Key insights for the mortgage industry heading into 2025

At the start of 2024, IMBs struggled with high interest rates and limited housing supply, driving up prices and limiting affordability. The Case-Shiller National Home Price Index rose until July 2024 but eased later on. For the third year, strict financial requirements hindered first-time homebuyers. While existing homeowners faced whether to keep their low-rate mortgages or buy at higher rates. Despite these challenges, originations were projected to reach $1.79 trillion in 2024, up from $1.6 trillion the previous year, according to the Mortgage Bankers Association (MBA).

During the October 2024 MBA annual conference, slower economic growth and rising unemployment were projected. While economic outlooks varied, inflation trended toward the 2% target, and hiring slowed. The fed responded with interest rate cuts: 50 basis points in September (to 4.75-5%), followed by 25 basis points in both November (4.5-4.75%) and December (4.25-4.5%). At the time economists expected up to four additional rate cuts in 2025 to balance rising unemployment and declining inflation.

With the fed’s dot plot forecasting additional rate cuts, the MBA initially projected a $2.3 trillion origination market for 2025. However, by the end of 2024, inflation remained stubbornly high, and employment levels stayed solid. With a change in administration in 2025, some economists anticipate new policies could sustain higher inflation for longer. Reflecting these developments, the MBA revised its origination estimate to $2.1 trillion.

Despite high inflation and strong employment, the Federal Reserve cut rates by 25 basis points in December but hinted at fewer cuts in 2025. As of Jan. 2, 2025, the Freddie Mac 30-year fixed rate mortgage averaged 6.91%, up from a low of 6.08% in September 2024. The 10-year treasury rate rose by about 100 basis points since September. The MBA now forecasts mortgage rates to be between 5.9% and 6.2% by the end of 2025, while Fannie Mae predicts rates will reach 6.3%.

Fannie Mae expects a modest increase in sales activity, constrained by affordability challenges and higher rates for longer. Positively, they project slower national home price growth, with wage growth surpassing home price gains, aiding long-term affordability. However, high rates will likely reduce refinancing borrowers.

As 2024 concludes, several key events have influenced the mortgage origination sector. New York Community Bank (NYCB), parent of Flagstar, sold about $5 billion in mortgage warehouse loans and ceased its warehouse lending. They also sold their residential mortgage servicing platform and related assets to boost capital and liquidity. Basel III, impacting capital requirements for lenders, remains under review and re-proposal. As businesses make strategic decisions based on liquidity and capital requirements, these events could impact sources of cash and financing rates.

During the second half of 2023, the National Association of Realtors (NAR) was ordered to pay damages related to excessive selling fees. Preliminary approval for the settlement was granted in April 2024, and rule changes were implemented as early as August 2024, well before the official finalized settlement in November. Under the settlement, real estate agents are blocked from discussing commission splits. Additionally, NAR agreed to two policy changes; (a) prohibiting offers of compensation from being shared on multiple listing service MLS and (b) requiring NAR members who work with buyers to sign written buyer agreements before touring a home. While the impacts of the settlement are new, many economists and industry groups have taken the position that commission will be lowered across the board for both the buyer and seller.

Some expect that lower commissions will push down home prices. The aim is to increase commission transparency and remove standards to boost competition among agents, potentially lowering costs. If successful, this could positively impact the spring 2025 buying market, even with higher projected rates.

In late 2023 and into 2024, delinquency rates have risen in sectors like credit cards and auto loans, despite overall low levels. Continued high inflation could increase delinquencies further. This trend is influenced by the end of COVID-19 stimulus, the restart of student loan payments in October 2023, and the reporting of delinquent student loans from September 2024.

While origination production increased and gain-on-sale margins improved compared to the prior year, securing sources of liquidity remains a critical priority until the origination market stabilizes. Companies must continue to forecast their cash needs for the foreseeable future and identify reliable sources of funding to meet those needs.

Companies with mortgage servicing rights (MSR) should consider selling them or using them for future originations as a hedge against downturns. Retaining servicing maintains borrower relationships, leading to future refinance and purchase opportunities. Alternatively, companies can sell loans with servicing released for an extra premium or enter into an excess servicing sale where only the excess servicing is sold, retaining the base servicing.

Entities with sufficient net worth and regulatory approval can engage in MSR financing. Some opt to securitize MSRs as a financing alternative. They can also consider entering into a servicing advance arrangement to generate additional liquidity from financing versus selling the servicing. If delinquencies increase, having financing in place for advance obligations, primarily Government National Mortgage Association (GNMA) principal and interest (P&I) advances, becomes a more tactical need. For more detail on the requirements of P&I advancing, see our article which discusses what happens in the servicing process when a loan becomes delinquent.

