The last week of the calendar year is usually a slow time for the mortgage industry, but 2022 was something else. It represented the lowest level of activity in 27 years.

“With mortgage rates still well above 6% and the threat of a recession looming, mortgage applications continued to decline over the past two weeks to the lowest level since 1996,” Joel Kan, Mortgage Bankers Association‘s vice president and deputy chief economist, said in a statement.

Mortgage applications decreased 13.2% on a seasonally adjusted basis from two weeks earlier, according to data from the MBA for the week ending December 30. (The results include adjustments to account for the holidays.)

That’s because costs for borrowers were higher, reflecting the mortgage market’s response to the Federal Reserve‘s tightening monetary policy. The MBA estimates the 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) increased to 6.58% for the week ending December 30 from 6.42% in the previous week. For jumbo loans (greater than $647,200), rates remained at 6.12%.

Consequently, lenders and loan officers have started 2023 at a low point, hoping a recovery will come in the second half of the year.

“On one hand, the third quarter gross domestic product was revised upward twice, the job market remains on solid footing, inflation has been moderating, and consumer confidence hit the highest point in eight months,” said Realtor.com’s senior economist George Ratiu.  

“On the other hand, corporate executives are feeling more bearish on account of borrowing costs going higher, with the perceived risk of recession rising. Concerns about the business outlook could prompt more company leaders to freeze hiring or resort to broader layoffs in 2023.”  

Cash-outs are getting harder

The MBA data shows that refi applications decreased 16.3% for the week ending December 30 compared to two weeks ago.  

“Refinance applications remain less than a third of the market and are 87% lower than a year ago as rates remained close to double what they were in 2021,” Kan said. “Mortgage rates are lower than October 2022 highs but would have to decline substantially to generate additional refinance activity.”

The expectation is that refis will go down even further this year. Under new rules, cash-out refis, which many lenders still relied upon in 2022, will be more expensive and harder to get in 2023.

In October, the Federal Housing Finance Agency (FHFA) announced it will implement targeted increases to the upfront fees for most cash-out refinance loans. The implementation, beginning February 1, 2023, intends to “minimize market and pipeline disruption,” the agency said.

In addition, Freddie Mac said in December that when proceeds of a cash-out refinance are used to pay off a first lien mortgage, it must be seasoned for at least 12 months, starting on March 7. It means a borrower has to wait 12 months to get new cash out after buying a house, getting a rate-and-term, or getting a cash-out refi.

“Cash outs are more expensive. Cash outs are harder to do,” United Wholesale Mortgage‘s CEO, Mat Ishbia, said in a recorded video. “At the same time, equity in homes is the highest it’s been out there. On average, $92,000 of equity per homeowner in America.”

Ishbia said he expects Fannie Mae to follow Freddie Mac’s footsteps

Who wants a mortgage these days?

The MBA data also shows that the purchase applications decreased 12.2% for the week ending December 31, compared to two weeks earlier, and was 42% lower than the same week one year ago.

“Even as home-price growth slows in many parts of the country, elevated mortgage rates continue to put a strain on affordability and are keeping prospective homebuyers out of the market,” Kan said.

Ratiu added that for the buyer of a median-priced home, today’s mortgage rate translates into a monthly payment of about $2,100—without taxes or insurance—a 63% increase from 2021. 

“Looking toward 2023, we can expect financial market volatility to continue until investors have more clarity about the economy’s direction,” Ratiu said.

“With the Fed committed to monetary tightening until inflation is decidedly moving toward 2%, borrowing costs will remain elevated, keeping housing affordability at the top of the year’s list of challenges.”