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The prospect of a spring mortgage market with fewer homes available for sale has Massachusetts lenders preparing for a challenging and competitive 2023.  

The low rates that most borrowers now have on their mortgages have not only stifled the refinance market, but they also could keep borrowers from giving up those mortgages and selling their homes.  

“We have been forced to really focus on making sure that we have best-in-class financing for people looking to buy homes, buy their first home and get into the market,” said Patrick Deady, senior vice president and director of residential and consumer lending at Fall River-based BankFive. “We expect almost all [mortgage] business to be purchase business and an extremely competitive market among financial institutions.” 

Lenders entered 2023 after three years of unexpected and unusually high demand for mortgages.  

As mortgage rates fell at the start of the pandemic while the federal government worked to support an economy in the grips of COVID-19 lockdowns, no one expected the surge of real estate activity that would follow, said Bert Talerman, president of Hyannis-based Cape Cod 5. 

“We had a very unique environment that ended earlier in 2022 where you had a very, very active sales market as well as a market where there was a lot of refinance activity because the rates were so low,” Talerman said. 

Rapidly rising rates, that eventually doubled over the course of 2022, brought the refinance boom to an end. Along with making monthly mortgage payments unaffordable for some prospective homebuyers, rising rates have also put homeowners who refinanced in 2020 or 2021 in a position where selling their home would mean giving up a low rate.  

“It’s going to be very interesting the next couple months as we see, coming into the spring season for real estate, if people are putting their houses on the market,” said Andrew Franklin, chief lending officer at Newton-based The Village Bank. “Part of the challenge is if you’re sitting on a 30-year fixed rate at 3 percent, do you really want to sell your house and buy something else at 6 percent financing?” 

A New Experience for Some 

Talerman said mortgage activity could return to levels similar to those in the years before the pandemic. He noted that relatively low rates had driven strong mortgage activity coming into the pandemic, adding that demand for homes on the Cape and the Islands had made for a solid purchase market for about a decade.  

While the bank has some employees who have worked through market fluctuations in the past, this will be the first slow market for newer staff.  

“Our mortgage pipeline certainly is significantly lower at this point than it’s been the last few years,” Talerman said. “You have less purchases in the market and lenders all aggressively competing for fewer deals, so it creates a very tough environment if you’re a mortgage loan officer.” 

Rather than hiring to handle mortgage volumes in 2020 and 2021, Cape Cod 5 shifted staff from other areas of the bank to the mortgage department. The bank still has mortgage activity to process, Talerman said, and will shift employees within the bank if volumes continue to drop rather than reducing staff. 

As volumes slow, Cape Cod 5 is taking the opportunity of having “a little bit more bandwidth” to make technology upgrades and process improvements, he said. 

“This is a time to continue to position yourself for the future,” Talerman said. “It’s an important business to us, it’s an important way that we meet the needs of the community.” 

To compete for a shrinking pool of mortgage borrowers, some local banks are turning to a range of loan products.

Price Hikes Help Cushion Lenders 

Even as rising interest rates made homeownership unaffordable for some borrowers, prices continued to rise in 2022, further reducing sales totals. In Village Bank’s market of Newton and Boston’s western suburbs, higher loan amounts for these houses have offset the lower number of sales, said Franklin. 

While Franklin does not project strong loan growth for 2023, he remains “cautiously optimistic” for the year. He noted that Village Bank has strong relationships with referral sources in its market, keeping activity in its pipeline. But Franklin does see challenges for the industry this year. 

“Unless banks or mortgage companies have access to and a strong pipeline for purchase financing, it’s going to be a difficult year from a volume perspective,” Franklin said. 

Like Cape Cod 5, The Village Bank has not reduced staff due to the slower mortgage market. After the strong years they just experienced, Franklin said, employees remain upbeat and have taken a longer-term view of the market. 

Franklin is looking ahead to borrowers with adjustable-rate mortgages that are due for an interest rate change this year, and the effects such higher monthly mortgage payments will have. So far, The Village Bank, which keeps all mortgages it originates on its balance sheet, has seen almost no delinquencies, Franklin said. He added that the bank is taking a wait-and-see approach to economic uncertainty and its effects on borrowers. 

Range of Products Helped 

Fall River-based BankFive also has not seen an increase in delinquent borrowers in its loan portfolio yet, said Deady, the bank’s director of residential and consumer lending. 

“From what we see in our delinquency, we see a lot of strength; we have not seen weakness yet – it’s remarkable,” Deady said. “I think we’re all in the industry preparing for some delinquency as the recession becomes more evident, but we haven’t seen it, so that is an interesting factor we’ll have to keep an eye on.” 

Diane McLaughlin

As in other regions, inventory is low in the bank’s Southeastern Massachusetts and Rhode Island markets, Deady said, but demand among prospective homebuyers remains strong. 

To compete for the limited number of purchase mortgages available, BankFive relies on a range of lending products, including VA and FHA loans that the bank underwrites through a correspondent relationship. The bank also participates in MassHousing’s first-time homebuyer program and recently rejoined Massachusetts Housing Partnership’s ONE Mortgage program. 

Deady has forecast a 50 percent reduction in mortgage business this year. Like all bankers, he said he will keep an eye on interest rates. If they start to fall, the refinance market will pick up again, he added, though the few refinance opportunities out there will be picked up quickly by lenders. 

“If we’re lucky, we might get relief in the fourth quarter in terms of a refinance market,” Deady said. “I don’t anticipate that being wonderful, but if we get it, it will be welcomed.”