US mortgage volumes have surpassed $3tn only in 2003 and 2020 © FT montage

US mortgage volumes could top $3tn this year as rising competition among lenders and an activist Federal Reserve combine to put further downward pressure on borrowing rates, according to industry executives and analysts.

Rates are poised to fall as a scarcity of inventory pushes home prices up, increasing loan sizes and putting the industry on track to approach the $3tn level — which has been topped only in 2003 and 2020.

“It’s going to be a big year,” said Stan Middleman, president and chief executive officer of Freedom Mortgage. “The prognosticators are calling for mid-two trillions, I think it's going to be closer to three.” Freedom is the ninth-largest mortgage lender in the US by volume, according to government data.

The Mortgage Bankers Association is forecasting lending volumes of $2.75tn in 2021, but Chris Whalen of Whalen Global Advisors also thinks that figure is too conservative. “I think we'll easily do $3tn to $4tn in new loans next year,” he said.

Jay Bray, chief executive of a mortgage lender called Mr Cooper, estimated that, at current rates, 800,000 of his company’s could save at least $200 a month by refinancing their mortgages. While 2020 had been a “staggering” year for the industry — with his firm funding almost $39bn in mortgages in the first three quarters — Mr Bray said 2021 could be almost as good.

US mortgage volumes could top $3tn this year

Mat Ishbia, chief executive of United Wholesale Mortgage, the second-largest of the mortgage lenders, said that his company “is going to do a lot more business this year than we did in 2020”, citing falling rates, millennials leaving cities to buy in the suburbs, and technology investments that had made the company more productive.

Mortgage rates are at all-time lows, which is good for homebuyers. The current average rate for a 30-year fixed-rate mortgage is now under 2.7 per cent, according to Fannie Mae, a full percentage point lower than a year ago.

But rates could fall further because mortgage lending is currently very lucrative by historical standards. One proxy for this profitability is measured by the so-called “primary-secondary spread” — the difference between mortgage rates charged by lenders and the yield on government-insured mortgage-backed securities.

US mortgage brokers set for bumper profits

The bigger the difference, the more money lenders are taking in. The spread now stands at 1.5 percentage points, down from 2 points in the spring of 2020 but well above the historical average of about 1 point. This indicates that lenders have flexibility to lower their rates for homebuyers even if interest rates in general remain where they are.

Mortgage rates “could fall another 30-50 basis points from here, if Treasuries stay stable,” said Walt Schmidt, who leads mortgage strategy at FHN Financial.

Yields on mortgage-backed securities, meanwhile, are being kept down by the Federal Reserve, which in December committed to keep adding $40bn in MBS to its balance sheet every month “until substantial further progress has been made” towards full employment.

Reaching that target has required the Fed to buy more than $100bn in MBS a month — roughly 20 per cent of total issuance — to replace securities on its balance sheet that are being repaid or are maturing.

This means that big mortgage lenders such as Quicken Loans, Mr Cooper and United Wholesale Mortgage could be in line for bumper earnings despite industry competition for borrowers. According to Inside Mortgage Finance, in the first nine months of last year all but one of the top 100 US mortgage lenders increased mortgage volumes year on year.

The government “needs housing to lead the economy out [of recession] and that doesn’t happen unless the Fed buys MBS,” Mr Middleman said.

Map showing declining housing inventory on the US in 2020

Capacity constraints have prevented rates from going lower already, insiders say. Competition among mortgage lenders hoping to hire brokers was “pretty fierce”, said Mr Bray — but improved technology was making each broker more productive. As capacity grows over the next several years, he said, “one of my worries is that [lenders] start engaging in irrational behaviour, people doing business at margins that don’t make any sense”. 

Another component driving high loan volumes in 2021 is house prices, which have been pushed up by tight inventories. US online platform Zillow said property listings on its site were down 34 per cent year on year in the week to December 12 with some states in the US north-east, such as New Hampshire and Vermont, seeing levels of housing stock cut by about 50 per cent from the previous year. In the year to December 2020 property listings fell more than 33 per cent for two-thirds of US states, but housing supply has been falling for much of the second half of last year.

Chart showing increasing US house prices and declining inventory

However, demand for housing remains strong. The number of days properties have stayed on the market has dropped substantially, with vendors accepting an offer three weeks faster than at the same time last year, according to the property group. This has led to prices rapidly increasing in recent months. Median list prices for properties on Zillow have been increasing at double-digit rates year on year since October.

The latest reading of the Case-Shiller US National home price index, which has a two-month lag, shows an 8.4 per cent annual price gain in October, accelerating from the month before. 

“We’re seeing higher loan amounts,” Mr Middleman said. “That’s what will get us to $3tn: the competition to buy homes. There’s not enough homes.” 

Additional reporting by Chris Campbell


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