KBW Boosts Optimism: Mortgage Volume Set for a Remarkable Surge!
Are you ready to dive into the future of the mortgage market? Buckle up, because the insights from Keefe, Bruyette & Woods (KBW) predict a more optimistic outlook for 2025 compared to many of their peers. However, they caution that total mortgage volume will still linger below the industry’s historical averages.
One big hurdle? A lack of refinance opportunities is expected to stall any recovery in production activity well into next year. With current mortgage rates hovering around 6.85%, only a meager 3% of existing loans are good candidates for refinancing. And even if rates were to drop by 100 basis points, we’d only see that number rise to 13%. As it stands, recent reports from Freddie Mac and the Mortgage Bankers Association show that the 30-year conforming mortgage rate is just shy of 7% after a series of hikes.
KBW’s forecast for mortgage origination volume in 2025 sits at a modest $2.16 trillion, falling short of the more typical range of $2.5 trillion to $3 trillion. Yet, this prediction outpaces the gloomier estimates from Fannie Mae at $1.97 trillion and the Mortgage Bankers Association’s $2.07 trillion. While Freddie Mac anticipates a rise in volume, they have yet to disclose specific figures.
Digging deeper, nearly three-quarters of existing mortgages are at 5% or below, with a staggering 62% boasting rates under 4%. In this high-rate landscape, some players are poised to thrive. KBW notes that “mortgage servicers will benefit from the sluggish prepayment activity that is hurting mortgage originators.” So, while originators may struggle, servicers could be the real winners in this scenario.
However, KBW has lowered its price targets for Rocket Companies and UWM Holdings, citing the ongoing pressure from higher interest rates and the prospect of muted mortgage volumes during the typically slower winter months. With Rocket being more reliant on refinancing, it finds itself in a tougher spot compared to its Detroit-area competitor, UWM, which holds a stronger position.
Meanwhile, companies like Pennymac and Mr. Cooper are seeing their stocks trade near recent highs as the market anticipates another year of robust servicing earnings. KBW believes the current valuation is justified given their attractive mid-teens return on equity (ROE), though they see limited catalysts for further growth.
Title insurance providers are set to face challenges this year as purchase activity is projected to rise only modestly. In contrast, mortgage insurance underwriters are expected to see steady earnings growth, driven by increased insurance-in-force. KBW predicts low-teens ROEs for private mortgage insurers, supported by stable home price appreciation and a robust economy that should help minimize potential losses.
Speaking of home prices, the ICE Home Price Index climbed 3.33% on an annual basis in November, up from 3.13% in October. The S&P CoreLogic Case-Shiller index reported a 3.6% rise for November, while the Federal Housing Finance Agency noted a 4.5% annual increase. But don’t be fooled—these rising numbers are more a reflection of weak sales from late 2023 than an indication of rapidly accelerating prices.
As we look forward, December might see another month of climbing annual gains before we anticipate a slight dip in early 2025. The bottom line? The mortgage landscape is anything but static; it’s a ride full of twists and turns that you won’t want to miss.
