While the average 30-year fixed mortgage rate—which hit 7.06% today—has come off last week's 22-year high of 7.49%, housing affordability still remains pressurized. And that spells bad news for mortgage lenders.
“If we're looking at overall industry volume in units, 2023 is as low as it's been since we started tracking units versus dollar volume in 1999,” Marina Walsh, vice president of industry analysis in the Mortgage Bankers Association's research and economics department, tells Fortune. “If you go across a period of over 25 years, this is the absolute lowest in terms of unit volume that we've ever seen.”
The Mortgage Bankers Association had forecasted $855 billion in mortgage originations for the first two quarters of 2023, however, they’ve been short by $59 billion as mortgage applications continue to decrease.
Indeed, independent mortgage banks and other mortgage lending subsidiaries reported a net loss of $534 per mortgage origination in the second quarter of 2023, according to data produced by the Mortgage Bankers Association. That's the fifth straight quarter that banks lost money on mortgages.
Among the contributing factors to mortgage lending industry challenges are surging mortgage rates, a lack of housing supply and low consumer confidence. These have “crushed the mortgage industry over the past two years,” John Paasonen, co-founder and CEO at digital mortgage platform Maxwell, tells Fortune.
“The radical change in interest rates over a very short period of time drove [mortgage origination] volumes down, but in addition to that, we also have a housing inventory crisis,” Walsh agrees. “We just don't have a lot of inventory out there for sale, which is also leading to lower volume.”
Lenders lose money on a loan when it’s more expensive to produce the loan than the revenue it generates. To combat these losses, lenders started shedding personnel and lowering their origination costs.
“Mortgage lenders have begun significantly adjusting their cost base through layoffs and vendor negotiations in the last 12 months, but there still hasn’t been enough volume in the market to offset those costs,” Paasonen explains.
For reference, the cost to originate a mortgage loan is about 0.5% to 1% of the total loan amount. The average cost to originate a loan in 2019 was about $9,300, according to a Freddie Mac study. But loan production expenses—including personnel and equipment—totaled more than $11,000 per loan in Q2 2023, according to data produced by the Mortgage Bankers Association. That’s down from $13,171 in Q1, however.
Another factor affecting mortgage origination volume has been a lack of refinances, which have “all but disappeared,” he adds. More than 60% of homeowners have mortgage rates lower than 4%, “so it’s unlikely that a refinance boom will happen again for many years.” That’s because there is little incentive for buyers to refinance or make a move that could end up increasing their mortgage rate.
While mortgage lenders do continue to report losses, there have been improvements during the past two quarters. In Q1 2023, the reported loss per loan was $1,972, and those originated in Q4 2022 reported a loss of $2,812 per loan, according to the Mortgage Bankers Association. In Q2 2023, the net loss was at $534 per loan.
“You never want to see losses,” Walsh says. “But in terms of where we were in the fourth quarter of 2022, and the first quarter of 2023, there is some improvement.”
This data could indicate that the losses seen in the mortgage lending industry are temporary, experts say.
“Tough times are an opportunity for solvent businesses to build market share, and the lending industry is no exception,” Erin Sykes, chief economist at residential and commercial brokerage Nest Seekers International, tells Fortune. “These mortgage bankers believe that our current challenges will not last forever, and thus they are choosing to take short-term losses in the hope of keeping business momentum and staying relevant through a downturn.”
Plus, mortgage lending companies also service loans, which can be profitable even if loan originations are costly. In fact, when looking at both production and servicing operations, about 58% of mortgage lenders are making a profit, Walsh says.
“On the servicing side of the business, we're at a record low delinquency rate, so cash is flowing on the servicing side,” she says. “In certain pockets of the country you have natural disasters, which will increase the cost of service because they're dealing with borrowers and who are affected by those natural disasters, but in general, servicing as a whole is doing very well.”
