Morgan Stanley sees AI adding billions to mortgage refinancing market

Investing.com -- Morgan Stanley analysts said artificial intelligence could add hundreds of billions of dollars to refinancing volumes in the $14 trillion mortgage market by removing friction that currently prevents homeowners from refinancing.

The investment bank said AI can improve nearly every stage of the mortgage process, with the borrower serving as an underappreciated catalyst for adoption.

AI optimization of mortgage product offerings during the purchase process could improve affordability and enhance access to credit, according to Morgan Stanley. The bank said this could lead to higher steady-state sales volumes, a higher homeownership rate, and a potentially higher default rate.

The firm said AI optimization of the refinance process would convert the 30-year fixed rate mortgage into something closer to a floater that only floats down. This creates a mortgage market that exists at its effective lower bound, maximizing the lock-in effect when mortgage rates increase.

Sales volumes would be lower in periods of rising mortgage rates as homeowners are incentivized to take homes off the market, Morgan Stanley said.

If the first-lien mortgage market exists close to its effective lowest rate, equity extraction opportunities become more numerous, the bank said. This could take the form of cash-out refinancing of the first lien or identification of affordable closed-end second lien or home equity line of credit opportunities.

Morgan Stanley said AI tools could enable home builders to navigate local regulatory hurdles more efficiently, facilitating increased housing production. The 21st Century ROAD to Housing Act also seeks to eliminate or reduce hurdles to building volumes, from zoning restrictions to regulatory costs and delays.

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