaboration between Ginnie Mae and the nonbanks, but also the banks that are providing credit facilities to the nonbanks,” said Piercy. “Ginnie may need to take action here. They could do a really good thing for everybody involved, including themselves, if they created a better mechanism for the banks to be secure in the credit facilities they provide to nonbanks.”

Ginnie has tried to address this in the past by tweaking the acknowledgment agreements that spell out its rights in MSR financings to better accommodate the role of the other parties involved, but other stakeholders have remained a little uncomfortable with the wording.

With the RFI under review, Piercy thinks Ginnie stands a better chance of producing an effective revision in the coming year that nonbanks and the depositories will be comfortable with if it really delves into the issues and engages in a productive dialog with everyone involved.

“I think something will come out that really provides a more attractive environment for the banks to be able to provide these types of facilities,” Piercy said. “I’m cautiously optimistic. Certainly I know that there’s been dialog around it.”

Brokers to gain business from changing employment picture

There are a significant number of borrowers that don't fit into that easy bank lending box, and need the services of a mortgage broker, Silver Fin's Pisnoy said.

"If everybody was able to prove income, everybody was W-2'd and everybody has excellent credit, at the end of the day, you'd be able to go to Wells Fargo or Chase," Pisnoy said. "But because everybody's situation is unique, whether it's a debt service loan or a business bank statement loan, brokers have options to get people financing that your standard lenders don't."

Moreover, for many self-employed people, 2020 and 2021 were not great years because of the pandemic. "But as we pull out of this and get back on track, there are certain options that we have, again that these other lenders don't," he said. Plus unlike depositories, "we specialize in one thing, and that is getting somebody the best deal, the best product [and] the best solution to the scenario that they had."

The increase of private-investor appetite in non-GSE and government-backed may indicate growth in lending to nontraditional income earners in 2022 said Robert Heck, vice president of mortgage at online marketplace Morty.

“There are plenty of pockets of borrower types that don't necessarily fit perfectly into some of these bigger loan programs — conventional specifically — like gig economy workers, contract workers. I think that there will be some exciting stuff going on in the market to try to better serve some of those areas,” he said. “And I think it will likely need participation outside of just the GSEs.”

Rising rates driving increased interest in non-QM

In just a few months, John Keratsis, the president and CEO of Deephaven, noticed a shift in attitude among mortgage bankers who are potential correspondent partners.

At the Western Secondary Conference in August, while there was a good deal of interest in non-qualified mortgage products in general and Deephaven in particular, after the show, the companies it met with had a wait-and-see attitude.

But at October's Mortgage Bankers Association annual, Deephaven had 60 meetings and the response was "Yeah, this is going to be a meaningful component of our business for 2022," Keratsis said. "And I think when you start to peel back the onion to figure out what's behind that, there's a lot of capacity that's been built into the market."

Lenders are looking to supplement their loan officer teams with products to replace the decline in refinance activity, Keratsis said. Deephaven is also expecting its wholesale channel to pick up in activity in 2022 as well.

As head of structured mortgage finance at TIAA Bank responsible for its warehouse lending, Charley Clark has already fielded several requests for non-QM mortgage and other specialized jumbo-loan products from clients. Heightened competition among independent mortgage banks next year is likely behind the burgeoning interest in the non-QM space, he said.

“I think the reason is the IMBs know that as we get into a more and more competitive market next year, they're going to need to reach out to these niche products to continue to bolster volume. So they're smart and they're preparing in advance,” he said.

Mortgage insurers see their fortunes changing

The bulk of new mortgage insurance written comes from home purchase activity. Since first-time home buyers, with many lacking the ability to put 20% down, are expected to make up a large percentage of the market, mortgage insurers are likely to benefit, Radian's Thornberry said.

"The second factor that's good is that as refinances slow down, and the projections a call for material slowdown in refinances, that increases the persistency of our insurance in force," the percentage of policies that remain in force 12 months later, he added.

But in lieu of refinancing, some lenders and servicers have offered borrowers options that might end up reducing profits for insurers.

“With the increase in home prices, we're seeing more and more lenders offering recasting options for people just to lower their monthly payment without changing the terms of their mortgage,” said Heck from Morty. “Some lenders out there are also allowing for revaluations of the home values as home prices have gone up to help them get rid of mortgage insurance sooner than they would if they did nothing. So I think those are all things that we'll probably see.”

MIs only pay claims when loans go to foreclosure, and that activity is expected to increase in 2022 as forbearances end and a percentage of borrowers can't resume payments as contracted or modify their loans.

At Radian's third quarter earnings call, Thornberry pointed out that "for the loans that went into default in the second quarter of 2020, 89% of those cured through the end of October. I'd say that we're very pleased with the credit performance of our portfolio and I think you have to step back and say that we consumers, taxpayers, industry, have all benefited from making the right decisions up front through the implementation of these forbearance programs really to help consumers navigate out of harm's way back to current status."

ESG initiatives take the spotlight

“ESG (environmental, social, and governance) considerations will continue to expand from investment funds and public companies to privately held financial services companies,” Michael Dubeck, CEO and president of Planet Financial Group said. “In the past few years, Planet Home Lending has been moving forward on ESG projects in anticipation of the trend.”

“This past year the White House, FHFA, Treasury, Fannie Mae, Freddie Mac, the Controller, and MBA all have discussed the influence of climate change on the mortgage industry,” he said. “And the recent social media around Better.com layoffs highlighted the importance of treating employees with respect. Measuring those non-financial factors that can influence a company’s operational efficiency, resilience and reputation will become more prevalent in 2022.”

Technology adoption continues

As typical in a tighter margin, declining origination environment, mortgage lenders will be looking to technology to help manage costs. And there has been an explosion of fintechs looking to provide options, said Suha Zehl, chief strategy officer at consulting firm BlackFin Group. But many mid-tier and smaller lenders lack the in-house person to help them manage the process. BlackFin provides those services.

If a lender goes for a cookie cutter solution, "this is what I'm going to do for every borrower, for every customer that I have, then you are not differentiating yourself," Zehl said.

The advanced analytics tools now available will help lenders tailor solutions for their clients, said Chris Boyle, president of home lending at tech platform Roostify. “Being able to take documents, extract data, do some calculations, do some other things — are really good for consumers. It helps them in making their buying decisions. It also helps the lender in making the credit decision,” she said.

“The ability to use that data in a very constructive way to do that fulfillment is certainly something that the mortgage space will see accelerate in 2022,” Boyle said.

She also credited Fannie Mae’s recent decision to factor in rental-payment data in the mortgage decision-making process as a path toward fairer lending and expects current technology to help serve goals of removing bias and achieving greater equity. “The digitization process is only going to be a champion of all of that.”

There are many providers that do the same thing and lenders have to analyze which one is the right one for their organization and for the customer that they’re serving.

"It's very critical to analyze that and evaluate to determine if Partner A is going to fit in with our culture, with the way we run our business or is it Partner B?" Zehl said. "They may both deliver the same service, but for you to have a successful implementation and successful delivery, the right adoption from your users and from your customers, it's really critical to find that synergy between your organization and the partners that you're selecting."

But in choosing a new piece of technology, lenders also have to remember the user experience for their staff, not just their borrowers; both should be considered as customers of this technology, Zehl said.

"And if you throw a solution that may be phenomenal for the customer/borrower that makes the life of the customers/user really difficult and challenging, then that's going to impact your productivity, that's going to impact your average cycle time and how long it takes you to close that loan," she continued.