MBA Says Fed Remarks Affirm Forecast, Mortgage Rates to Rise

Fed chiefs met. They spoke. Economists opined.

Mortgage Bankers Association Chief Economist Mike Fratantoni summed up what lenders need to know:

“As the Fed’s actions were anticipated, this announcement will not impact our latest forecast for mortgage rates and mortgage originations. We expect that rates on 30-year mortgages will increase from 3.2% today to about 4% by the end of 2022,” Fratantoni said.

The MBA’s Oct. 17 Mortgage Finance Forecast also predicted originations, which reached a high of $1.36 trillion in last year’s fourth quarter, will fall to $610 billion by the fourth quarter of 2022 as the refinance boom ends.

The Federal Reserve on Wednesday said it would reduce its $120-billion-per-month purchases of bonds and mortgage-backed securities of this money, buying $10 billion a month less in Treasury securities and $5 billion less a month in agency mortgage-backed securities. The purchases, called monetary easing, were begun after COVID-19 was declared a pandemic to help keep money flowing into the financial system.

Fed Chair Jerome Powell said the economic outlook has been brightening, despite the slow pace of economic growth in the third quarter.

“Aggregate demand has been very strong this year, buoyed by fiscal and monetary policy support and the healthy financial positions of households and businesses. With COVID case counts receding further and progress on vaccinations, economic growth should pick up this quarter, resulting in strong growth for the year as a whole,” Powell said.

NAFCU Chief Economist Curt Long said the tapering of asset purchases was expected, and the reduction rate puts the Fed on track to end the purchases by June 2022.

Long said the Fed is likely to begin raising rates next June if inflation pressures persist into 2022. However, he said he believes the Fed will start raising rates later.

“The FOMC committed to reach full employment prior to liftoff, and employment remains several million workers shy of pre-COVID levels,” Long said.

“Second, although the recent spike in inflation has brought forward market expectations for the next rate increase, it is likely that supply chain disruptions will improve – if only marginally – over the first half of 2022, which could relieve price pressures,” he said.

MBA economists said they expect higher inflation to persist, in part because of the effect of higher home-prices and rents caused by the lack of for-sale inventory and decreasing vacancy rates for apartments.

The Fed has continued to signal it is waiting for the economy to reach full employment before raising short-term rates, and Fratantoni said his team expects the economy to reach that mark by mid-2022.

“Although job growth has been slower the past two months, there may well be a pickup through the remainder of the year,” Fratantoni said. “Employers continue to struggle to fill millions of open positions.”