Featuring the perspectives of:
Jeremy Collett
Chief Capital Markets Officer, Rate
Erik Hand
Executive Vice President, Mortgage Lending Director, HomeStreet Bank
What do you expect to happen with interest rates in 2025?
Erik Hand: The answer depends upon which part of the yield curve you want to look at. The Federal Reserve has started easing the federal funds rate that impacts the short end of the curve more so than the long end. Since the September 2024 meeting, the Fed has reduced the Federal Funds Rate by .75% which impacts consumer loans like credit cards, auto loans and real estate loans such as home equity lines of credit. These loans correlate with the short end of the yield curve. However, the 30-year mortgage rate — which is correlated with the long end of the yield curve — has increased slightly. For 2025, we will likely see the spread widen between the short and long end of the curve. This will result in Adjustable Rate Mortgages (initially fixed for three, five, or seven years) making sense for a lot of homebuyers.
As for a rate prediction, Fannie Mae is forecasting the 30-year mortgage to be below 6% next year. I think that’s a little aggressive. I expect the rate to be in the low 6% range.
Jeremy Collett: Markets have been trading decisively risk-on since Trump’s election win, characterized by large rallies in equities and crypto currencies. The inflows to higher returning investments have left the bond market teetering and as a result interest rates have moved materially higher. The outlook for future Fed rate cuts has cooled and our base case suggests we’ll only see 50-75 bps of cuts next year — so rates should be “lower, but slower.” Thirty-year mortgage rates likely remain in the 6s throughout 2025.
What will be the biggest challenges and opportunities for lenders in 2025?
Collett: 2025 looks like it will be more of the same for mortgage originators, with focus remaining on cost control, incorporating tech to chop origination costs and building upon diverse product offerings to deal with the market challenges of sustained elevated interest rates. There is tremendous uncertainty around impacts of tariffs, deportation and GSE (government sponsored enterprise) reform to also cope with.
Hand: The main 2025 challenge will be lower volume, which is much the same as the prior two years. Volume is also impacted because today’s higher rates do not support refinance activity. However, even in this lower volume environment there are opportunities for lenders who are willing to embrace new ways of meeting the needs of the borrower, such as offering digital closings.
The change in our government’s administration will also bring a change in focus for housing. Calls for the privatization of Fannie Mae and Freddie Mac will increase, and that will have an impact on the role those two companies play in housing finance. I do trust that any move to privatize Fannie and Freddie will be measured. A quick change in their structure would be very disruptive to housing and the economy.
What will be the impact of AI on mortgage lending in 2025 and beyond?
Hand: We are seeing AI being used initially to improve efficiency and loan quality through the loan fulfillment process. It is also being used to help loan origination staff research product options and guidelines and to help with marketing content. Eventually, we will get to a point where AI will assist borrowers in the loan process, including helping select which product is best for them. However, before we get to that point, we need to ensure that the proper monitoring is in place so that any advice given by the AI tool is free from any unintended bias.
Collett: In 2025, I believe AI is most likely to impact areas like compliance and underwriting, with its ability to quickly call up massive amounts of guidelines and regulation data and insert them into the origination process. There is certainly room and demand to incorporate AI functionality involving OCR technology, which is currently used in the conforming world, into the NQM market.
