Marty Green thinks of the housing market in 2022 as two very different movies. The first half of the year, with mortgage rates in the 3s and 4s, was like “Fast and Furious.” Houses were selling at a fever pitch in a matter of days, with multiple offers, waived contingencies and buyers paying $100,000(!) over asking price. High octane stuff.

But the housing market in the second half of 2022? “The Big Chill” or “Frozen,” says Green, principal at real estate law firm Polunsky Beitel Green. The number of home listings dried up, contracts were canceled, the few buyers still out there demanded concessions, mortgage rates spiked to 7% and homebuilder sentiment hit rock bottom.

By September, a full-fledged housing market recession had set in.

“The 2002 housing market has been a tale of two halves,” said Green.

And, the market looks likely to remain frozen well into 2023, experts told HousingWire.

A mortgage rate lockdown freezes the housing market

Homeowners who refinanced during the pandemic simply aren’t going anywhere, according to Nick Smith, managing partner and CEO at Rice Park Capital Management.

“They are not selling and have a lot of equity in their homes. The higher mortgage rates are also putting a wet blanket on demand for new housing,” he said.

Thanks to the Federal Reserve’s benchmark rate being near zero for two full years and generating record-low mortgage rates, a tiny minority of homeowners now have an incentive to refinance at all in 2023. The elevated mortgage rate environment has created a mortgage rate lockdown effect of sorts, limiting the pool of customers for the mortgage industry.

With homes taking longer to sell, due in part to higher mortgage rates, buyers in 2022 had negotiating power to get concessions or credits to lower rates down for a limited period. Those trends are likely to continue in 2023.

Temporary rate buydowns have become a popular concession, especially among homebuilders, in which one out of 10 loans feature a seller-paid buydown, said Peter Idziak, senior associate at Polunsky Beitel Green. Adjustable-rate mortgages are also in vogue, enabling buyers to partially combat historically bad home affordability.

Homeowners in 2022 also tapped into their home equity, which peaked at $11.5 trillion in the second quarter of 2022, capitalizing on home equity loans and home equity line of credit (HELOC). In the third quarter of 2022 alone, HELOC and home equity loan originations rose 47% and 43% year over year respectively, according to Transunion‘s latest available data. 

With debt levels rising and a recession looming, it’s easy to see more people turning to the equity in their homes to pay down credit cards or make up for a liquidity shortfall caused by job loss.

“With the economics of cash-out refinance worsening amidst higher rates, homeowners are showing increased willingness to use home equity lines of credit (HELOC) and home equity loans to tap equity,” a Housing Finance Policy Center report states.

Layoffs, LOs leaving the industry for good 

The mortgage industry shrinking by more than half to an estimated $1.7 trillion in 2022 from 2021 meant mortgage lenders have had to cut costs – primarily through layoffs.

Top 10 lenders, including Wells Fargo, Pennymac, Guaranteed Rate and loanDepot, have gone through multiple layoffs throughout the year, and smaller local lenders, which aimed to expand by targeting the purchase market, were hit just as hard, if not harder. 

Other smaller lenders, including real estate tech startup Reali and Sprout Mortgage, shuttered, while First Guaranty Mortgage Corp filed for Chapter 11 bankruptcy. Some smaller players, including Inlanta Mortgage, which were hiring LOs and branch managers in the summer, abruptly announced to shut down earlier this month, citing an “unanticipated drop in mortgage product demand.”

The top loan originators, who exceeded the landmark $1 billion in origination volume in each of the past two years, weren’t immune to rising rates either. Shant Banosian, executive vice president of sales at Guaranteed Rate, laid off about 50% of his team, and Thuan Nguyen, CEO of Loan Factory, reduced his company size by half this year. 

The top producing LOs who focused on purchase mortgages were positioned in a better spot than those whose business depended on refis. Banosian, whose loan origination volume will be close to $1 billion in 2022, said he turned housing market headwinds into an opportunity to target new geographic markets. 

With a huge increase in remote work and his core group of clients buying homes across the country – whether it be vacation homes, more affordable areas, or for new work opportunities – Banosian was at risk of losing clients when they went to states his team wasn’t operating in. 

“As they (existing clients) went to do business in these new states, we figured out where the real estate agents are, and who the players are, where the markets they’re buying and did some research and started making phone calls,” he said in an interview with HousingWire. 

The LOs who are in it for the long haul have gone old school: meeting up with real estate agents, getting licenses in multiple states and utilizing social media to get their names out. Those who joined during the refi boom or didn’t build referral relationships have permanently exited the industry. Or will soon.

Loan officer headcount in the industry could decline by 45% from last year’s estimated 353,120 LOs nationwide, which expanded by 34% from 2019, according to projections from Stratmor Group.

If the industry experiences a 65% drop in origination volume from the peak in the fourth quarter of 2020 to a trough in the first quarter of 2023, the Mortgage Bankers Association projects production employment will likely need to be scaled back by 24 to 31%.

“We are also going into the seasonally lower winter months, so we should expect lower volumes to continue at least for the next two quarters,” said Shampa Bhattacharya, director for U.S. non-Bank financial institutions at Fitch Ratings.

“Everybody is going to have a black eye here. It’s not a lack of desire for loans, the loans don’t exist,” Brian Hale, founder and CEO at Mortgage Advisory Partners, said.