The rate increases of 2022 have come in with the vengeance of a summer storm, fast and furious.
According to Freddie Mac’s Primary Mortgage Market Survey, the average 30-year fixed rate was at 3.11% during the first week of 2022. As we approach the end of the second quarter, that average hovers right around 5.78%, after a dramatic upswing in the past few weeks. As turbulent as recent months have been, there is hope that the worst of the storm is over—the Mortgage Bankers Association (MBA) predicts rates to stabilize at 5% by year-end.
Although rates are no longer in the 2s, 3s, or even 4s, it is important to remember that, historically speaking, rates in the 5s are still incredibly low.
“We have known for quite some time that rates were going to be rising,” says Ron Kuhn, branch manager and senior loan officer at Summit Funding. “We are seeing an increased interest in 5/1 and 7/1 ARMs (adjustable- rate mortgages) in order to help make mortgage payments more affordable.”
Affordability is certainly a topic of concern. According to the MBA’s Purchase Application Payment Index, the national median mortgage payment applied for by applicants was $1,889 in April, up from $1,736 in March, $1,653 in February, and $1,320 in April 2021. The national median mortgage payment for FHA loan applicants was $1,374 in April, up from $1,254 in March and $1,000 in April 2021. These numbers represent a 43% and 37% increase in mortgage payments year over year, respectively. With inflation at a 40-year high, mortgage payments aren’t the only cost that has skyrocketed—monthly budgets are being stretched to full capacity. Natalie Fischer, vice president of national strategic alliances for loanDepot, echoes this sentiment. “Rising interest rates definitely impact entry-level and first-time home buyers that are tied to a monthly payment and may no longer qualify,” Fischer says.
Concerns in the lending industry aren’t limited to rates and affordability—margin compression is also alive and well. According to Fannie Mae’s Q1 Mortgage 2022 Lender Sentiment Survey, 75% of mortgage lenders believe profit margins will decrease in the next three months, up from 65% in the prior quarter, while 17% believe profits will remain the same and 9% believe profits will increase. Competition from other lenders, market trend changes, and consumer demand were the top reasons cited for the decline in profitability expectations.
Despite obvious challenges, optimism remains. “Higher home prices and rates, as well as ongoing supply constraints, are now expected to lead to an annual decline in existing home sales. However, MBA continues to expect purchase originations to reach a new record in 2022,” says Mike Fratantoni, MBA’s senior vice president and chief economist. “Even though existing sales volume will be slightly lower than last year, the continued growth in new-home sales and the rapid rise in home prices should deliver a smaller, but solid, 4% annual growth in purchase origination volume.”
He adds, “Total origination volume is now expected to be at $2.56 trillion this year—down from roughly $4 trillion in 2021.”
With refinance volume down roughly 75% and minimal resale inventory, lenders would be well advised to grow their new construction market share. Bottom line: This market requires creative loan technicians who are impeccable with pipeline management as well as client education and communication.
