Eyes on the Horizon

This piece originally appeared in the December 2023 edition of MortgagePoint magazine, online now.

In its initial report on mortgage rates to kick off the year 2023, Sam Khater, Freddie Mac’s Chief Economist, wrote of rates, which stood at 6.48% as of January 5, 2023: “Mortgage application activity sunk to a quarter-century low this week as high mortgage rates continue to weaken the housing market. While mortgage market activity has significantly shrunk over the last year, inflationary pressures are easing and should lead to lower mortgage rates in 2023.”

Sadly, for prospective buyers and mortgage-seekers in 2023, lower rates were not in the cards. Instead, they rose 81 basis points to close out 2023 (as of November 22) at 7.29%. Peaking at 7.79% in October, the 30-year, fixed-rate mortgage rode a seven-week upswing to a 23-year high, leading to subdued buyer demand amid continued affordability concerns.

“Affordability challenges and too few homes for sale remain the one-two punch that is keeping many prospective buyers on the sidelines,” Mortgage Bankers Association (MBA) President and CEO Bob Broeksmit observed. “We expect mortgage volume to decline nearly 30% this year to $1.64 trillion, before an expected 19% rebound in 2024, as rates finally start to trend downward.”

With rates hovering around the 8% mark for a good balance of Q3 and Q4, the pause in rate hikes by the Federal Reserve began to bring more aspiring homebuyers off the sidelines and back into the marketplace.

As we get set to enter a new year, MortgagePoint took the opportunity to poll several industry execs from across the mortgage finance spectrum—from tech providers to C-suite execs, servicers, and GSE representatives—to gauge their feelings on the year we’re about to leave behind and what lies ahead for the industry in 2024.

Q: What’s in store for the housing market as we enter 2024? What are some of the headwinds that the industry will be faced with in the coming year?
Bryan Bolton, Chief Administrative Officer and SVP, U.S. Bank’s Consumer Business Banking Operations: Continued limited inventory and only a slight uptick in foreclosures. Borrowers have a lot of equity and are more engaging with their servicers. More streamlined programs and online accessibility have made it easier for borrowers to get help faster and easier. Even if rates come down, they will still be much higher than the rates a lot of these borrowers currently have. If they sell their property and take their equity to get into another property, they are dealing with high housing prices and higher rates, and may not find another home. With the higher rates, it is harder to give them meaningful payment relief if they can get any. That is going to increase redefault rates.

Sandra Madigan, EVP of Product Strategy–Servicing Technology, ICE Mortgage Technology: Mortgage forbearance programs established to aid homeowners through the COVID-19 pandemic will wind down in 2024. In response, new initiatives aimed at providing continued support for homeowners will likely be introduced by entities such as the FHA, VA, Fannie Mae, Freddie Mac, and HUD. Concurrently, I expect to see regulators update loss mitigation strategies to keep people in their homes.

A housing inventory shortage will continue exacerbating affordability challenges, especially for first-time homebuyers. The demographic landscape is undergoing a notable transformation, with many empty-nester baby boomers now contemplating downsizing. Leveraging their accrued equity, older homeowners may gravitate towards smaller starter homes—the very segment that Generation Z aspires to enter as first-time homeowners. This intergenerational dynamic will compound the challenge of providing affordable housing options for new entrants into the market. It will also create an opportunity for lenders to help older homeowners put their equity to work.

Michael Merritt, SVP, Mortgage Default Servicing, BOK Financial: I think we will continue to see volatility in the housing market, driven by higher interest rates and low inventory. Affordability will continue to be a headwind for the industry in 2024. Higher rates impact origination volumes and options and present challenges in the loss mitigation space. Another potential headwind is an increase in defaults from macroeconomic factors. Servicers are prepared to meet this challenge and help homeowners with assistance options.

Stanley C. Middleman, President and CEO, Freedom Mortgage: My overall impressions, looking out at 2024, are as follows: There will be minimal changes next year. I expect most of the year will look and feel like this year. The first and second quarters should be the most challenging, with a little bit of pick-up at the end of Q2, and into Q3, during the buying season.

