Current Mortgage Market Cycle Unlike Previous Downturns

This down cycle is tougher than most, but it will likely be shorter-lived than prior cycles

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Consistent with the speed and severity of the increase in rates, mortgage origination volumes have plummeted fast. This chart captures historical and 2022 forecasted volumes provided by the Mortgage Bankers Association (MBA).

The current mortgage market down cycle is different from any downturn the industry has experienced in the past, according to a recent issue of Stratmor Group’s Insights Report. Stratmor Senior Partner Jim Cameron analyzes the industry data that shows just how it differs in his article “What’s Different About This Downturn?”

“While most senior executives have managed their way through multiple downturns in the mortgage business, the universal sentiment is that ‘this one feels different.’ That’s because it IS different!” Cameron says. “It’s quite true — as down cycles go this is a bad one.” The good news is that there are many reasons to believe that the current cycle will be shorter-lived than previous ones.

This downturn “has delivered the biggest and fastest rate increase in modern history, the sharpest volume decreases ever — especially in terms of loan units — and the steepest reduction in revenue the mortgage business has ever seen,” according to Cameron.

“Yet there is some light at the end of the tunnel and there are some positive aspects to this cycle. Absent a major recession, the duration of the downturn may be shorter than past down markets,” he says. One of the reasons is that non-banks, including independent mortgage bankers (IMBs), have a historically high market share, standing at 81 percent so far in 2022.

Non-banks are more likely than banks to move quickly to reduce capacity. “While it is true that many non-banks entered this downturn with a large war chest of cash and capital, this is more than offset by the impact of warehouse and investor covenants, which are causing lenders to move expeditiously to cut costs. In short, while this downturn is very painful, perhaps we will get through it faster.”

Other factors pointing to a shorter down cycle: positive home buyer demographics, extremely low delinquency rates and improved household net worth and debt service capability. “As we look at data on the U.S. population by age, a very large cohort is in the 28- to 38-year-old bucket, which happens to be prime home-buying age,” Cameron indicates. “This bodes well for the home purchase market in the next five to 10 years.”

“These factors may help hasten us toward the day when we can return to ‘normal’ with revenue rationalizing, capacity adjusted, and a return to profits that are reasonable based on the risks of the business,” Cameron says.

A second Insights Report article, written by Stratmor Customer Experience Director Mike Seminari, discusses the importance of communications for lenders as they navigate the current downturn. In “How Can Mortgage Originators Improve Their Communications Skills?” Seminari points to the fact that nearly one in four borrowers who had a problem in some area of their mortgage journey attributed the issue to communication. Not only was communication the most frequently cited issue, but it was also among the most damaging of problems, causing the Net Promoter Score (NPS) to drop to -60, all but negating a chance at a referral. Seminari suggests three steps originators can take now to avoid the pitfalls of poor communication and keep borrowers on the “happy path” for their mortgage loan.

Read the complete report.