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Where the mortgage market heads from here, according to loanDepot's chief investment officer

While nationally aggregated home prices and single-family homebuilding have proved fairly resilient, all things considered, through the rate shock, the mortgage market hasn’t been as fortunate.

Since mid-2022, the U.S. mortgage market has been experiencing one of its biggest downturns in history.

To better understand how the mortgage market is faring, and what could come next, ResiClub reached out to do a Q&A with Jeff DerGurahian, chief investment officer and head economist at loanDepot, one of America's largest mortgage lenders.

Below is ResiClub’s Q&A with DerGurahian.

Q: How would you describe the mortgage industry and the housing market over the past two years as we came out of the Pandemic Housing Boom and entered the mortgage rate shock period?

Marked by high-interest rates, rising [national] home prices and a low housing stock, the last two years are unlike anything we have seen in the housing market’s recent history. Americans, especially first-time homebuyers, have been grappling with rising home prices against a backdrop of inflation – which has sparked a home affordability crisis.

On the other hand, American homeowners hold a record $32.7 trillion in home equity and of those who are still paying a mortgage, 63% carry an interest rate below 4%.

Q: Where do you expect mortgage rates and the housing market to go from here?

With inflation finally cooling, we’re anticipating one or two rate cuts from the Fed this year, with the market beginning to normalize in 2025. And as we look ahead, the next refi wave will not be a rate & term refi story as it was during the low-rate era of the pandemic, it will be the resurgence of home equity.

Q: How do you expect the housing market and the mortgage industry to respond if mortgage rates fall?

Right now, while home values continue to rise in some markets, they are falling in others, leading to increased inventory across the country. When interest rates begin to drop, we can expect more buyers who have been waiting on the sidelines to enter the market. This will create more demand and likely lead to higher home values. However, this added demand will continue to strain the existing inventory.

Q: In June, the Federal Housing Finance Agency (FHFA) approved a limited pilot program with Freddie Mac to purchase second mortgages from lenders, which allows borrowers to access the cash in their home equity stash pile. U.S. homeowners have around $32 trillion in home equity, while outstanding home equity loans only amount to around $400 billion. Wall Street types support this move, framing it as a stimulus for the U.S. economy. But given the federal government’s inflation concerns, is now really a good time to launch a program that would free up that record equity to homeowners?

The home equity market has been relatively dormant since the 2008-2009 financial crisis, and it’s a shame there isn’t more attention on it now. As homeowners are being squeezed by inflation and high-interest debt, a home equity loan can be a very smart and useful financial tool that, when used wisely, can help them save a lot of money by lowering their cost of borrowing (especially compared to unsecured credit card borrowing) without sacrificing their current mortgage rate.

Freddie Mac’s initial pilot move to purchase second mortgages is limited to $2.5 billion and focused on smaller loan balances. If it is expanded and Fannie Mae offers a similar program, it will open up the home equity market and lower the cost of borrowing by infusing more liquidity into the secondary market for home equity loans. This will spur more lenders to offer equity lending products, bringing much needed relief to consumers.

Q: How has loanDepot’s business fared over the past two years as we came out of the Pandemic Housing Boom and entered the mortgage rate shock period?

As with all lenders, we faced a shrinking housing market. In response, loanDepot created the Vision 2025 strategy to align the company with the current market size while investing and planning for future growth. We’ve made positive progress towards our goals, including foundational investments in our people, products, and technology platforms. As part of this strategy, we aim to become a lifetime partner in our customers' homeownership journey, which led us to launch a HELOC that has become a meaningful contributor to our year-over-year revenue growth. And last week, we introduced a home equity loan as part of our equityFREEDOM suite of home equity lending products.

Q: Suppressed mortgage activity has led to market woes in the last couple of years, as waves of consolidations and layoffs have hit the mortgage industry. Moving forward, do you expect there to be more layoffs or more hiring across the sector?

Easing interest rates and an increased housing supply bode well for lenders who are prepared for the long term and have the infrastructure to capitalize when the market turns, as we have been planning with Vision 2025. The smart use of technologies like our melloNow automated underwriting engine will give us operating leverage and should enable us to scale up more efficiently. Some lenders, including loanDepot, have begun strategically hiring for these markets. However, not all lenders are in a strong position, and it is likely that we will see some consolidation and workforce reductions from those unable to weather one of the worst market downturns since the Great Depression.

Q: What are the biggest headwinds facing the U.S. housing market in the next few years? What are the biggest tailwinds?

Housing affordability will remain an issue for some time. Even as interest rates lower, pent-up demand will keep prices high. This, combined with other rising expenses such as home insurance and property taxes, will continue to impact buying power, especially for first-time homebuyers. On the other hand, continued housing demand will ensure that the market stays strong, allowing homeowners to maintain and grow their equity positions. When supply issues ease, we may also start to see the predicted 'silver tsunami,' as it becomes more feasible for Baby Boomers to downsize, thereby freeing up housing inventory for younger generations.

Earlier today, ResiClub PRO members got our report looking at how long homes are taking to sell across the country.

These 2 interactive maps show what's happening to days on market across the country