A challenging operating environment marked the close of 2023, but the mortgage industry hoped for renewed optimism in 2024. While the market improved, many small and mid-sized Independent Mortgage Banks (IMBs) did not meet expectations, with some focusing on surviving until 2025. Optimism has shifted towards late 2025 and 2026 due to persistent near-term challenges.
Economic factors
High interest rates and limited housing supply challenged IMBs in early 2024, raising prices and reducing affordability. Although the Case-Shiller National Home Price Index increased until July 2024, it later declined. For the third consecutive year, strict financial requirements hampered first-time homebuyers, while existing homeowners hesitated to trade low-rate mortgages for higher rates. Despite these difficulties, the Mortgage Bankers Association (MBA) predicted that originations would increase from $1.6 trillion to $1.79 trillion in 2024.
The MBA’s annual conference in October 2024 projected slower economic growth and rising unemployment. While economic forecasts differed, inflation was moving toward the 2% target, and hiring slowed. The Federal Reserve responded by lowering interest rates by 50 basis points in September (to 4.75-5%), followed by 25 basis points in November (4.5-4.75%) and December (4.25-4.5%). At the time, economists predicted up to four more rate cuts in 2025 to balance rising unemployment and declining inflation.
The MBA initially predicted a $2.3 trillion origination market for 2025, based on the Fed’s dot plot forecasting additional rate cuts. However, inflation remained high and employment solid at the end of 2024. Some economists predict that new policies under the 2025 administration may keep inflation higher for longer. As a result, the MBA lowered its origination estimate to $2.1 trillion.
Key events
Several key events influenced the mortgage origination sector as 2024 came to a close. New York Community Bank (NYCB), the parent company of Flagstar, sold approximately $5 billion in mortgage warehouse loans and discontinued its warehouse lending. To increase capital and liquidity, they also sold their residential mortgage servicing platform and related assets. Basel III, which affects lenders’ capital requirements, is still being reviewed and re-proposed. These events may have an impact on sources of cash and financing rates as businesses make strategic decisions based on liquidity and capital requirements.
Liquidity
While origination production increased and gain-on-sale margins improved over the previous 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 funding sources to meet those needs. IMBs should think about using multiple warehouse financing facilities to reduce the risk of suspension or unavailability for certain products. Companies must evaluate their ability to repurchase loans because agency repurchase requests can put a strain on cash flow in situations with tight liquidity. Finally, companies should be prepared to modify loans in accordance with loss mitigation guidelines in the event of potential increases in delinquencies.
Diversification
Even though the origination market was stronger in 2024, many companies are still turning to other products to generate revenue. To originate loans to qualifying borrowers, more lenders have re-entered the non-qualified mortgage (non-QM) space. Some originators are lending to foreign nationals and borrowers with Individual Taxpayer Identification Numbers (ITINs) who are eligible for loans. Others are considering offering bridge loans and non-QM construction loans in addition to traditional construction loans. Some specialty finance companies are focusing on purchasing and securitizing non-QM products.
Regulatory landscape
The Federal Housing Finance Agency (FHFA) and the Government National Mortgage Association (GNMA) collaborated during the pandemic to align and formalize new servicer eligibility and capital requirements. The first round of updates went into effect on September 30, 2023, and December 31, 2023.
