Mortgage lending predictions for 2023

by Timothy Inklebarger

Featuring the perspectives of:

Jeremy Collett, Executive Director of Capital Markets, Guaranteed Rate
Kim Nelson, CEO, BankSouth Mortgage

Will interest rates continue to rise next year, and what impact will rates have on the market?

Nelson: I anticipate that rates will moderate in the first quarter and begin to improve by fourth quarter 2023. Much depends on the economy and curbing of inflation.

Collett: We can make educated guesses, but rates are hard to predict. The Fed just raised their federal funds rate to 3.75% to 4% on November 2, indicating that more rate hikes are coming. We think that this cycle of aggressive rate hikes is coming to an end soon, dependent on inflation coming down. We could see the Fed raising rates by 0.5% at their December meeting, then 0.25% in 2023, until their rate sits at 4.75%-5%. If that happens, mortgage rates could fall.

What buyers should remember is that they can “marry the home, date the rate.” In other words, find a home they love and be prepared to refinance when mortgage rates come down.

What should homebuyers be watching for regarding mortgages?

Collett: First-time homebuyers and communities that have traditionally suffered with affordability issues should keep a close eye on recent enhancements made by Fannie Mae and Freddie Mac. The current administration and Federal Housing Finance Agency (Fannie and Freddie’s regulator) have been laser-focused on opening up affordability and creating products that allow for further home ownership opportunities for this segment of the market.

Just this week, they announced that four groups will see their upfront loan fees — also called guarantee fees or “G-fees” — eliminated when using conventional loans backed by Fannie Mae or Freddie Mac. These groups include low- to median-income first-time homebuyers, buyers using the HomeReady or Home Possible loan programs, buyers using the HFA Advantage or HFA Preferred loans and single-family loans that fall under the Duty to Serve program.

Nelson: Lower-cost and variable-rate mortgage options could be beneficial if homebuyers were to refinance in the next one to three years. It is essential to work with an informed realtor and mortgage loan officer as your trusted advisor.

What will be the biggest challenges and opportunities for lenders in 2023?

Nelson: Rising interest rates and housing supply will continue to challenge the housing industry. Opportunities lie with companies like ours, which are well-capitalized and that continue to innovate technologies and processes, educate the consumer and place a focus on the customer experience.

Collett: There are several hurdles that lenders will face in 2023, many of which carry over from 2022. The fluctuating rate environment continues to be a challenge for everyone, and I expect that will continue into 2023.

In addition to interest rate volatility and uncertainty around how the Fed will fight 40-year highs in inflation, lenders will still have to contend with profitability and cost control in this new, low-volume environment. We believe 2023 will be a year of consolidation for lenders, so expect a large uptick in mergers and acquisitions among lenders.

Liquidity remains an issue. The secondary market for the most part has been decimated by the enormous spike in interest rates. Falling deposit rates, lower asset prices and snail-paced runoff rates have created a major liquidity crunch that doesn’t appear to be going away anytime soon.

Different types of loan products, like ARMs and temporary buydowns, can help buyers ease into homeownership and take advantage of lower or more stable home prices without a long-term rate commitment. When rates come down, opportunities exist to lock in for the long term.

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