IMBs should consider the use of multiple warehousing financing facilities to reduce the risk of suspension or unavailability for certain products. Companies must assess their ability to repurchase loans, as agency repurchase requests may strain cash flow in tight liquidity situations. Lastly, with potential increases in delinquencies, companies should be ready to modify loans according to loss mitigation guidelines.

While mortgage rates typically follow changes in the 10-year treasury rate, financing facilities are often tied to the Secured Overnight Financing Rate (SOFR). This dynamic can create a disconnect, timing difference or misalignment in expectations between mortgage rates and financing rates, ultimately affecting net interest margins. IMBs should try to manage this disconnection, optimizing financing strategies for better alignment with market dynamics and margin management.

For IMBs that have acquired or expanded a retained servicing portfolio in recent years, the size of that portfolio might now be significantly larger than their annual origination portfolio. Organizations should be prepared for any liquidity impact from a reduction or write-off of the servicing portfolio on both a hedged and unhedged basis, compared to their capacity to increase originations before a more favorable rate origination environment.

Organizations concerned about passing their financial covenants should prepare a financial forecast, create a financial plan and connect with their financing partners to see if a covenant waiver will be required.

While the 2024 origination market was stronger, many companies continue to turn to other products to generate revenue. More lenders have re-entered the non-qualified mortgage (non-QM) space to originate loans to these qualifying borrowers. Some originators are lending to foreign nationals and Individual Taxpayer Identification Number (ITIN) borrowers who are eligible for a loan. Others are looking at offering bridge loans and non-QM construction loans in addition to traditional construction loans. Some specialty finance companies are concentrating on purchasing non-QM products and securitizing them. In 2024, we have seen an increase in non-QM securitizations by finance companies that specialize in this space. The overall spreads to treasuries have been wider than recent benchmarks and the increased equity in homes has made the collateral attractive. Secondary market demand for non-QM products is helping drive origination growth in this sector, while moderated delinquencies have kept concerns in check.

To account for the higher housing costs in today’s market, and for some borrowers who are priced out, some lenders are offering 40-year mortgages to amortize the principal over a longer period. Due to higher rates, there has been an influx of adjustable-rate mortgages (ARMs) which reset as the borrowing base index (index the ARM is pegged to) resets, with the expectation that interest rates will eventually decrease.

Rising home prices have prompted many homeowners to leverage their excess equity, especially as credit card balances and delinquencies increase and borrowers seek relief from high-interest debt. To address this, lenders are offering Home Equity Line of Credit (HELOC) and cash-out refinances as liquidity solutions. HELOC rates, which are tied to the prime rate and track the fed funds rate, have declined following the fed’s December rate cut. In contrast, 15- and 30-year mortgage rates have risen. As the holiday spending season concludes, more borrowers may seek funds to cover buy-now-pay-later obligations or credit card balances. Additionally, some lenders are promoting renovation loans as an alternative for homeowners looking to improve their properties rather than purchasing new homes or relying on higher-rate financing options.

While traditionally considered a higher risk loan, many lenders now offer manufactured housing loans for purchasers of manufactured housing. Some lenders are also offering buydown of the initial rate of loans to lower the interest rate on the loan. The buydowns can be permanent or temporary for a period such as one or two years and in some cases longer.

With many politicians and economists highlighting the affordable housing crises, some lenders are looking to leverage down payment assistance programs to help borrowers fund the downpayment and closing costs for the borrower.

Non-bank capital requirements

During the pandemic, amid a historically low-interest rate environment, the Federal Housing Finance Agency (FHFA) and the Government National Mortgage Association (GNMA) collaboratively worked to align and formalize new servicer eligibility and capital requirements. The first rounds of updates were effective Sept. 30, 2023, and Dec. 31, 2023, refer to our prior article which walks through these updates.

The following updates are effective Mar. 31, 2024:

Annually, FHFA requires a capital and liquidity plan, including an MSR stress test.

The following updates are effective Dec. 31, 2024:

GNMA is implementing a risk weighted capital model, whereas FHFA is not implementing one.

• Originally required for Dec. 31, 2023, GNMA deferred the effective date until Dec.31, 2024.
• Under the model, adjusted net worth, less excess MSRs divided by risk weighted assets need to be greater than or equal to 6%.
• Excess MSRs are defined as MSRs greater than adjusted net worth.

