2023 Year end updates for the mortgage industry

As we close out 2023, and turn to 2024, we reflect on the challenging operating environment for many mortgage originators, especially the small and mid-size Independent Mortgage Banks (IMBs) and optimistically look forward to more robust years. The following year end update will highlight the state of the economy, cover current events, liquidity concerns, and the changing regulatory landscape. For more information on the mortgage industry and the services performed, visit the Mortgage Center of Excellence.

State of the economy 

Throughout 2023, the Federal Reserve raised the Fed Funds rate four times for a total of 100 basis points (bps) from 4.50% to 5.50%. Simultaneously, a historically low number of homes for sale continued to place upward pressure on housing prices and limit borrowers’ ability to afford new houses. The increased financial requirements largely blocked out first time homebuyers. Existing homeowners were presented with a dilemma on whether to sell their existing homes with mortgages at potentially much lower rates, for new houses with mortgage rates at two-decade highs. The trifecta of higher interest rates, low inventory, and higher housing prices, slowed mortgage originations significantly when compared to the prior year from approximately $2.3 trillion to $1.6 trillion, impacting the bottom line of many IMBs. 

During the annual Mortgage Bankers Association (MBA) conference in Oct. 2023 and a subsequent article from the MBA, the MBA projected a decrease in gross domestic product (GDP) and consumer prices, with an increase in unemployment rate. While there have been various outlooks on the future economy with many economists forecasting a “soft landing,” the MBA, along with other trade groups and economists, have predicted recessionary conditions. These recessionary conditions are predicted to move the Federal Reserve Open Market Committee to cut the Federal Funds Rate starting in 2024, and continuing through 2025, in line with economic indicators. In addition to the anticipated recessionary conditions, other factors, such as the cost of debt on the federal budget and the potential impact of commercial real-estate loans maturing and requiring subsequent refinancing at higher rates, could impact the decision to cut rates. 

With potential rate cuts, many are projecting a considerably larger origination market starting in 2024 through 2026, which was noted by the MBA in their Oct 2023 article. For the week ending Dec. 21, 2023, the weekly average Freddie Mac 30-Year fixed rate mortgage fell to 6.67% from a high of 7.79% for the week ending Oct. 26, 2023. Similarly, the 10-year Treasury rate which mortgage rates generally track, fell below 4% from a high of approximately 5% during a comparable period. The decrease in rates is expected to spur home sales and bring potential homeowners who were sidelined back into the purchase market. Also, refinances are expected to increase for those who purchased and financed homes at higher rates.