MBA Economic Forecast: 'Slow, Steady Growth' Amid Stronger Headwinds

Mike Sorohan msorohan@mba.org

February 28, 2019

ORLANDO--U.S. economic growth has been "slow and steady" for the past several years and is expected to stay that way, economists with the Mortgage Bankers Association said Wednesday.

"There are a lot of favorable demographics right now," said MBA Associate Vice President of Surveys and Forecasts Joel Kan, speaking here at the MBA National Mortgage Servicing Conference & Expo. "Job growth is strong. With rates moderating a bit, we've lowered our expectations a little and now see some more refi growth, particularly in cash-outs or HELOCs."

Kan noted headwinds, including the possibility of the U.S. economy moving into a recession. Regardless, he said, the economy is expected to slow down a bit. "We won't know if we are in a recession until we are told we are in a recession," he said. "Nonetheless, we do expect a cooling off in economic growth over the next few years."

The Fed, Kan noted, has "paused" on its rate hike strategy, but he said he expects the Fed to continue to move forward with continued hikes to the federal funds rate, settling on a 2.625 percent rate by 2021.

Purchase originations will continue to grow, but is still being held back by inventory shortages, Kan said. The MBA forecast sees total loan originations at $1.760 trillion in 2019.

The unemployment rate, currently at around 4 percent, is lower than the Fed's assessment of "full employment" of 4.5 percent, Kan said. Wage growth, which Kan said had been held back for a while, is now moving forward, particularly for lower age groups and lower-skilled workers, such as home builders.

"All of this is going to help us going forward from an economic standpoint and from a housing standpoint over the next few years," Kan said.

Additionally, MBA said household formation continues to grow, particularly in context of the housing crisis and the Great Recession. Over the past two years, household growth shifted more from rental households to owner households, as more Millennials enter the housing market, Kan said.

And while this hasn't translated into home purchases yet, Kan said, the reason is housing inventories--or lack thereof, particularly in the lower-priced home range. "We haven't seen a lot of move-up activity," he said, but he expects the situation to improve as home builders react to market conditions. "But we're still not where we should be," he said, noting that the current housing inventory (2.1 million units for sale) is well below the historical average of 2.8 million over the previous 18 years.

Kan also pointed to signs of "moderation" in home price growth. "It doesn't mean that home prices are going to start dropping," he said. "But it does mean that home price growth is going to slow to a more sustainable pace."

From a servicing standpoint, said MBA Vice President of Industry Analysis Marina Walsh, economic conditions also remain favorable. The 4th Quarter MBA National Delinquency Survey, released earlier this month, showed mortgage delinquencies at an 18-year low, at 4.06 percent. MBA reported delinquencies fell among all categories.

"We still have legacy product," Walsh said. "There are still loans originated in 2008 and 2009 that are still in that 90-day delinquency bucket, particularly with FHA loans, but they are dropping off as well."

Looking forward, a healthy economy, despite some economic headwinds, should keep mortgage delinquencies in a stronger position. "We're not going to see a return to the 2008 mortgage delinquency levels," she said.

Servicers face issues with profitability, which has declined steadily since 2012. "Large banks aren't making money on the production side," Walsh said. "As we've shifted from a refi market to a purchase market, profitability has dropped off."

Walsh noted independent mortgage banks, which have sharply increased their share or the originations market, are also retaining servicing as well. "This might create some liquidity issues going forward; we're hearing a lot of talk about IMB liquidity," she said.

Walsh also noted IMB servicing retention on loans originated is dropping. After reaching a peak in 2011-2012, where 30 percent of loan originations were retained, IMB servicing retention has fallen below 20 percent. "However, those IMBs who continue to retain servicing are seeing better profitability," she said. "That's because right now servicing operations are quite strong."

However, Walsh said the direct cost to service loans continues to grow as well, a point of concern as profit margins continue to tighten, even as delinquencies drop. "Even if you have only one delinquent loan, you still need all that internal infrastructure in place," she said.

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