Mortgage application volume hasn’t been this low since 2000

Lender losses

Soldiers on the front line of battle are the first to suffer from enemy attacks. In the housing market, lenders are the front-line troops when it comes to housing market shifts — and, in 2022, are already feeling losses.

As the Pandemic Economy is now behind us and we plunge headfirst into 2022’s undeclared recession, lenders are feeling the blows of a slowing housing market.

Compared to this time last year, mortgage applications decreased in mid-August 2022 by:

• 18% for purchase mortgages; and
• 82% for refinance mortgages, according to the Mortgage Bankers Association (MBA).

Rising interest rates have reigned in mortgage originations and caused an ever steeper cut to the refinance share. The last time lenders saw mortgage application volume this low was in the year 2000. For anyone entering the industry in the last two decades, this is the lowest application volume has been ever.

Accordingly, independent mortgage brokers reported net losses in the second quarter (Q2) of 2022. For every loan originated, mortgage brokers reported an average loss of $82 per loan, a decline from the average profit of $223 per loan in Q1 2022, according to the MBA.

Lender profits have plummeted from the record heights experienced in 2020, when each loan produced an average profit of $4,202. These profits fell to an average $2,339 profit per loan in 2021, according to the MBA, and have now landed in negative territory.

Part of the reason for steeper losses is due to an increase in loan production expenses, which hit a record high of $10,937 in Q2 2022. For reference, from 2008 to present, the average expense per loan was $6,902.

Production costs include:

• mortgage loan originator (MLO) compensation;
• technology and equipment;
• property and insurance expenses; and
• sales and support staff.

Refinance mortgages tend to cost lenders less from application through closing, thus the aggressive cut to the refinance share has added to higher average production costs.

Lenders seeking to reduce their production costs — and survive in the leaner years ahead — will turn to financial technology (Fintech) to make up the deficits. Fintech lenders have 13% lower production costs and complete the escrow process five days faster than non-Fintech lenders, according to a 2020 Freddie Mac study.

However, higher production costs are not the only problem for lenders to handle before they can become solvent. Higher interest rates, reduced home sales volume, fewer new home sales and cautious homebuyers are all issues lenders have little to no control over.

Related article:

Fintech struggles to advance real estate

Navigating housing market professions in 2022 and beyond

News of reduced mortgage applications is a warning for professionals working across all segments of the housing market.

End user participants — homebuyers and homeowners — are quickly catching on to the negative impacts of higher interest rates alongside the rapid inflation in consumer prices and asset prices, which have quickly deflated buyer purchasing power.

With less money available for home purchases, homebuyers and homeowners are tightening their wallets, now forced to wait for the housing market to turn in their favor. As home sales volume continues to slow and home prices slip in the second half of 2022, this means waiting for prices to bottom.

Lenders are responding to the crisis by widening their rate margins and tightening mortgage standards.

For example, mortgage credit availability is falling quickly, experiencing a significant one-month drop of 9.0% in July 2022 alone. By index level, access to mortgage credit has not been this tight since 2013, according to the MBA.

Lenders are also choosing to increase their risk premiums as a buffer against future rate increases and higher chances of mortgage default.

Typically, the spread between the 10-year Treasury-Note rate and the 30-year fixed rate mortgage (FRM) rate is 1.5 percentage points.

But as of mid-August 2022, the spread between the 10-year T-Note and 30-year FRM rate is 2.15 points, a significantly higher risk premium than the historical rate spread of 1.5. Today’s high spread indicates lenders are padding their risk premiums in anticipation of future rate increases and foreclosures.

These higher rates act to discourage homebuyers who may be on the edge of qualifying, pushing them into lower price tiers or out of the homebuying game altogether.

Lenders are already buckling down in expectation of a continued reduction in mortgage activity. It’s time for real estate brokers and agents to prepare, too.

Survive the housing market slowdown by:

• expanding your income streams into adjacent forms of real estate practice, like becoming a:
  • property manager;
  • notary public; or
  • MLO;
• becoming an expert in distressed sales, including:
  • short sales;
  • foreclosures; and
  • real estate owned (REO) properties;
• learning about investment strategies, such as:
  • forming real estate syndicates; and
  • facilitating 1031 exchanges; and
• revitalizing your marketing plan by:
  • FARMing for new clients;
  • prioritizing buyer clients; and
  • developing efficient online market practices.

Having peaked in March 2022, watch for home sales volume to continue to slow in 2023-2024, with prices falling heading into 2023, bottoming in 2025. A sustainable recovery for the housing market will occur once end users sense prices have bottomed, launching the next sales volume and price increase to take off around 2026-2027.

To usher your practice through this timeline, subscribe to the firsttuesday Newsletter and receive a weekly breakdown of California’s housing market in your inbox.

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