The Fed's actions and how they transformed mortgages: a timeline

December 23, 2022 4:05 PM

Concerns from Federal Reserve officials about inflation, and their actions taken to address it, have markedly changed housing finance in 2022.

These developments have resulted in the sharpest run-up in mortgage rates seen in over three decades, slashing mortgage origination volumes, and generally contributing to a volatile market. However, they also finally gave the servicing side of the market a chance to exercise its countercyclical benefits after years of lower rates.

Some examples of the various ways the Fed's actions reverberated throughout the mortgage market in the past year can be found in the National Mortgage News retrospective that follows.

Jan. 6: Mortgage rates rise to new heights on Fed signals

The weekly average for a standard 30-year fixed product started off the year jumping to 3.22%, a high not seen since early in the pandemic after the release of minutes from the Federal Open Market Committee's December meeting.

The minutes revealed that monetary policymakers were expecting to raise the federal funds rate and taper asset purchases.

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Jan. 7: MSR portfolio trading activity heats up

With mortgage rates rising in response to signals from the Fed, the market for servicing became more favorable in January. That's because the risk that prepayments will occur when loans refinance to a lower rate became appreciably diminished.

As a result, sales of particularly large portfolios of mortgage servicing rights ramped up, fueled by the record origination volumes seen in recent years. Later analysis showed the prices some commanded during the month were the highest seen in decades.

Although the market for servicing cooled later in the year, it generally had a good run early on in 2022.

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March 14: Bond market volatility hits lenders

Prior to Federal Reserve officials' confirmation of their plans for a rate hike and a pullback from quantitative easing, the housing finance industry was seeing some wild market gyrations due to speculation about monetary policy and the Ukraine War.

Lenders began taking on more active management of their loan pipelines, interest rate risks and their secondary market executions as a result. They also began considering marketing to home equity borrowers.

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March 16: Fed confirms end to bond buying binge

Monetary policy officials put a stop to at least some of the speculation around their actions, by committing to a short-term rate hike and announcing a stop to the expansion of its balance sheet.

Pundits hoped that confirmation would stabilize the market at the time, but continuing uncertainty about the magnitude of future Fed actions made for a volatile market through much of the year.

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March 17: Lenders brace for change as Fed raises rates

Once the Fed confirmed the need for tighter monetary policy and raised short-term rates 25 basis points, the industry began preparing for some of the typical trends that arise from higher lending rates for mortgages and other types of consumer debt.

Although the fed funds rate isn't always directly correlated with the longer-term rates for home loans, when monetary policymakers exert tightening on both that and the Fed's portfolio, the trend in mortgage borrowing costs tends to be directionally similar. That means lenders need to place more reliance on homebuyer loans as opposed to rate-driven refinances.

It also generally signals increased fraud and underwriting risk. That's because purchase mortgages generally have more data points to verify than refinances do, and also the rise in other consumer obligations exerts upward pressure on debt-to-income ratios that usually are a key underwriting metric.

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May 5: Mortgage rates reach 2009 high as Fed makes second hike

The 30-year fixed-rate mortgage averaged increased to 5.27% for the weekly period ending May 5 as monetary policy tightened the Fed funds rate for the second time in 2022, raising it by 50 basis points. That left the average mortgage rate more than two percentage points higher than a year earlier, when it was 2.96%.

There was going to be much more where that came from, but lenders didn't know how much rates would rise yet.

(Read full story here.)

May 17: Mortgage profits plunge 87% in 1Q

Mortgage bankers only made 5 basis points on each loan originated in the first quarter, according to data released by the Mortgage Bankers Association at its annual secondary market conference.

Contributing to the decline was uncertainty around the Fed's policy manifest in secondary-market spread widening, which the MBA described as being similar what has been seen in some crisis periods. Later in the year, the MBA found most lenders were originating at a loss.

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June 16: Mortgage rates surge at fastest clip since ‘87

After the Fed raised short-term rates by 75 basis points in June, mortgage borrowing costs rose faster than they had since the 1980s, bringing the average 30-year loan to a high of 5.78%.

Contributing to the spike in rates at the time were unexpectedly strong inflation numbers and consumer pessimism.

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July 5: Rate hikes weigh on bank mortgage demand

Depositories with large mortgage operations had been relying on home loans as a key source of income, but bank experts reviewing second quarter numbers said they saw this starting to change.

Demand for both mortgages and residential construction loans had begun to notably wane at this time, with some forecasts anticipating a further seasonal decline through the third and fourth quarters.

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July 27: Banks can handle it, Powell says, raising rates

The impact of the Federal Reserve's rate hikes — like the 75 basis point increase made on this date — is something well-capitalized banks should be able to handle, Federal Reserve Chairman Jerome Powell said.

Powell acknowledged that the market had responded with some volatility, but noted that it was "to be expected" and that markets were "basically…working."

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Sept. 21: Fed hits pause on plans to sell MBS

Chairman Powell hiked short-term rates another 75 basis points in September, and noted that while eventually the Federal Reserve did plan to take sell some of its mortgage backed securities, it had no immediate plans to do so.

A day later, Freddie Mac reported that the average for 30-year mortgage rates was up 27 basis points and reached 6.29%. Also some in the industry had a positive reaction to the Fed's lack of immediate plan to sell mortgage-backed securities, noting that it could result in a relative reduction in volatility.

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Nov. 2: Powell waves off fears, mortgage rates near 7%

Fed Chairman Jerome Powell once again raised rates another 75 basis points despite the mortgage and broader financial industry's concern about it possibly having too negative an effect on the broader economy.

Regarding housing, Powell noted that he wanted to see a correction and that he wasn't not concerned about high rates putting the kind of pressure on mortgage lenders to weaken underwriting in the wake of the Great Recession.

However, when a Mortgage Bankers Association index that tracks the tightness of underwriting was published the following month, it showed that credit availability loosened for the first time in nine months.

Just prior to this rate hike, mortgage rates had risen above 7% for the first time in 20 years, but later they wavered due to the release of more favorable inflation data.

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Dec. 14: Fed decreases rate hike, mortgage rates drop

In response to more favorable inflation numbers, the Fed downsized its rate hike to 50 basis points for the first time since May, and mortgage rates responded by falling the next day to 6.31%.

The time for aggressive rate hikes may be over, said Fed Chairman Powell, but he signaled that tightening will likely continue going into 2023.

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