Typical winter lull to be augmented in light of high mortgage rates
A monthly index prepared by a leading mortgage hedge advisory illustrates what is already painfully obvious to brokers and homeownership seekers: Mortgage lock volume is down while refinancing activity is nearly negligible.
Mortgage Capital Trading Inc. released its housing industry report for October, showing a drop of 17.76% in mortgage lock volume over the prior month. For the same period, cash out refinance saw a boost – albeit a minor one – with an increase of 11%.
Andrew Rhodes (pictured), senior director, head of trading at MCT, said erosion of housing affordability, high rates and lack of supply represent something of a triumvirate of factors contributing to the decline in loan origination volume. “Unfortunately, it doesn’t look like there’s anything that’s going to help us out during the winter,” he added during a telephone interview with Mortgage Professional America.
Watching to see what the Fed does next
For the time being, all eyes are on the Fed. At its most recent meeting earlier this month, the Federal Reserve chose to pause on hiking interest rates further at it continues to fight inflation. Through a series of increases to the borrowing rate to cool the economy, the Fed has been able to bring inflation to 3.7% from a high of 9.1% in June 2022. While impressive, the dip is still short of the 2% level the Fed has long sought.
“I don’t think the Fed is going to raise anymore,” Rhodes said. “But if something comes out as an outlier – if the CPI [consumer price index] comes in screaming hot or non-farm payrolls come in super-hot in January – there might be a reason for them to increase another 25 [basis points],” he said.
Bottom line, though, it’s likely that the more things change in the coming months the more they will stay the same: “If everything comes with a certain range of the consensus numbers, I think we’re going to be sitting here for a while.”
He ventured his own guess as to when rates might go down: “I’m not sure what other people are expecting,” he began. “Some people are saying end of Q1, beginning of Q2,” he said of the period next year where some predict mortgage rates will come down. I think, in all seriousness, it’s closer to Q3 but I don’t know. I know the Fed seem determined that inflation come down to 2%, and I think it’s going to be a long fight.”
Bracing for the big chill
Typically, a cyclical slowdown during winter has a freezing effect on loan origination activity. This year, it appears that standard lull will be slower to thaw given the negative impact of economic forces.
“Multiple factors, such as an 8% mortgage rate, the Fed’s continued fight against inflation and the industry’s cyclical winter lull, shows we’ll likely continue to see low origination volume heading into the new year,” Rhodes said.Top of Form
He does foresee the Fed might hike the rate another 25 basis points as part of its economic alchemy in reducing the inflation rate. “I think that we do see more upward pressure on rates,” he said under that rate hike scenario. “According to the expectation of the Fed, I think we’d probably see 7s primarily, maybe 7.5%,” he said in reference to mortgage rates. “If we do see another increase of 25 basis points, I think that pushes us to the 7.5% more solidly. It’ll put more pressure on rates, unfortunately, and further escalate the issue on housing, in general, in terms of its affordability.”
Overall, there were no real surprises in the aggregate in preparation of the indices, Rhodes suggested. But that drop in mortgage lock volume of nearly 18% did raise eyebrows. “That actually was a little bit more than I expected truthfully,” Rhodes said. “But definitely we expected a drop in production in the winter months. Hopefully, it won’t be as bad looking at the November indices and hopefully we’ll see some sort of flattening out and not another drastic falloff.”
A recent boost in activity might bode well for the next set of indices, he said. “The rally at the beginning of the month has definitely helped us out,” Rhodes said. “We’ve seen an increase of applications come through so hopefully that leads us to a month of more consistent locks and volume flowing through.”
MCT’S Lock Volume Indices present a snapshot of rate lock volume activity in the residential mortgage industry broken out by lock type – purchase, rate/term refinances and cash out refinance – across a broad diversity of lenders from the company’s national footprint.
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