Although it is widely anticipated that rates will be slightly lowered in 2024, I believe that the tangible impact of that rate change will not be significant. I would expect a return to last year’s (2022) level, with the biggest positive in the second half of the year. This minor pick-up in origination will not greatly alter the impact on the general health of the originator marketplace.

There is also some room for larger and more stable gains on sale numbers around securitization activity, but not enough to solve the existing excess capacity in the industry. I am expecting the early vintages of servicing will continue their strong returns with continued subdued prepayment speeds, keeping the value of that servicing high throughout the year.

All in all, 2024 should, industrywide, be a slightly better year than 2023. The wild card in this would be geopolitical impact beyond our current understanding.

Jason Obradovich, Chief Investment Officer, New American Funding: Overall, the housing market will face varying degrees of challenges in 2024. Higher rates are certainly testing each geographic area unevenly. The markets that will thrive are those with a continued lack of supply and persistent demand. However, affordability remains a concern given the runup in prices over the past few years, coupled with much higher rates than we have seen in over a decade.

One of the unintended consequences of the FOMC’s recent actions is a situation where homeowners are effectively stuck in their current mortgage because the cost to move to another home at a much higher rate would be unaffordable, if not impossible.

This has broken the housing market to a point where the normal supply of homes and exchange of homes is not happening.

When you combine higher rates, record prices, a lack of supply that could last years, if not decades, with current homeowners’ inability or unwillingness to sell, you have a broken housing market.

Breaks are rarely even, and there will be markets that face many more challenges than others. Some markets that relied on somewhat weak demand during COVID-19 and/or rely on investor activity to push prices higher could see a weakening in prices if demand drops even a little bit. Meanwhile, other markets have suffered a shortage in supply for years before COVID-19 and do not rely on outside investors. Those markets will continue to see strong demand, with the only challenge being interest rates and affordability. Once the FOMC (Federal Open Market Committee) reverses policy and brings rates lower, those markets will certainly see price increases continue.

At its core, the housing market is on a solid foundation, but dealing with some noise related to the current high level of interest rates that likely will be corrected in the next year or two.

Lee Smith, Senior EVP & President of Mortgage, Flagstar Bank: I feel 2024 is going to continue to be a tough year for mortgage originations.

Right now, Fannie Mae, Freddie Mac, and the MBA all forecast the market at more than $2 trillion, but I think that gets revised downward if rates stay higher for a longer period and the Fed continues to sell mortgage-backed securities (MBS) into the market.

Capacity still needs to be right-sized across the industry, and I think the tougher market will force that to happen. Combine all of this with limited inventory, and it becomes a perfect storm.

Toby Wells, President, Cornerstone Servicing: Even if interest rates ease, the total cost of homeownership will continue to rise due to inflation, rising property values amid low inventory, higher property taxes, and skyrocketing insurance premiums in some regions. With rising homeownership costs, combined with the end of COVID-era relief programs, mortgage delinquencies are expected to tick upward from the historic lows of 2023.

Organizations with the agility to evolve according to homeowners’ needs will be positioned for growth in a more challenging environment.

Servicers are already feeling pressure to ramp up their support for homeowners as more household budgets are squeezed.

Some are beginning to step up their default operations now to prepare, while those who did this proactively in 2023 are already in a better position to handle potential delinquencies. This has been a priority for my team. We have also been expanding our proactive efforts to help homeowners keep up with their mortgage payments. For example, we have coupled continuous monitoring of escrow activity with timely engagement to soften the impact of year-over-year changes in escrow activity. We are going the extra mile to help homeowners understand why, how, and when their mortgage payments may increase due to higher tax or insurance expenses. Our goal is to give them ample time to prepare before a payment change takes effect. More broadly, this higher level of support and partnership can help homeowners keep their mortgages healthy throughout the loan term.

Jake Williamson, SVP, Single-Family–Head of Collateral Risk Management, Fannie Mae: The housing market is strong for homeowners who locked in low mortgage rates and have more equity in their homes due to rising home prices. Yet, homebuyers, especially consumers looking to buy their first home or those of modest means, are burdened by high home prices, limited supply, and high mortgage rates.

