Between the recent rate hike from the Federal Reserve, the ongoing war in Ukraine and continued economic recovery following the pandemic, mortgage lenders across the country are managing a volatile housing market.

Lenders are also bracing to combat predicted margin compression in the coming year as declining purchase demand, fueled by rising interest rates and the spike in home prices, collide with a drop in refinance activity and latent capacity in the market. With the anticipation of additional rate hikes looming and growing geopolitical uncertainty on the horizon, lenders that are looking to increase their efficiency and profit may not see a clear path forward.

Although no one can predict exactly how the markets will react to certain events, mortgage lenders that develop a strategy for the uncertainty we find ourselves in will be best equipped to handle whatever comes next.

In an effort to cool inflation, the Fed has started rolling back the pandemic stimulus measures put in place beginning in 2020. This means that the March interest rate hike will not be the last. The Fed has announced a total of six more rate hikes this year with the possibility of more coming in 2023.

Interest rates are one of the biggest determinants of mortgage prices, and the predicted rate hikes in tandem with other actions, such as balance sheet reduction, taken by the Fed in the coming years could have a sizable impact on increased mortgage rates and decreased volume.

"The easiest analogy is that the rubber band went very far in one direction subsequent to COVID‑19, and it is now snapping in the opposite direction just as quickly," explained Adam Carmel, Founder and CEO of Polly. "You had rates at zero, and the Fed bought up a massive amount of mortgage‑backed securities and Treasuries in just a couple of years. So, not only are the Fed rate hikes having an impact on mortgage prices, but the Fed discontinuing bond purchases paired with reduced liquidity in the market is probably having just as material of an impact as projected rate hikes."

Starting in March of 2020, the Fed began employing its tactic of quantitative easing (QE) by introducing a series of economic stimulus measures in response to the COVID‑19 crisis. These measures included abruptly cutting interest rates to zero, introducing a wave of emergency lending programs, and buying up billions in Treasuries and mortgage‑backed securities (MBS). With the purchase of some $80 billion of Treasury bonds and $40 billion of MBS, interest rates plummeted and mortgage rates fell to a record low of 2.65% by the first week of 2021. And while providing financial markets with more liquidity was an intentional move by the Fed, too much liquidity may not be such a good thing for the mortgage market.

"When the Fed bought in enormous scale, liquidity was entering the financial system at a record pace and drove the overall risk curve down," Carmel noted.

Although injecting liquidity into the system initially led mortgage rates to plummet, the Fed's plan to finalize its tapering of MBS purchases could soon send mortgage rates soaring.

"The spread between MBS and Treasuries over the last couple of years has been at a historically narrow range. As the Fed reduces the size of its balance sheet, you're probably going to see MBS widen out against Treasuries, or at least normalize," Carmel said.

While lenders may be facing a steep volume decline in comparison to last year's refinance boom, now is the perfect time to begin planning for the future.

"Current market conditions have created an opportune time to really focus on company building, maximizing efficiencies, and finding every basis point possible in revenue," Carmel said. "As a lender, you look to refine and enhance your processes, procedures, and talent. You should also be looking at how you can up level and optimize your tech stack and what solutions you can use — not only in a difficult market like the one we find ourselves in, but for when rates start to go down again, which they inevitably will. For the first time in a long time, lenders now have access to modern, cloud‑native technology that will allow them to scale their mortgage operations in an easier, far more flexible and configurable way."

An eagerness to operate faster, smarter, and more profitably is what drives capital markets and secondary teams to seek out the most advanced, customizable tech solutions available. Finding a platform that allows for the capital markets function to be automated facilitates the ability to grow as a business while reducing the need to massively scale hiring — and thus, face the consequences of potential over hiring. Rather than anticipate the unpleasant potential of hiring booms followed by large‑scale layoffs, scalable software enables lenders to effectively meet the demands of an industry prone to unpredictable ebbs and flows without the worry of continually onboarding and offloading additional staff.

"The most modern cloud‑native software allows for unlimited flexibility, configurability and scalability, and that's where Polly comes in," Carmel said. "We have introduced the most cutting‑edge capital market solutions available to the industry today, specifically designed so lenders can scale up, configure as much as they want, and be able to do so with as much flexibility as they desire."

Polly's revolutionary pricing engine allows lenders to effortlessly configure rules, manage margins with infinite dimensions, and quickly distribute pricing across all channels. From real‑time API integrations and workflow automation to intuitive rule management and a fully customizable user experience, Polly's Product and Pricing Engine (PPE) helps lenders stay in lockstep with an evolving mortgage industry.

"We are obsessed with our customers' happiness and success, and we constantly want to innovate so we are deeply focused on customer and partner engagement," explained Carmel. "And I think that is really important, particularly right now, because it's a great time for us to take a holistic, internal view also. Our customers, and the industry as a whole, want and more importantly need new capabilities, innovation, and functional depth across the mortgage tech stack. Whatever our customers need to be successful in this unpredictable environment and beyond, we want to build that for them, and we'll do it instantly," Carmel said.

This article was originally published by HousingWire.