Higher inflation, post-pandemic economic recovery and a reduction in Federal Reserve stimulus incentives are key economic factors expected to put upward pressure on interest rates as we move into 2022 — increasing the already stiff competition among mortgage lenders.

Furthermore, a more competitive mortgage lending environment will only magnify the importance for lenders to have an efficient loan application and approval process. Some fintech companies have already made inroads against incumbent banks by automating underwriting processes, but now, as the fight for market share intensifies, automation will become mission-critical for maintaining profitability.

Shrinking market ahead

Lenders are already feeling rate-related pressure, and it’s going to continue into the new year. According to the Mortgage Bankers Association (MBA), 30-year fixed-rate loans could reach 4% by the end of 2022. Those higher borrowing costs are expected to slow consumer interest in refinancing, resulting in a lower volume of loans.

While interest rates are likely to stay relatively low compared to historical levels, they are forecasted to remain above the record lows of the past 18 months. The good news is that a red-hot housing market will fuel a 9% increase in purchase mortgage originations, based on MBA projections. But as rates rise, refinancing is expected to decrease. Overall, the MBA forecast for 2022 predicts that total origination volume will drop 33% to $2.59 trillion next year, and $2.53 trillion in 2023.

With fewer consumers choosing to refinance, mortgage lenders — who have profited from high volume due to low rates — must choose to transition to more automated systems or to implement even more advanced systems for underwriting and analytics to maintain the same margins they experienced over the past few years.

With the forecast of a shrinking market ahead, here are some must-haves for mortgage lenders in 2022:

Improved ability to scale on-demand

The boom of the last two years resulted in lenders scaling up their staffing to meet the record demand from consumers. For most, automation wasn’t even an option as they were simply trying to keep up with the flood of applications. However, as the demand for refinancing slows down, many lenders will be left with idle staff, and the unfortunate result will see lenders balancing staffing to match application volume. 

Automation is the solution. Automation can provide operational elasticity for mortgage lenders, enabling them to adapt more easily and quickly to fluctuations in demand and to ensure that customer experiences are streamlined and efficient.

Faster onboarding and automation

Lenders who are faster and more efficient at onboarding new customers will experience improved margins. Rising interest rates will reduce the total number of borrowers who apply for a mortgage, which means a smaller pie and increased competition among lenders.

Many mortgage lenders still rely on cumbersome paper-based loan approval systems and processes. These legacy artifacts can slow decision times and, in a competitive marketplace, cause borrowers to switch to a financial institution that can move more quickly.

Automation can facilitate decision-making at every step in the process, all while improving accuracy and compliance. One common example of such automation is the extraction of data from borrower applications and supporting documents, which eliminates the manual effort typically conducted by processors and underwriters to pull information out of documents. Additionally, digital onboarding tools enable the use of artificial intelligence to quickly determine which loans are ready for a decision and which require more documentation or closer scrutiny.

Using a slowdown for digital transformation

Outside of remote closings (which exploded in growth), the boom caused by the record mortgage loan volumes largely paused digital transformation across the mortgage industry – many lenders simply would not have been able to keep up with the sheer volume of business in their pipeline had they switched to new systems.

But the expected reduction in overall volume starting in 2022 will give lenders more elbow room to develop the workflow strategies required to overcome automation challenges. Making an automation transition takes planning and time to implement, but it is not impossible!

While 2022 promises to bring changes to the mortgage industry, it will also be an opportunity to implement automated processes that will reduce manual underwriting costs, optimize efficiency, improve customer experiences, and boost profitability. If interest rates rise, it will create challenges for both legacy lenders and digital-first fintechs… and the survival of the fittest will boil down to who can automate most efficiently.

Avi Marcus is vice president of mortgage strategy for Ocrolus.

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

To contact the author of this story:
Avi Marcus at amarcus@ocrolus.com

To contact the editor responsible for this story:
Sarah Wheeler at swheeler@housingwire.com