According to Fannie Mae’s November Home Purchase Sentiment Index®, a survey-record 85% of consumers indicated that it’s a “Bad Time” to buy a home, with most respondents citing high home prices and high mortgage rates as the primary reasons. By comparison, only 37% believe it’s a “Bad Time to Sell a Home.” With housing supply still at historically low levels, particularly the inventory of existing homes for sale, overall housing activity will likely remain relatively subdued for the foreseeable future.

Despite this challenging economic backdrop, we remain committed to working with lenders to support renters and homeowners and advance equity within the housing and mortgage markets.

This includes driving the efforts outlined in our Equitable Housing Finance Plan; bringing to market HomeView® and HomeView en Español, our free-of-charge online homeownership education course to help consumers confidently navigate the mortgage and homebuying process; developing innovative enhancements to Desktop Underwriter®, rent payment history and cashflow underwriting; advancing valuation modernization efforts; and reducing appraisal bias to create a more inclusive mortgage credit evaluation process.

Q: With the factors of high rates, high prices, and limited inventory working against today’s prospective buyers, which of these factors will be the first to break or bend to provide relief to the marketplace?
Greg Austin, EVP, Mortgage Lending, Carrington Mortgage Services: This is a three-way “chicken or the egg” dilemma. There is no indication that home prices will fall enough to have any material difference on the market. As long as rates remain high, buyers will be stagnant, especially those that hold a 2.75% to 3.5% current mortgage, hence listings will remain low. The only thing that can open the market up will be a meaningful reduction in interest rates. Once rates come back down, activity will certainly pick up.

Bolton: High interest rates and stubborn inflation will remain a challenge for consumers in 2024. It is not only keeping the housing market extremely tight, but locking people into very high rents, massive credit card debt, and an inability to maintain or build reserves. I think the Fed is showing more of an inclination to slow down increasing interest rates. That is a good indication rates will stabilize or come done slightly in 2024, providing some relief to consumers.

Merritt: Rates will be the first to bend based on the pressure from other economic factors. The Fed has kept rates consistent recently, and it is easier to see circumstances that would lead to lowering rates in the near term. Once rates begin to lower, we will see some relief in affordability.

Q: Are there any trends in technology you are witnessing being employed by the industry to streamline operations?
Madigan: There are four major trends I am seeing: eNote adoption, APIs (application programming interfaces), automation, and Big Data.

I have seen an enormous shift in lenders’ willingness to adopt technologies that support eClosing, like eSigning, eVaults, eNotarization, eRecording, and eNotes. The ability to electronically record eNotes and securely store loan documents in a centralized repository creates a single source of truth from origination to servicing, offering greater convenience for consumers and huge efficiency gains for lenders. Storing electronic documents in a unified vault creates a continuous lineage, simplifying access for servicers and attorneys in the event of foreclosure.

Lenders are becoming increasingly tech-savvy, strategically integrating APIs into various aspects of their operations.

Technology providers are responding in kind, making APIs available to lenders so they can seamlessly connect with different channels and capabilities. In addition to enhancing operational efficiency, API (ap[1]plication programming interfaces) adoption helps save money by eliminating the need for developing custom software work-arounds. It also allows the lender to adopt and implement new solutions quickly.

Automation tools will play a more significant role by allowing faster exception management in tasks and workflows.

Increased computing power assists with the development of more sophisticated rules, allowing systems to complete more work in the background without human intervention.

Williamson: Through digital tools, Fannie Mae is committed to providing more upfront certainty and reducing risk for lenders, such as Day 1 Certainty®, which helps lenders verify borrower income, employment, and assets. In an analysis of our single-family loan data, we found that when lenders take advantage of at least one Fannie Mae digital tool, a loan is 33% less likely to produce defects compared to a loan with no form of validation. And if multiple tools are used, the defect risk is reduced by 50% to 70%. These tools include Collateral Underwriter®, which uses appraisal data and advanced analytics to help identify and research appraisals with overvaluation, undervaluation, and appraisal quality.

