Mortgage industry should shed another 25 to 30% of staff

The mortgage industry still needs to wring out more capacity in order to get to where it needs to be to operate profitably, Marina Walsh, the Mortgage Bankers Association’s vice president of industry analysis, told attendees at the group’s annual convention in Nashville on Sunday.

Based on various data sources, including its own Weekly Applications Survey, Walsh and her colleagues determined “we’re about a third of the way there, we still have a ways to go.”

The market peaked in the fourth quarter of 2020 and will hit a trough in the current quarter. Based on its origination forecasts, “we think there’s about 25 to 30% in terms of capacity that needs to be squeezed out,” Walsh explained.

During 2021, the mortgage industry originated a total of 13.55 million units, the MBA said. That will fall to 5.94 million this year and 4.96 million next year, before rebounding to 5.61 million in 2024 and 5.96 million in 2025.

Meanwhile, based on profitability data reported so far, independent mortgage bankers are likely to report a loss on their origination activities for the full year, for the first time since 2022, Walsh said.

After earlier this year calling the chances of an economic downturn “a coin flip,” MBA Chief Economist Mike Fratantoni outright forecast that the U.S. will enter a recession next year.

“The upside of that potentially for the industry is it’s the thing that’s likely going to bring rates down a little bit,” he commented. While the 30-year fixed rate will average 7% this year, it will slip to 5.5% in 2023.

Fratantoni made his prediction based on signs of “significant softening” in the jobs market.

“This recession that we’re going to go through is likely to be relatively shallow, relatively mild, certainly compared to what we went through 2008-2009,” Fratantoni said. Back then, the unemployment rate peaked close to 10%; this time it will be about 5%.

Furthermore, household savings, created by the large amount of refinancings reducing mortgage payments, established a buffer for many families, leaving them with low debt service.

“The housing market really led us into what’s going to be this 23 recession,” Fratantoni said. “I think the housing market is going to lead us out as well.”

Home price growth is expected to moderate in 2023 and 2024, but the silver lining is that it would allow household income to catch up to property values, said Joel Kan, deputy chief economist.

The MBA’s October forecast calls for $2.257 trillion in volume this year, falling 9% to $2.047 trillion next year, rebounding to $2.311 in 2024. It introduced its 2025 outlook, pegging that at $2.468 trillion.

These are down from the September forecast of $2.324 trillion in 2022, $2.244 trillion in 2023 and $2.501 trillion in 2024.

Freddie Mac released its third quarter industry forecast on Oct. 21, with total production for 2022 expected to be $2.595 trillion. But next year’s outlook is more bearish than either the MBA’s, at just $1.945 trillion.

Fannie Mae’s October projections called for $2.33 trillion in volume this year and $1.735 trillion in 2023.

“Mortgage rates have increased at the fastest rate in four decades, quickly taking the wind out of the sails of the housing market,” said Sam Khater, Freddie Mac’s chief economist, in a press release. “Caused by stubbornly high inflation and higher mortgage spreads, the rise in rates has created affordability challenges that have forestalled many consumers’ decision to buy a house.”

Rising rates should cause a gradual increase in the inventory of homes for sale. “The combination of much lower demand and higher supply will cause home prices to decrease during the next year,” Khater said.