7 lending trends to watch in 2025

November 20, 2024

7 lending trends to watch in 2025

Debt is a problem, interest rates will likely drop farther, and AI will continue to make inroads.

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The US lending space is in constant flux-but perhaps never more so than today, as multiple trends intersect. At the recent 2024 Mortgage Bankers Association (MBA) conference, seven of those trends, including four that are mortgage-specific, were brought to light. Let's have a look at these trends, which point to where the US lending industry may be headed in 2025.

1. Growing debt is a growing concern

The bad news: Debt, both consumer and government, is skyrocketing. The worse news? No one seems to care.

Total US debt now stands at $35 trillion. That equates to over $100,000 for every single American, including the 78% living paycheck to paycheck.

Is anyone paying attention? Not if the presidential elections of 2016, 2020 and 2024 are any indication. In those campaigns, debt discussions were nonexistent. In fact, policies proposed by both political parties will only add to the country's already onerous debt load. And what a load it is: As of June 2024, the US had a debt-to-GDP ratio of 122%, the highest since World War II. (See Figure 1.)

Source: Congressional Budget Office: The Budget and Economic Outlook: 2024 to 2034
Figure 1

It's not just government debt, either. Household debt is reaching crushing levels as well. Total US consumer debt-including mortgage loans, credit card balances, student loans, auto loans, personal loans, etc.-is nearly $18 trillion.

That's simply not a sustainable path. So where does it end? When will the country's mountainous debt load finally be addressed? Probably only when, in the words of former US Speaker of the House John Boehner, "someone sneezes." That is, only when the nation's debt becomes so crushing that it triggers an inflation or deflation crisis.

In the meantime, the proverbial can continues to be kicked down the road. In what may be one of the biggest financial travesties in a generation, our ballooning debt burden is being passed on to our children and grandchildren.

2. Delinquencies are on the rise

The cause can be debated. Was it the government's pandemic-era stimulus program? The inflation that cash infusion undoubtedly caused? Consumers' post-pandemic borrowing to maintain their newly elevated standard of living after the stimulus spigot was turned off.

I'll leave the explanation for economists to debate. Whatever the reason, though, the undeniable fact is that today's consumers have taken on way too much debt, as noted-especially on credit cards and auto loans-and they're having trouble paying it back.

The trend is most pronounced in plastic (see the troublesome green lines on Figure 2). Credit card lending is up around 50%, but the number of credit card holders isn't-ipso facto, people have much higher balances on their cards. Not surprisingly, credit card delinquencies have spiked to 11%, the highest since the Great Recession of 2009-2010. Auto and student loan amounts and delinquencies (the charts' red and yellow lines, respectively) are nearly as troubling. Clearly, the trend is in the wrong direction.

Source: Federal Reserve Bank of New York
Figure 2

3. AI in lending is real and it's spectacular

Ah, AI. The two letters that are sucking the air out of conference rooms around the globe. As relates to the lending industry, though, are there any actual use cases that illustrate AI's benefits? Has it solved a business problem? Improved productivity? Added value?

In a word, absolutely. Today, lenders are using AI tools for:

• Digitization. AI tools are being used to ingest, classify and accurately transfer documents to digital platforms or systems. That's reducing admin time and costs.
• Chatbots. Real-time voice and language recognition, translation and documentation are being employed to enhance the customer experience.
• Agent assist. During customer calls, sales and customer service agents are prompted with next-best-steps, specifics of a particular topic, and the ability to email or text information to customers with minimal effort. That's improving customer experience, speeding turnaround times, and cutting costs.

And that's just today. AI is in its infancy. Within a few years, I believe the technology will spike efficiency and productivity in ways that we can't envision now.

4. About mortgage loan originations…

The MBA expects mortgage loan originations to increase by nearly 30% in 2025. That would represent the strongest year of growth since 2020, when the beginning of the COVID-19 pandemic and very low interest rates instigated unusual year-on-year growth.

The MBA has a track record of success in its predictions. Its October 2023 projection for 2024 was accurate: a forecast of 5.18 million mortgage origination units that nearly matched the actual count of 5.09 million. Now, it's predicting 6.52 million units-a 28% bump-in 2025. If the MBA's forecasting past is prelude, that's good news for mortgage lending in the new year.

5. Mortgage rates could continue to drop

Fall 2024 saw an encouraging pop in mortgage activity after the Fed lowered its Funds rate by 50 basis points in September, then 25 more in November. Unless the new administration takes a hard detour, there's optimism for potential additional rate reductions in the future.

However, according to the MBA, we shouldn't expect the Fed's rate cuts to portend a return to 3% mortgages any time soon-or maybe any time at all. For 2025 and probably beyond (see Figure 3), the 30-year fixed mortgage rate is expected to remain at around 6%-matching the rates of 20 years ago.

Source: Federal Reserve Board, Freddie Mac, MBA
Figure 3

6. No big rebound in housing activity

Mortgage/housing activity is expected to remain moribund in 2025, for a few reasons. First, the government's COVID-era 0% rates, and the ensuing surge in mortgage volumes and housing activity, was an artificial accelerant; it only served to pull forward activity from future years. And guess what? Those future years are now upon us, with predictably slowed activity.

In addition, existing homeowners with low-interest mortgages, including those who refinanced at super-low rates during the pandemic, are in no rush to move and switch out those low rates on their current homes for higher rates on a new purchase. Finally, hybrid work models have freed many people from the necessity of relocating for their jobs-a traditional reason for moving.

These three factors add up to continued depressed housing activity for at least the near future.

7. Homeowners' insurance grows costlier

There's a definite link between stubbornly high mortgage rates and rising homeowner insurance costs. Whether or not you believe in climate change, the reality is that the last five years have seen more weather-related disasters than at any time in U.S. history-with a total price tag of over $600 billion, according to the American Property Casualty Insurance Association.

With natural disasters costing an average of $120 billion per year, insurers have compensated by increasing their rates-a lot. Neither natural disasters nor associated increases in homeowners' insurance rates should be expected to slow in 2025, or really any time in the future.

The lending space is always in motion, so these will not be the only seven trends that emerge in 2025. At the very least, though, they serve as thought starters as we get ready to turn the page onto a new year. Buckle your seatbelts, everybody.

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