We continue to invest in Collateral Underwriter, as well as other tools and initiatives to make the home valuation process more efficient and accurate. For decades, there was just one way to confirm the property value for home purchase or refinance loans: an appraiser visited the property armed with a clipboard, tape measure, and camera, then performed an analysis and submitted a report. In recent years, the gear might have been upgraded to a tablet computer and laser measuring device, but the process was the same.

Earlier this year, Fannie Mae made valuation modernization updates to our Selling Guide to leverage technologies, data, and analytics to enhance the management of collateral risk, making the process more efficient for lenders, borrowers, appraisers, and secondary-market investors. This transition offers a spectrum of options to establish a property’s market value, with the option matching the risk of the collateral and the loan transaction, and leverages technology to foster a more efficient, understandable, and impartial valuation system.

This included a new valuation option—Value Acceptance + Property Data—which utilizes property data collection by a professionally trained and vetted third party, such as an insurance inspector, real estate agent, appraiser, or even a trainee appraiser, who conducts interior and exterior data collection on the subject property guided by an application on a hand-held device. Upon completion, the lender or its representative delivers the data to our application programming interface. This technology-based process reduces origination cycle time and may reduce borrower costs while promoting safety and soundness by obtaining current observations of the subject property.

In addition, the adoption of cutting-edge technology, digital transformation, and process updates are changing the way appraisers work and offering different career opportunities to a new generation of appraisers. While appraisers can still choose to go out into the field, it is now possible to complete appraisals by primarily working in an office or from home by accessing multiple online data sources along with property information collected or facilitated by other parties using technology such as 3D scans and purpose-built mobile applications. This evolution presents intriguing new opportunities for appraisers to work in a variety of different ways, providing flexibility regarding working hours and location. Appraisers can also spend less time booking and traveling to appointments, especially in rural areas, and more time doing what they are trained to do: analyze property data and form an expert opinion of value.

Q: As artificial intelligence (AI) and machine learning (ML) continue to advance and evolve as everyday tools for the industry, will we ever be able to rely 100% on these tools, or will the human touch always be a necessary part of the process?
Paul Hurst, Chief Innovation Officer, First American: While advances in AI and ML offer great promise for driving efficiency in real estate transactions, we believe the human touch will always be a necessary part of the origination process.

Getting a mortgage and buying a home is not like ordering a taxi or groceries. It’s most likely the largest transaction a consumer or business will make in their lives, and while people want the process to be seamless, they also rely on mortgage and real estate professionals, as well as title professionals, to provide certainty and trust in the process.

While there are many rote manual tasks in the transaction that can and should be automated, people are required to manage the myriad of edge cases that machines can’t handle and, most importantly, help buyers navigate the emotional aspects of buying a home. People want to buy and live in their dream home. AI and ML will enhance the origination and transaction process, but people will remain central to helping buyers achieve their goals.

Madigan: While AI and ML advancements have undoubtedly improved industry processes, relying solely on these tools is not realistic and presents new risks. The ability to connect with a person who empathizes, understands difficulties, and provides guidance is irreplaceable. It is also important to understand that decisions, influence, traceability, and auditability are essential components of any successful AI or ML implementation that meets industry and regulatory/oversight needs.

While AI and ML can streamline processes and even help employees work through difficult cases, the need for a human touch in customer interactions, especially during financial hardships, will likely persist. The goal is not to eliminate human involvement but to leverage technology to optimize the overall mortgage management process, ensuring that human connections are prioritized where they matter most.

Obradovich: There will always be a place for AI and ML in the industry, but it’s incredibly new and untested at this point. The housing and mortgage industry relies so heavily on humans, but I do see opportunities for these tools to make processes much more efficient. However, the housing and mortgage industries need humans to make certain decisions or perform certain activities that are not easily transferred to this technology. Beyond that, historically, the industry has been very slow to adapt to these types of tools or technology in general.

Smith: I think AI and technology can and will play an important role in improving the mortgage industry, whether that be through a better customer experience or improving processes and efficiencies in the back office. I do think there will always be customers who prefer that personal experience, and there will always be edge or more complex loans that cannot be entirely automated and need that personal touch.

