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Mortgage lending has continued to increase throughout the pandemic. Many individuals are spending more time in their place of residence, and this has created an increased demand for home purchases. The low-interest-rate environment has been extremely accommodating to borrowers as well. Mortgage offerings have trended digital during the pandemic. Companies that have an online presence have outcompeted those that lack digital capabilities. The shift to digital mortgages has allowed new fintech companies to grab a large share of the global mortgage market. Mortgages are adapting to the digital age, during a time when home buying continues to stay hot.
Will Origination Volumes Continue to be Strong?
One aspect of the home buying process that has evolved over the pandemic is mortgage originations. Mortgage originations in 2021 have declined 10% from their 2020 numbers. Digging deeper into these numbers, the loan originations on new houses have actually risen in 2021 (11%). It is the 14% decline in refinance originations that has caused the total originations to decline in 2021.
Rates began to drop in 2020, so this inspired a lot of homeowners to refinance their mortgages to a lower rate. Now that rates have been lower for some time, many homeowners are locked into rates around 3% and have less motivation to refinance. The low-interest-rate environment is an obvious demand booster for new loan originations. Many experts see the federal reserve keeping interest rates low to aid the economy in recovery. The Mortgage Bankers Association (MBA) forecasts purchase loan originations to rise 9% to a record $1.73 trillion in 2022. As mentioned earlier, the lower interest rate environment tends to lead to less refinancing demand. So, if rates stay consistently low, it would make sense for refinancing originations to stay flat or even decline.
Will Interest Rates Increase?
The question that every investor is always asking! Interest rates have taken an interesting journey, to say the least during the pandemic. Rates plunged once Covid took hold of the world, and the average 30 years fixed mortgage ended 2020 at 2.65%. As the economy began to recover in 2021, 30-year rates crept back over 3%. Many forecasted that rates would continue to rise and make it above 4% for 2022. However, the increase has stalled a bit, and as of today, the average 30-year fixed-rate mortgage is at 3.32%.
Even the modest rise in interest rates in 2021 had a large impact on the refinancing demand. When mortgage interest rates increased to over 3%, the number of homeowners eligible to refinance dropped from 18 million to 12.9 million within a month. Mortgage rate trends depend heavily on the rate the federal reserve sets for banking institutions. There has been talking about the federal reserve raising rates as the economy recovers, but with new variants of Covid and cases rising once again, this could be delayed. While the pandemic and interest rates, in general, are very hard to predict, it is important to keep in mind rates are near their historical lows. If rates stay in the low range, this may be a catalyst for even stronger demand in homebuying.
What about Refinance Volumes?
As mentioned earlier, refinance numbers have declined as the pandemic has continued on. Initially, there was a refinance boom when interest rates dropped. Once rates steadied there was not as much demand to refinance.
Interest rates will be the main determinant in the refinance market. Because of rising interest rates, the MBA expects refinancing volume to decline to $1.191 trillion in 2021, which is a steep decrease from $2.149 trillion in 2020. As long as interest rates continue to rise, refinancing should continue to decrease.
The opposing view would be for interest rates to fall once again, which would most likely increase demand for refinancing. While many experts see this as unlikely, there is the possibility that the Federal Reserve could lower interest rates again. With covid rapidly evolving and new variants slowing global economies, interest rate decreases may be seen as a necessary measure to keep the economy afloat. Of course, the federal funds rate trickles down into the mortgage lending market. So, a decrease from the federal reserve should lead to a decrease in rates for mortgages.
The pandemic has been a very unpredictable time period for forecasting mortgage rate trends. The consensus appears to say that refinancing will decrease as interest rates rise. But there is no guarantee that interest rates will rise, only time will tell where they go!
Will Home-buyers Expect a Full Digital Process?
One of the outcomes of the Covid pandemic is the acceleration of the digital economy. Many meetings and interactions were held over video conferencing services rather than in person. The mortgage market is no different, technological advances have increased the demand for digital services. These advances are another step towards moving the mortgage industry to a fully digital experience
There are a couple of reasons for the increased digital presence of mortgages. During the pandemic, many prospective home buyers had more time at home and on their mobile devices. This led to more folks scrolling through websites like Zillow to survey the home buying landscape. What better place to put an online mortgage advertisement than a homebuying website! Many buyers found their dream home online, and then found advertisements for mortgages on the same page. Mortgage companies that did not advertise online missed out!
It is evident that most homebuyers today are interested in a fully digital mortgage. Another explanation for the digitalization of mortgages is the millennial first-time homebuying crowd. Many millennials that are looking to purchase a home grew up on the internet. The younger generation not only feels comfortable finding a mortgage online, but many also prefer the digital process over the in-person process. Less paperwork and traveling are key advantages to a digital mortgage.
Traditional Players and Fintech Partnerships
With the mortgage market landscape evolving in the digital world, many established mortgage providers are partnering with fintech software companies. This is a way to enable mortgage companies to reach a tech-savvy audience. The pandemic home buyer is not walking into a bank or meeting with a mortgage broker face-to-face at the same rate as before the pandemic.
For instance, many home buyers are actually purchasing homes without even seeing the physical property. For these fast-acting buyers, it is critical for mortgage companies to have a chat feature on a home buying website. If the buyer is going to buy without visiting the property, there is a good chance they will finance the property digitally as well.
Another homebuying trend during the pandemic is the use of smart home devices by home purchasers. Many prospective home buyers will tell their Siri or Google Assistant to search for a home in a specific area. Clever mortgage companies are creating YouTube ads that can prompt a user to speak to their smart home device about the mortgage opportunity. Advertisements that cater to verbal devices are a new way to attract home buyers.
Having a timely follow-up is also crucial for mortgage companies. Many prospective home buyers are browsing the web and getting advertisements for mortgages. Mortgage companies need to follow up by phone, text, or email after a home buyer expresses interest. There is so much more competition online, and if there is no follow up the home buyer may move on to the other dozens of opportunities.
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Jackson is a consultant for a large American Asset Manager, notable clients include Morgan Stanley, Merrill Lynch, and Wells Fargo. He also writes on financial topics, including bitcoin, personal finance, and portfolio construction. Avid skier during the cold New England winters.