The following risk weighting will be applied under the model: 

• 0% - Cash and cash equivalents
• 0% - Prepaid expenses  
• 0% - Reverse mortgages held for investment 
• 0% - Ginnie Mae loans eligible for repurchase
• 0% - Adjusted net worth equity adjustments
• 20% - Agency and government loans held for sale 
• 50% - Non agency and other loans held for sale 
• 250% - Mortgage servicing rights 
• 100% - All additional assets

As discussed above, many IMB’s are building servicing portfolios in higher multiples to their annual originations. MSRs are a significant portion of an issuer’s assets, this subjects these IMBs to interest rate volatility affecting MSR valuations. As noted under APM 24-12, Ginnie Mae will offer risk-based capital requirement (RBCR) relief to issuers that demonstrate successful hedging over time.

The APM also highlighted the following takeaways:

• Ginnie Mae will calculate issuer hedging efficacy ratios based on the quarterly Mortgage Bankers' Financial Reporting Form (MBFRF) reports submitted by Issuers.
• Ginnie Mae defines “hedging efficacy” as “proportion of derivative gains/losses used to hedge MSRs relative to the change in MSR values due to market and model change as noted in the MBFRF.”
• Hedging efficacy will be used to determine the MSR value adjustments on a quarterly basis and Ginnie Mae will then take the average of the MSR value adjustments over twelve quarters to determine the percentage by which the issuer’s MSR values will be reduced for RBCR.
• The MSR value adjustments will not affect the Issuers adjusted net worth.
• Issuers who would like relief must submit their MSR value adjustment and the resulting RBCR with their annual audited financial statements.
• If issuers have not hedged in each of the most recent twelve quarters, Ginnie Mae will use the average of hedging performance where hedging results are available, subject to the minimum eligibility requirements.

IMBs and Issuers should refer to Ginnie’s APB 24-12 for the complete listing of the program requirements.

Basel III

The Federal Deposit Insurance Company (FDIC), the Federal Reserve and the Office of the Controller of the Currency (OCC) collaborated to issue new capital rules, known as Basel III Endgame on July 27, 2023. The rules go into effect in July 2025 and are implemented over a three-year period. The new guidelines propose more stringent guidelines for banks with over $100 billion in assets. The new requirements have raised concerns not only for the banks that are impacted, but also for the mortgage industry.

Some of the potential impacts to the mortgage industry included:

• With banks above $100 billion now being required to have more capital, this could force banks to reduce their overall mortgage platform as they allocate their capital.
• Basel III proposes a loan to value (LTV) risk weighted approach to hold loans on the balance sheet. The proposed LTV approach increases the capital required to hold loans. Some banks could reduce the number of mortgages that they originate, which could create more origination flow for the IMBs, but overall could decrease the amount of mortgage originations when combining traditional banks and IMBs.
• More capital is required to hold MSRs, which could create less demand for MSRs and could impact MSR values, and MSR liquidity. This could also limit the availability of MSR financing, as lenders may become less willing to provide funding.
• Lower MSR values could decrease liquidity in the correspondent channel, further straining this segment of the market.
• Over the last couple of years there have been a few warehouse lenders that have already left the space. The capital requirement change could impact how much resources are allocated to warehouse lending and or increase the cost of debt for the facilities.
• Special interest groups are concerned about how this will impact the overall mortgage origination market, still in a challenged environment. With a push to provide affordable housing options, many feel that this would continue to compound the space.

While we are quickly approaching the July 2025 deadline, there has been a lot of debate on Basel III endgame. On Sept.10, 2024, the Federal Reserve issued a re-proposal, with the intent to reduce capital requirements from the original proposal. The following were highlighted as part of the re-proposal:

• The re-proposal raises capital requirements by 9% for global systemically important banks (G-SIBs). Banks with assets between $100 billion and $250 billion are mostly excluded, except for recognizing unrealized gains and losses on certain securities, leading to a 3-4% increase in capital needs long-term. Non-G-SIBs face about a 0.5% rise.
• For mortgages, the re-proposal lowers capital requirements for loans up to 90% loan-to-value but keeps them the same for loans over 90%. It also aims to reduce risk weights for specific mortgage activities to avoid restricting business.

The new guidelines of the re-proposal address the need for banking stability without requiring excessive capital. Some of the special interest groups that raised concern about the impact on IMB’s are more in line with the intent of the re-proposal. Comments are currently being collected, with no finalized timeline for completion.

