It felt like somebody turned on the spigot. There were leads, referrals and action in January, after people returned from holiday vacations and rates declined, said Don Monson, branch manager at Sente Mortgage.
He was cautiously optimistic for a better 2023. Monson had hoped for a “spring rush,” but recently, somebody turned the spigot back off.
“It’s almost like there was a false start,” Monson said.
The combination of an economic uncertainty, high mortgage rates and persisting affordability challenges will further reduce purchase demand, which keeps Monson and thousands of loan officers up at night. With the industry cooling down slower than expected, LOs are having to work harder and get creative to overcome the double whammy of surging rates and a lack of inventory.
Rising rates will likely scare buyers away from the market, as it makes monthly mortgage payments less affordable, loan officers interviewed by HousingWire said. Existing homeowners who locked in mortgage rates or refinanced to the 2.5% and 3% levels during the pandemic years also have no incentive to give up their low mortgage rates for a higher mortgage unless they absolutely have to.
The lack of inventory makes business even more difficult for loan officers, whose real estate agent referral partners simply don’t have many buyers ready to pull the trigger.
In this higher-rate environment, buyers can’t find homes, which, in an ironic turn, can lead to bidding wars in areas that are safe, have good school districts and have nice properties.
“I’ve got several pre-approvals out there where people just can’t find what they want and the rates are throwing them off,” Monsoon said.
The brave buyers
In a smaller origination market, LOs are looking to expand their market share among people who are still looking to move – whether it be for new jobs, marriage, or growing families.
It’s not as crazy of a sellers market as it was two years ago when buyers were sending love letters to real estate agents — and contingent offers were non-existent, LOs said.
“It’s not so much that it’s more of a buyers market, but it’s less of a seller’s market,” Sam Wax, partner and loan originator at My Easy Mortgage, said. “It’s starting to even out. The pendulum hasn’t swung back to where buyers are asking 10, 15, 20% lower than what listings are for.”
Right now, buyers see about 10 to 20 properties, and when they find a home that fits their criteria, “they pounce on it,” Wax explained.
“I’d say there are some buyers who are actually settling, even if it’s not their dream property,” he said.
Wax said about 50 to 60% of his clients are first-time homebuyers. While mortgage rates are high, rent in the Tampa Bay, Florida market has also been rising. Those who are tired of paying rent are purchasing homes and starting to build equity, according to Wax.
In contrast to when rates were in the 3% levels and refis were easy business, LOs are now having to handle more challenging cases.
“It really felt like there were a lot of deals that were first-time homebuyers,” Monson said. “A lot of them were lower price homes or hard deals. I see a lot more low credit scores, funky income, foreign nationals or bank statement loans,” he said.
While there are indications that a housing market correction is underway, the median existing-home sales price rose 1.3% from a year ago to $359,000 in January, marking 131 straight months of year over year increases, the National Association of Realtors (NAR) said. Combined with surging rates, elevated home prices mean a lot of homeowners are going to stick to their current house to avoid elevated monthly mortgage payments.
“All things generally equal, and you’ve just wanted a little bit of a bump in the quality of your home, you’re not moving based on the difference in payments,” said Hunter Marckwardt, executive vice president of CrossCountry Mortgage.
But when moving becomes a necessity, people are ready to pull the trigger.
“If you’re stuck in a small property, and you’re expecting, or you’ve got a blended family, I think that people are tired of being constrained based on an interest rate, and are ready to make the move to do the things that they need to do for their families,” Wax said.
LOs easing the financing pain
Buyers are now used to rates in the 6% levels and understand that the days of 3%-range mortgage rates are gone, at least for an unforeseeable period, LOs said. This means LOs need to find ways to ease the financing pain for borrowers on a case-by-case basis.
“Every single client scenario is different,” Marckwardt said. “[The year] 2020 and 2021 was all about how quickly a lender could execute. To me, 2023 is really all about understanding a buyer’s motivation and ability to qualify, and then determining where to go from there.”
For instance, most loan officers don’t see the point of their clients buying down rates by paying a lot of money upfront. If mortgage rates drop over the next 12 to 24 months and there’s an opportunity to refinance for borrowers, buying down a point will be sunk cost.
“If the client believes that rates are going to drop in the next year or two, then why buy down a rate that’s not going to have a break even for another five years? So it makes sense to do temporary buydowns,” Monson said.
Temporary rate buydowns have become available among a majority of lenders starting in the summer. United Wholesale Mortgage was among the first lenders to launch 2-1 and 1-0 buydowns, followed by lenders that include Rocket Mortgage, loanDepot, Guild Mortgage and NewRez.
For borrowers who don’t plan to own the property long term, adjustable rate mortgages (ARMs) could be an affordable option.
“If someone’s going to be in the property for five to seven years, and an ARM is three quarters of a point lower than a 30-year fixed mortgage rate, then it makes sense to look at those products,” Marckwardt said. “But I’m also not seeing that big of a spread between ARMs and the 30-year fixed rates.”
The ARMs share of mortgages climbed to a high of 12.8% of loans in October, according to the MBA. For the week ending Feb. 24, the share consisted of 8.1% of total mortgage applications.
Loan officer culling
“People who haven’t caught up with the idea that it’s a different market and I have to work like a rookie, they’re not catching up as fast.,” Monson said. “Sometimes it comes down to ‘do you have enough good resources?'”
The Stratmor Group estimates that about 440,000 to 450,000 people were employed in 2021 when the mortgage market was at its peak. There’s an excess of some 150,000 people compared to pre-pandemic levels, Stratmor estimated.
“Last year, a lot of lenders went out of business. Whoever survived in January thought that there is a chance that we are turning a corner,” Max Slyusarchuk, CEO of A&D Mortgage said. “We didn’t turn the corner yet and the Fed still wants to hike the rate to stop the bidding wars to stop inflation.”
Layoffs and employees exiting the industry is gloomy news, but for those loan officers who focused on cultivating relationships with their referral partners, they’re confident, the rightsizing of the industry will help them get back to pre-pandemic sales numbers.
“There’s so many people that got into our business. I think people that have been around for a while, focusing on a purchase driven business model, will stay, whereas a lot of people that don’t have established relationships, and don’t have a purpose-driven business model, will be out of business,” Marckwardt said.
“I think this year is going to be a culling year,” Monson said. “The year is starting off slowly, but I think we’re going to finish in a pre-pandemic number, and part of that is due to attrition. Last year was front-end loaded, and this year is going to be back-end loaded.”