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At the end of February, as we finished preparing this presentation, fears regarding the COVID-19 epidemic were just starting to unsettle global financial markets. It was truly a “stop the presses” moment for us. Instead of an environment with a very positive economic outlook, it quickly shifted to one where the near term suddenly looked very uncertain and pessimistic. However, for mortgage originators, a high-employment, record-low-interest-rate environment is about the best combination of conditions possible. Lenders may have a record-setting year. Alternatively, if things get too bad, financial markets could seize up and drive many of them out of business. Only time will tell.
The U.S. economy had apparently executed one of those elusive soft landings, where economic activity slows but doesn’t quite fall into recession. Indicators which had pointed toward potential recession in 2020 started turning around after the Fed began dropping interest rates last July. The stock market took off. Consumer spending stayed strong despite pessimistic business sentiment and a manufacturing slowdown. The economy got a second wind.
Moreover, for mortgage originations, 2019 was a banner year. Falling mortgage rates ignited a modest midyear refi boom and helped boost a stagnant purchase market. The unexpectedly fast interest rate decline was tough on mortgage servicing operations as runoff rates exploded, but production pipelines full of new refi loans more than made up for that.
However, in the last few weeks, economic concerns surrounding the impact of the coronavirus have staggered global financial markets. They’ve driven bond rates down to record lows and sparked a second wave for refinances.
For a long while, it looked like a 2020 recession was a sure thing, then the economy looked very encouraging, and now with each coronavirus update, a recession looks more likely , with GDP growth likely to slow due to supply chain jams, reduced travel, restricted entertainment expenditure, and lost hours of work. The Fed and the Trump administration either have or soon will launch numerous emergency initiatives to combat the economic and financial impacts of a serious epidemic.
Our 2020 outlook for the housing industry was quite positive before concerns about the coronavirus exploded. Delinquency and foreclosure rates were back to even better-than-normal levels. Home price appreciation was at reasonable levels. Housing construction had started to ramp up again, although inventory constraints would have continued to restrict housing sales. Now, things are much more uncertain.
What does this mean for the mortgage industry? Bolstered by hardy economic conditions and the large, increasingly affluent Millennial segment, purchase volume will continue to thrive, growing by an expected 6%, though it will still be constrained by tight inventories in many markets. In addition, contamination risks may severely cut into aggregate demand, including housing demand.
Refinance applications tailed off as 2019 ended, but with another interest rate decline in February, they spiked up again. Lender pipelines are still quite full, so the first half of 2020 will look a lot like the second half of 2019 in terms of refi production. With rates plummeting due to the coronavirus scare, another refinance spike has begun. For 2020, we expect another 50%+ increase in refi volume from 2019’s elevated level.
In total, we expect the size of the 2020 mortgage originations market will increase by an estimated 27% from the 2019 market, the biggest origination year since 2005. But the impact of the coronavirus remains a wildcard.
Key points include:
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