Lenders are carefully watching demand for purchase loans as mortgage interest rates rise.

After two years where the U.S. mortgage market saw about $4 trillion in loan volumes each year, rising interest rates could mean the home lending industry could be in for a muted 2022.  

“We are watching carefully as to how the purchase market is going to go this year – I think we’re optimistic,” said Jay Tuli, president of Arlington-based Leader Bank. “A certain amount of rate movement is not really going to move the needle too much, but if rates really start going up, it’s going to have an impact.” 

Massachusetts had $142 billion in residential mortgage volumes in 2021 after seeing $126.2 million in 2020, according to The Warren Group, publisher of Banker & Tradesman.  

The U.S. saw $4.1 trillion in residential volumes in 2020 and approximately $3.99 trillion in 2021, according to the Mortgage Bankers Association. Unlike the MBA, The Warren Group considers mortgages for four-family homes as commercial rather than residential products. 

The MBA is forecasting $2.6 trillion in volumes for 2022, a 35 percent decline year-over-year.  

Refinances will see the biggest impact, with the MBA forecasting refinance volumes to drop by more than 60 percent to $861 billion. Refinancing is expected to make up 33 percent of all mortgage originations in 2022, down from 57 percent of originations in 2021.  

About 74 percent of residential loans originated in Massachusetts in 2020 and 2021 were refinances, according to The Warren Group. 

“So much refinancing was done with a lot of borrowers locked in at much lower rates – 3 percent or maybe even lower in some cases – there’s just not a lot of opportunity left out there if rates continue to increase on the refi side,” said Joel Kan, the MBA’s associate vice president of economic and industry forecasting. 

The average rate on a 30-year, fixed-rate home loan jumped to 3.69 percent last week, according to Freddie Mac, after rising to 3.5 percent in late December 2021. 

The MBA expects rates to increase throughout 2022, with the 30-year fixed rate mortgage rising to 4 percent by the end of the year. Strong economic growth has put upward pressure on rates, Kan said, and actions by the Federal Reserve to respond to job growth and inflation could end up affecting mortgage rates as well.  

Fed’s Twin Moves 

While Federal Reserve officials signaled in December that 2022 could see three increases to the benchmark interest rate, some economists, including those at Goldman Sachs, say there could be as many as five increases.  

Loretta Mester, president and CEO of the Federal Reserve Bank of Cleveland, said in a speech on Feb. 9 that she expects to see rate increases begin in March, adding that the number of increases remains uncertain. 

“In my view, increases in the fed funds rate in the coming months will be needed, but the ultimate path of the fed funds rate in terms of the number and pace of increases will depend on how the economy evolves,” Mester said in a speech for the European Economics and Financial Centre Distinguished Speakers Seminar.  

Moves to reduce the size of the Fed’s balance sheet, including the eventual run-off of mortgage-backed securities, could put additional pressure on rates, Kan said. He added the MBA’s forecast has mortgage rates remaining low by historical standards. 

Kan also expects volatility in the rates throughout 2022, with factors such as the pandemic, geopolitical upheavals like the Russia-Ukraine standoff and market reactions to moves by the Federal Reserve, potentially causing rates to move up and down throughout 2022.  

Strong Purchase Opportunities Seen 

Even if rates do increase, industry analysts expect the purchase market to be strong. The MBA is forecasting purchase mortgage volumes to increase in 2022 by more than 5 percent over 2021. 

For some analysts, this forecast is too small. Research analysts at Wedbush Securities said in a report this month that the believed that loan origination forecasts from the MBA, Fannie Mae and Freddie Mac were “too conservative.”  

“We expect the purchase market, which is currently forecasted to grow [approximately] 9 percent in 2022, to drive overall volumes higher even in the face of rising mortgage rates given the current demand for housing which is far outpacing supply,” Wedbush analysts Henry Coffey, Jay McCanless and Brian Violino wrote in an industry note this month. 

McCanless told Banker & Tradesman that homebuilders continue to see housing demands among Millennials and Generation Z, as well as Baby Boomers looking to downsize, and that rising interest rates have not yet changed the dynamics of demand amid the low inventory of homes. 

He added that in several regions of the U.S., costs comparisons make buying a home more favorable than renting, even if rates rise. 

Even with refinance volumes dominating mortgage activity the last two years, Leader Bank saw its share of the purchase market increase 22 percent in 2021, bank president Tuli said.  

Diane McLaughlin

And now that refinance volumes are dropping substantially, Leader is focusing its energies on the purchase market, Tuli said. He said the bank continues to see prospective homebuyers looking to trade apartments for houses, or homeowners looking for more elbow room. The still-high volume of savings sitting in Americans’ bank accounts also points to the potential for a strong purchase market, he said.  

While Leader Bank has not been hiring to replace staff members who leave its residential lending team, Tuli said, the drop in refinance activity has not led to any other staff reductions, as the bank expects to need its full team to handle demand from the purchase market. 

To prepare for this year’s homebuying season, Tuli said, the bank has increased its marketing budget for residential lending and added new products, including a program to help self-employed people get mortgages. 

“The question really is, will the rates taper the buying activity or not? And that’s to be determined,” Tuli said. “I think it’s a matter of how much rates move.” 

With Rate Hikes, Mortgage Lenders Face Uncertain Year

by Diane McLaughlin time to read: 4 min