Williamson: While there will always be a need for some level of human involvement in the valuation process, we have already seen the benefits of AI and ML in the appraisal space. Since the introduction of the Uniform Appraisal Dataset standards in 2015, we have been digitally gathering appraisal data as part of our mortgage acquisition process. These data include photographs of the subject and comparable properties used in the property valuation process, which are typically unlabeled image files linked to the appraisal document.

Recently, Fannie Mae trained three deep-learning models using more than 200,000 labeled images by experienced reviewers and moved to production of these computer vision models. Using these models, we have evaluated two billion property images, and every day, we are scoring four million more such images. As a result, we have been able to incorporate this image-recognition technology into our internal Collateral Insight tool to display property images for subject and comparable sales side-by-side for easy comparison of a given room type. This tool enhancement saves the time of our Appraisal Quality Control reviewers, improving their efficacy and further automating their processing.

We also introduced an appraisal text-scanning review process in 2021. With it, we used a combination of natural language processing and machine learning to scan the commentary sections of millions of appraisal reports for prohibited and subjective terms including references to race, ethnicity, or religion, and eliminate false positives to ensure these results are accurate and timely reviewed. We then sent letters to every appraiser who had multiple findings, reminding them that such language may be evidence of a non-objective valuation process or discriminatory bias.

We repeated our text-scanning process in 2022, and the results were encouraging, as 78.6% of the appraisers who received a letter in 2021 had no new text findings on appraisals submitted after the letter date. The total number of appraisers with findings declined from 3,193 to 1,557, and the overall rate of appraisal reports with findings decreased from 0.15% to 0.11%.

While we continue to enhance the technology that supports our appraisal text-scanning review process, this is just one illustration of how technology has the potential to improve valuation accuracy, reduce discretion in the valuation process, prevent human error, and better detect mis-valuation.

Q: Do you feel an industry expansion or contraction lies ahead in 2024?
Merritt: A small expansion is the most likely outcome in 2024. I think we will continue to see consolidation across the industry with the headwinds we are facing.

Obradovich: Given the recent inflation data, it appears the FOMC will no longer need to keep raising interest rates, which will allow the housing market to slowly adjust to a new reality. If rates fall further from here, the market may expand in 2024, given its current trajectory and the fact that demand continues to grow at a greater rate than supply. If inflation unexpectedly continues to rise for some reason, then the FOMC will be forced to slow the economy down much more aggressively, and that could hurt market expansion.

Smith: A contraction. Capacity still needs to be right-sized, and the higher-for-longer interest rate environment, together with a lack of inventory, will force that to happen.

I think it will occur through mergers and acquisitions, companies finishing their pipelines and locking the door, and mortgage professionals self-selecting out and moving to a different industry.

Q: As the need arises for skilled professionals in the mortgage space, what incentives are being offered to retain these valued individuals and attract them to your company?
Austin: The incentive to come to Carrington Mortgage Services, as well as our ability to retain current talent, is the company itself. We are, first and foremost, an asset manager, which has allowed us to grow to over $144 billion of servicing balance. Carrington provides its associates with the stability others do not offer. Associates are not working at just another monoline mortgage lender. We have multiple business revenue streams.

Beyond that, we offer a wide range of FHA, VA, USDA, GSE, and non-QM products.

Bolton: This is a challenge in an environment where banks need to focus on capital and nonbanks are focusing on liquidity. With revenue being stressed, institutions will default to expense reductions to keep efficiency ratios in line.

So, there isn’t a lot of excess money for retention packages, etc., which will default to ensuring your compensation programs are recognizing high performers and ensuring they are rewarded appropriately.

Merritt: Talent is the primary focus of our organization, both from a recruitment and retention standpoint. We are focused on protecting our positive culture, and our mission of delivering for our customers by investing in the right technology and tools, creating development and enrichment opportunities, and flexible work arrangements for our employees.

We believe that engaged and motivated employees deliver better service, which leads to happier customers.

