MBA Forecast for 2021: Prepare for Higher Mortgage Rates

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To his Annual event Wednesday, Mortgage Bankers Association Chief Economist Mike Fratantoni predicted that mortgage rates may increase over the coming year, but will remain close to their all-time lows.

Fratantoni stressed that the job losses seen in 2020 were unprecedented, even compared to the Great Recession.

“Yes it has come down to 10 million, but look how that compares again to the 2009 peak of 6.6 million,” he said. “This has just been a huge negative shock to the economy as a whole.”

However, due to the narrow focus of job losses on industry, this slowdown turned out to be very different from what the economy experienced in 2009. And the recovery will likely depend on the length of the pandemic.

“This distress is not going to go away anytime soon,” Fratantoni said. “Many of those people who thought they were on temporary leave now report having lost their jobs permanently. Many employers they thought would be returning have gone bankrupt, and the longer this crisis lasts the more restrictions are in place, and again public health demands that some of these restrictions remain in place, but the economic cost is real. .

“And because you have so many people who are going to be displaced from their chosen jobs, this search for a new job in a new sector of the economy, even if it will eventually be successful, is going to take longer. time, so we think the recovery from here is going to be a bit slower than what we’ve seen so far in 2020, ”he continued.

Earlier this year, the Federal Reserve finished his june two day political meeting leaving the rates unchanged and gave a strong indication that it will not raise interest rates for a long time. Fratantoni raised this point, saying short-term rates will stay at 0% at least until 2022 and said we will see a very cautious Fed when it comes to raising rates from here.

However, he predicted that mortgage rates will rise steadily over the next year. The chart below shows that interest rates for the 30-year fixed rate mortgage will end this year at around 3% and could reach around 3.3% in 2021.

interest rate

Housing inventory and prices

With low interest rates driving demand, housing stock has become a growing concern. MBA associate vice president of industry analysis Joel Kan explained that the current inventory is only based on a three-month supply. He said as builders scramble to replenish the supply of new homes, the most recent census data shows an annualized rate of 1.1 million new constructions – the highest level since 2007.

But as inventories rise, it doesn’t happen fast enough, putting upward pressure on home prices. Kan explained that estimates show an annual increase of around 4% to 5%, a trend that will continue over the coming year.

Profitability

Prior to this year, 2003 was the last time a record for profitability was set on the origination side, and 2012 was the last record year for refinancing. However, MBA vice president of industry analysis Marina Walsh predicted that 2020 could eventually set new earnings records for independent mortgage bankers.

MBA predicts mortgage originations to total $ 3.18 trillion in 2020 – the closest we’ve reached the 2003 high of $ 3.81 trillion. In 2021, mortgage originals are expected to fall to around $ 2.49 trillion, which would remain the second-highest total in 15 years. At $ 1.54 trillion, next year’s purchases would eclipse the previous record of $ 1.51 trillion in 2005.

IMB-benefits

“What’s interesting too is looking at this orange line, it’s the average production volume,” Walsh said. “Usually, in our quarterly performance report, you would think it’s an annualized number of three, for 350 IMB to 1 billion. But $ 1 billion is the average for this particular quarter. So exceptionally high volume and exceptionally high profits as well. “

Maintenance

On the business services side, high borrower default rates – especially for FHA borrowers – remain a concern. The priority for service providers will be to seek out the most appropriate loss mitigation strategies for borrowers and investors after forbearance.

“Service agents will remain busy in 2021 helping borrowers move out of forbearance and move towards longer-term solutions,” Walsh said. “This will likely result in an operational need for additional personnel for loss mitigation and increased maintenance costs. “

And while defaults hit all-time highs in 2020, Walsh explained that forbearance options have kept foreclosures low and may continue to help borrowers through 2021.

Walsh said that as more loans fall into the seriously delinquent bucket, service costs could rise.

maintenance fees

“Based on the data we have now, productivity is actually continuing to increase, but it’s only for the first half of 2020,” she said. “The same has happened for those of you who were there in 2009, where we had very high defaults and our costs had not quite caught up yet and as the loans became more and more overdue and seriously overdue, that’s when the real costs really start to come in.

“We expect that by 2021, with these loans in the severely defaulted stage, especially for providers with a large FHA pool – FHA loans as a percentage of their overall volume – we would expect to see service costs increase and productivity will drop and continue to hire loss mitigation specialists, ”Walsh said.

The pandemic effect

However, the MBA’s forecast for 2021 assumes that an effective vaccine will bring the COVID-19 pandemic under control, leading to a gradual economic recovery that is aided by further fiscal stimulus.

“The economy, labor market and housing market have all seen significant rebounds since the start of the pandemic, but there is still deep uncertainty,” Fratantoni said. “Further waves of viruses could lead to further lockdowns and greater instability in the labor market.

“On the other hand, another pandemic-related stimulus package would lead to faster economic growth and additional support for the housing market, but with slightly higher pressure on mortgage rates,” Fratantoni added. “2021, particularly the second half of the year, is expected to be a year of continued growth in purchases and a slowdown in refinancing activity.

“As long as the spread of the pandemic is contained, the economy is expected to grow by about 3% next year, allowing the labor market to improve, incomes to rise and home sales to rise by significantly, ”said Fratantoni.

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