For mortgage lenders, 2022 was characterized by rapidly decelerating originations and shrinking margins as the market shifted due to interest rate headwinds, excess capacity, and an increasingly challenging competitive backdrop.
What will the coming year bring? Each year, ICR draws on the deep industry knowledge of its sector-focused teams to share their views on the year ahead to help identify the key issues that investors will likely focus on in 2023. Below, we explore key trends, headwinds, growth drivers, and other items to watch in the mortgage lending sector over the coming year.
Continued decline in origination activity due to unfavorable interest rates cycle
Mortgage rates have hit their highest point since late 2008, and in general, interest rates are expected to remain higher for longer periods of time. As a result, origination activity across the industry will likely stay depressed in 2023. The Mortgage Banking Association (MBA) forecasts align with this, indicating that industry origination volumes to be down again in 2023 following a steep decline in 2022. Refinancing activity continues to dry up as most borrowers are out of the money, and purchase volumes remain muted, reflecting limited inventories and higher mortgage rates.
Heightened competition
While loan volumes across the industry contracted in 2022, sales-related headcount and infrastructure cuts have lagged behind, resulting in excess capacity. In other words, there are too many loan officers and brokers chasing fewer loans. Shifting competitive dynamics are driving further market disruptions. Specifically, community banks are increasingly looking to recapture originations market share, while select sponsors in the wholesale channel are seemingly willing to sacrifice near-term pricing for market share growth.
Profitability under pressure
On top of declining origination volumes, we expect Gain-on-Sale (GoS) margins to “bounce along the bottom,” reflecting ongoing Fed tightening, excess capacity and related pricing pressure, tighter primary-secondary market spreads, and continued mortgage-backed securities (MBS) market volatility. More favorably, upward mortgage servicing rights (MSR) revaluations in a rising rate environment remain accretive to GAAP income statements and book values, while some firms have turned to selling MSRs to support liquidity.
Key growth drivers
Despite persistent macro headwinds, we expect select lenders to leverage developing trends to drive sustainable growth. First, while related volumes likely remain somewhat muted in the near term, we anticipate a step up in purchase mortgage activity as rates stabilize, inventories rebuild, capacity normalizes, and favorable demographic trends take hold.
In addition, we expect volumes across less rate-sensitive products including HELOCs and cash-out refis to hold steady. As mortgage servicing businesses act as natural hedges during periods of rising interest rates, MSR mark-ups will offset declining origination business contributions. Finally, in order to support profitability, most mortgage lenders will continue to reduce headcount to better align expense levels with revenue trends, while some players exit select businesses/channels due to uneconomic pricing.
Ongoing consolidation
As net losses continue to pile up for some lenders, we expect to see further bankruptcies and consolidation across the industry. Sub-scale lenders that lack diversification and/or capital will likely look to partner with larger players or risk continuing to cede market share. On the flip side, differentiated, well-capitalized firms are positioned to benefit from favorable recruiting and retention trends at the loan officer/broker level, as well as accelerating M&A opportunities.
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