More bullish outlook on mortgage volume from KBW

Keefe, Bruyette & Woods is more bullish on the mortgage market for 2025 than other industry prognosticators, although it also notes total volume will remain below industry norms.

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Any production activity recovery will be further delayed past this year because of the lack of loans that are in the money to refinance, it notes.

The report, part of a larger financial sector outlook from the investment banker, points out that just 3% of existing mortgages are refi candidates at 6.85%, the approximate current rate when KBW did its analysis.

If 30-year fixed rate mortgage pricing were to decline by 100 basis points, the refi population only grows to 13%. But the latest Freddie Mac and Mortgage Bankers Association reports both put the 30-year conforming mortgage at just under 7% after a series of increases.

“We forecast industry origination volume of $2.16 trillion in 2025, well below a more normalized $2.5 trillion-$3 trillion level,” said the section on residential mortgages authored by Bose George, Alex Bond and Frankie Labetti.

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That is still higher than the December forecasts from Fannie Mae at $1.97 trillion and the Mortgage Bankers Association’s $2.07 trillion. While Freddie Mac also thinks volume will rise, it does not provide specific numbers.

Nearly three-quarters of current mortgages are at 5% or below, with 62% having rates at under 4%, KBW’s research showed.

Those high rates will leave one segment of the industry as winners. “Mortgage servicers should benefit from the slow prepayment activity that’s hurting mortgage originators,” KBW said.

KBW has dropped its price targets for Rocket Cos. and UWM Holdings “amid the higher interest/mortgage rate backdrop and the prospect of muted mortgage volumes in the seasonally slower winter months,” George said in a separate report.

Given that Rocket is more refi-dependent than UWM, it is “more weakly positioned” than its Detroit-area rival, the KBW outlook added. Both have “more limited servicing income” than some of its competitors.

Both Pennymac and Mr. Cooper, the servicers the outlook report specifically mentions, have their stocks trading near recent highs “as the market appears to be anticipating another year of strong servicing earnings. We think the current valuation level is appropriate given attractive mid-teens ROEs but see limited upside catalysts,” KBW said.

Title insurers are also going to be challenged this year because purchase activity is only expected to increase modestly this year, the outlook noted.

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On the other hand, mortgage insurance underwriters’ earnings are driven by their insurance-in-force which KBW expects to continue to grow, albeit modestly. Mortgage insurers are less total volume dependent than title underwriters as its product is only used for loans with a down payment under 20%.

“We forecast low-teens [return on equity for the private MIs] on average as we expect credit to remain benign,” the report said. Supporting the ROE outlook is stable home price appreciation and a strong economy, which will help to limit potential losses.

Speaking of appreciation, the ICE Home Price Index rose 3.33% on an annual basis in November, up from October’s 3.13%.

The ICE HPI is a repeat sales calculation. The S&P Corelogic Case-Shiller index reported a 3.6% rise for November, while the Federal Housing Finance Agency had a 4.5% annual increase.

“Rising annual gains were a result of weak sales from late 2023 rolling out of the backward looking 12-month window, rather than a sign of accelerating prices in the month,” said Andy Walden, Intercontinental Exchange vice president of research and analysis.

Single-month price gains cooled slightly at 22 basis points on an adjusted basis in November, versus a gain of 25 basis points for October as rising interest rates resulted in modestly softer purchase demand.

“We’re likely to see another month of accelerating annual gains in December, before edging slightly lower in early 2025,” Walden said.