How Inflation Affected the Mortgage Businesses in the US?

The Effects of Inflation on the US Mortgage Industry

The entire world is affected by inflation, but one country that has been hit the worst is the United States. The annual inflation rate in the US rose to 8.5% in July 2022, close to a four-decade high. Although prices of commodities were rising since last year because of supply chain disruptions caused by the COVID-19 pandemic, the Ukraine war contributed to the hike and catapulted the price of gas, food, transportation, and rent. The price of household commodities and essential goods also surged at a faster pace than the average income.

Inflation has made a brutal impact on the housing market too and as a result, alarmed the mortgage industry. The fatal combination of rising interest rates, skyrocketing inflation, spiked housing prices, and a low supply of homes took a toll on the housing market and slowed down mortgage origination like never before. If the rate at which inflation is soaring, the mortgage interest rates might go even higher. But the question is how? How does inflation affect the mortgage rates and the industry as a whole and what is its current impact? Let’s find out.

How Does Inflation Affect Mortgage Interest Rates?

The reason why the soaring US inflation is affecting the mortgage industry is that mortgage interest rates are closely related to it. The rates are dependent on many factors. Some are within your control, like your credit score, the amount of down payment, and your monthly debts whereas, some are beyond your control and are dependent on how the US economy is performing, like inflation. Since inflation decreases the value of the US dollar and its purchasing power, this causes mortgage rates to increase.

How Inflation Affected the Mortgage Businesses in the US?

Inflation also makes a direct impact on mortgage businesses. It reduces the demand for mortgage-backed bonds among investors, thus dropping the value of mortgage-backed securities. As a result, the mortgage interest rates of all mortgage types increase. Taking a mortgage loan becomes expensive, the amount of monthly payment increases, foreclosure spikes, and loan origination takes a downturn.

The US economy is suffering from surging inflation which led to a fall in the demand for mortgages in July, hitting the lowest point since 2000 according to the Mortgage Bankers Association. The mortgage market is witnessing one of its worst phases as the market demand fell more than 6 percent because the borrowers have lost considerable purchasing power. Mortgage applications also dropped 7 percent; 19 percent lower than the rate in the same week last year. The refinance index decreased 4 percent, thus falling to a 22-year low.

Since the borrowers struggle to pay for monthly installments due to the higher cost of borrowing, lenders have to deal with a blow to their business, particularly independent mortgage lenders as they are struggling for survival.

Many banks pulled back from the mortgage and the future can be filled with a string of bankruptcies and a spike in layoffs. For example, non-qualified mortgage lender Sprout Mortgage shut down its operations amid market volatility. Another lender, First Guaranty Mortgage Corp., known for riskier lending, stopped operating and filed for bankruptcy in July. It originated $10.6 billion in mortgage loans in 2021 and now has $473 million in debt which the company owes to banks that funded the residential mortgages it provided.

Independent lenders are facing significant operating losses and cash flow challenges because of the worsening condition of the mortgage refinance market caused by the housing affordability crisis and lack of inventory. The value of their loans has dropped significantly as Federal Reserve tightened rates by 2.25 percentage points in order to control inflation. Lenders who work with government-backed companies are less affected by the inflation and dramatic collapse of the mortgage market because they have the option of getting emergency funding. However, no matter the type of lender, the plunge in origination volume spared no one.

What Does the Future Hold?

The future of the mortgage industry depends on how long the inflation will soar and what the Federal Government will decide. More layoffs and other cost-cutting measures from mortgage businesses can be witnessed to stay afloat during inflation. Diversifying their portfolio and entering into new domains like reverse mortgages, home equity products, and personal loans might help originators capture the volume and maintain a margin.

Another strategic change that lenders can make is relying on technology, like mortgage automation and other AI-led solutions, to cut down on costs and be more agile so that market fluctuations like these don’t affect them significantly. Till then, only time will tell what the future holds for the mortgage industry.

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