Wells: Competitive salaries, benefits, and perks remain important, but team member retention starts with finding the right people. Filling our organization with team members who exemplify Cornerstone’s culture of service and excellence helps us maintain a happy and productive environment. When team members want to come to work and be part of the team, they stay happy, collaborative, and engaged. From there, we champion team members who demonstrate Cornerstone Servicing’s mission to make a positive difference for others by recognizing their successes and investing in their growth. Offering ongoing opportunities for mobility and incentive programs structured around our shared, organizational goals is very impactful for us.

Williamson: Fannie Mae employees are driven by our mission to advance equitable and sustainable access to homeownership and quality, affordable rental housing for millions of people across America. Every day, our employees are working on complex policies, programs, and solutions to broaden and deepen inclusion policies and initiatives for current and aspiring homeowners and renters.

This year, Fannie Mae was named a Top Workplace by The Washington Post and The Dallas Morning News, entirely based on employee feedback, and underscores the dedication of our workforce to our mission. We also received the Best in Values award from The Dallas Morning News, having the highest employee response of companies surveyed to the statement: This company operates by strong values.

We know our central role in the housing economy demands that we recognize and reward the hard work and achievement that our people deliver. We strive to be an employer of choice and offer competitive, life-encompassing benefits that align with our mission. Our Live Well program focuses on health, finances, career, work-life fit, and community because each component plays an important role in how we show up for work and deliver on Fannie Mae’s mission. We offer benefits, programs, and resources that help during moments that matter—such as buying a first home, continuing education, caring for loved ones, and much more.

In 2023, we updated leave programs to include enhanced vacation leave, 12 weeks of paid caregiver leave, home catastrophe leave, and grandparents leave, and we expanded our paid parental leave to 12 weeks. Our focus on finance includes opportunities for employees to achieve future financial goals through programs and a competitive compensation structure. Examples include our student loan repayment program and an up to $10,000 grant after closing on a home purchase for eligible employees.

As a Top Workplace, Fannie Mae is committed to serving our communities. When natural disasters affect a community, the impact can be significant. With the goal of reducing the time it takes for a family to return to a safe and stable home after a disaster, our Disaster Rebuild Deployment program provides opportunities for our employees to participate in clean-up activities as well as home repairs and rebuild efforts. We provide eligible employees with 37.5 hours of paid disaster relief volunteer leave annually to enable them to serve in disaster-stricken communities.

We also support employees’ self-led giving and volunteering. Fannie Mae matches up to $5,000 per year in charitable gifts to eligible U.S.-based nonprofit organizations and offers employees up to 10 hours of paid volunteer leave per month to give their time and talents to causes they support individually. Through the company’s Matching Gifts program, employees, board members, and the company collectively donated $4.1 million to eligible nonprofits in 2022.

Q: With household savings rates below normal levels, student loan payments resuming, the price of oil on the rise, and lending standards tightening, how will these factors play into the foreclosure landscape?
Wells: Many factors will strain household budgets and place more homeowners at risk of default and foreclosure. In general, mortgages originated before 2023 under higher lending standards will be at lower risk, as rising property values add to their equity.

In contrast, 2023 was marked by peak interest rates and relatively less stringent underwriting standards. Borrowers with less excess cash to cover the rising costs of homeownership will be more likely to struggle with mortgage payments. Further, those with a high loan-to-value ratio will have less equity to leverage if times get tough.

The upside: mortgage servicers can make a positive difference for homeowners with proactive engagement and personalized support. The key is building relationships with homeowners long before a first missed payment. Homeowners will be more likely to entrust their servicer for help in the face of hardship, and tech-savvy servicers will have more data to detect hardships early and provide relevant resources to help them stay on track.

Q: What are some strategies used to cater to and attract business from emerging markets?
Austin: The non-QM opportunity continues to be one of legitimate long-term growth. A quality non-QM loan provider must meet the demands of the market, and by this, I mean in terms of strategic programs and products. The programs need to be as unique as the borrowers who require them. Alternative income documentation such as bank statements, profit and loss, and 1099 loans are just a few examples. Loans that not only run up the FICO bands but also run down into lower FICO bands.

In a time where contract workers, consultants, self-employed, 1099 wage earners, and the gig workforce are all growing, sound non-QM lending will be needed.