Amended safeguards to security breaches

Following the U.S. Securities and Exchange Commission (SEC) final rule on cybersecurity risk management, strategy, governance and incident disclosure by public companies issued on July 26, 2023, the Federal Trade Commission (FTC) issued an amendment on Oct. 27, 2023, requiring non-bank financial institutions to report certain data breaches and security issues. The FTC’s safeguards rules require non-bank financial institutions to administer and maintain a security protocol to safeguard consumer information. The amendment requires these institutions to notify the FTC if there is a security breach involving data of at least 500 customers where unencrypted information has been obtained without the approval of the customer. Non-bank financial institutions should provide the notification as soon as the impact is known, but within 30 days of the incident.

Although many public companies have prepared for the SEC's final rule on disclosing material cyber incidents, the recent FTC amendment imposes additional reporting requirements for non-public, non-bank IMBs. These institutions may not have developed similar reporting processes as their public counterparts. These requirements take effect on May 13, 2024.

Following SEC and FTC enhanced reporting on breaches and security issues, Ginnie Mae issued its own cybersecurity incident reporting guidelines under APM 24-02 on March 4, 2024. Issuers must notify Ginnie Mae of cybersecurity incidents within 48 hours of detection. This requires maintaining an effective program for handling potential incidents. Notifications must include the date and time of the incident, known details and the party responsible for follow-up. An incident is defined as any unauthorized access, use, disclosure, alteration, transfer or destruction of confidential or non-public personal information that may impact the issuer's obligations under the guaranty agreement. The requirements also apply to Issuers who subservice portfolios for others.

On May 23, 2024, under Mortgagee Letter 2024-10, the FHA mandated reporting a cybersecurity incident to the Department of Housing and Urban Development (HUD) within 12 hours of detection. Issuers must have an effective program for handling incidents promptly. The report must include the mortgagee's name and ID, incident date, cause, description, impact on sensitive information and affiliated companies, status of the cyber response and a contact for follow-up. An incident is defined as any event jeopardizing the confidentiality, integrity, or availability of information or systems, or violating security policies, affecting the mortgagee's ability to meet FHA obligations.

With a number of new guidelines becoming effective, originators should understand the implications that these guidelines will have on their organization. Originators should consult with their subject matter experts to fully address the impact of adoption.

Over the past couple of years, several notable mortgage originators and servicers have experienced high-profile cybersecurity breaches that garnered significant attention. As IMBs / non-bank servicers are building a larger population of consumers, they are becoming a larger target for bad actors. Perpetrators are becoming more sophisticated in their approach to data breaches. With cyber incidents becoming more prevalent, IMBs have been required to follow New York Department of Financial Services (NYDFS) cybersecurity rules since 2017. These rules were amended in November 2023 to reflect industry best practices and additional measures to be taken by covered entities to enhance cybersecurity programs. The mortgage industry is particularly vulnerable due to the vast amount of borrower data, wire activities involved in the origination process and payment activities in the servicing process. These incidents can result in significant costs related to loss mitigation, resolution efforts and reputational damage that undermines consumer trust. The issue has become such a hot topic, that Ginnie Mae and FHA have also issued reporting requirements.

To effectively mitigate the risks stemming from cyber incidents, companies need to create a culture of cybersecurity awareness throughout the organization not just from the chief technology officer (CTO) or chief information security officer (CISO). To do this, mortgage and servicing entities should:

• Establish appropriate oversight of the cybersecurity program by those charged with governance and executive leadership, including assessing cybersecurity knowledge skills and experience of those charged with governance as well as seeking cybersecurity intelligence and training from outside the organization.
• Develop a robust risk assessment to align the firm's cybersecurity program to the unique risks of the organization, its people, processes and technology.
• Enforce the cybersecurity program through policies and procedures designed to define firm standards relating to information security and confirm acknowledgement of these policies and procedures by company personnel. Implement the appropriate technology to effectuate the cybersecurity program, including (but not limited to) firewalls, vulnerability scanning technology, multi-factor authentication (MFA), penetration testing, security incident and event management, intrusion prevention/detection and encryption.
• Assess the efficacy of cybersecurity tools and services refreshing, updating and upgrading as necessary.
• Develop appropriate monitoring mechanisms to ensure timely detection, assessment, escalation, response and disclosure of incidents.
• Regularly train and educate employees on the risks relating to cybersecurity information security best practices. Including social engineering (e.g., phishing) exercises designed to provide practical application of cybersecurity best practices.
• Assess the organization’s need to obtain cybersecurity insurance to protect the organization in the event of a cybersecurity incident.

As the sophistication of cybersecurity bad actors evolve, maintaining an effective cybersecurity program and preventing data breaches will only become more difficult. Lenders, originators, services and financial institutions will need to continually evolve their cybersecurity program and continue to train and test their personnel to enforce a culture of cybersecurity awareness.