Even before the Federal Reserve cut rates by 50 basis points, sentiment among our lender clients had shifted noticeably. They were more optimistic and, for the first time in two and a half years, focused once again on capacity and not just cost reduction.
For many, the turning point started earlier in the year when cash-out refinances began to steadily increase, mostly due to debt consolidation. With the market anticipating additional rate cuts, it is reasonable to expect that declining mortgage rates will soon make rate and term refinances attractive to homeowners who purchased in the last two years. Lower rates may also encourage more buyers to move off the sidelines, and more sellers to list their homes, improving the inventory situation.
Will this create a mini boom for our industry? Some very large lenders have been quietly adding headcount to handle higher volumes, and others have been publicly discussing their investments in AI to help them gain market share when the market improves.
At First American, our economists have been encouraged by recent directions in home sales and inventory. However, they have cautioned that affordability challenges and the rate lock-in effect created by the ultra-low-rate mortgages originated in 2020 and 2021 remain headwinds to the housing market.
No one can predict how much volume may increase. If past experience is any indicator, it is fair to assume that higher volumes, scaling organizations and changing market conditions will not only bring opportunity, but also a potential increase in manufacturing errors, borrower misrepresentation and fraud risk.