Lonnie Glessner isn’t normally one to turn down business. But with origination volume expected to exceed $3.4 trillion this year, stretching the capacity limits of lenders and everyone else in the housing ecosystem, some mortgage applicants simply haven’t been worth his while.
“I have a refinance client in California and they own a geodesic dome home,” said Glessner, a senior loan officer at Draper & Kramer Mortgage in Englewood, Colorado. “They are nearly impossible to finance, thus not worth my team’s time currently. We can’t be chasing rabbits all over the park right now. My team of LOAs, processors, assistant processors, underwriters and closers are still overwhelmed with business…I need to keep it easier for them.”
The geo-dome owner was among the tens of thousands of mortgage applicants that didn’t end up getting funded during the third quarter. According to the most recent Mortgage Bankers Association report on profits, 72% of mortgage applications in the third quarter were funded by independent mortgage banks, known as the pull-through rate.
Historical data from the MBA shows a huge variance in pull-through rates. In the fourth quarter of 2019, the rate checked in at 78%. Its low point over the last five years was 67%, in the first quarter of 2020. For the most part, the pull-through rate has hovered in the low 70s over the last five years.
Over the past week, HousingWire reached out to loan officers and mortgage executives across America to drill down specifics on which prospective borrowers weren’t making it to the finish line. After all, the average borrower’s FICO score today is at its highest level in recent history at over 750, mortgage rates are often below 3% for borrowers with strong fundamentals, and people are desperate to buy a new home or save money through a refi.
Multiple sources said their pull-through rates on refinancings are much lower than purchase (borrowers typically stick with the real estate agent’s LO recommendation), and that several factors can come into play: some LOs didn’t want to waste time with rate-shoppers; others avoided borrowers with weak credit and limited cash reserves; and others said tricky loans meant that they’d be leaving money on the table by skipping over easy-to-handle loans they could crank out and collect $8,000-plus a pop.
Steve Dominguez, a Rancho Mirage, California-based mortgage broker at Nexa Mortgage, told HousingWire that his pull-through rates are consistently in the 90s. He credited that to a screening process he’s put in place to avoid wasting time on loans that aren’t in his wheelhouse.
“I screen my mortgage applicants very carefully, and I am rarely surprised by an underwriter decision,” Dominguez, a 30-year-plus industry veteran, said. “I know upfront before I submit an app whether it will fly.”
Part of the screening process involves weeding out loans under $100,000, and loans with a lot of “hair.”
“I typically stay away from multiple co-borrowers with low credit scores and no cash to close,” Dominguez said. “I don’t do down payment assistance loans anymore, although I’ve been known to do a USDA loan or two. I get requests for loans to borrowers with no socials (Individual Taxpayer Identification Number only), DPAs, foreign nationals. I need to spend my time wisely so I turn these down (for now).”
Multiple LOs shared similar sentiments. Some said they had developed an effective process for handling the incredible wave of refis – currently at record volume – and straightforward conventional purchase loans. Exotic non-QM loans or products for borrowers with checkered credit histories and limited cash reserves aren’t going to find a loan with them. Not these days, anyway.
One broker, who requested anonymity, said there’s a good chance the more challenging loans will still be around when volume wanes and he can catch his breath.
“I’m not going to step over dollars to pick up pennies,” said the Florida-based loan officer, who added that as a broker he no longer loses deals on rate. “It’s just not worth it for me to chase thorny loans. I’m happy to hand out referrals – like, if you want it, cool, man – but this is such a crazy time it would be dumb for me to take that on.”
According to a recent analysis from LBA Ware, commissions earned by LOs in Q3 2020 increased 50% from Q3 2019, principally because the average LO funded 51% more volume in Q3 2020 ($2.6M per month) versus Q3 2019 ($1.7M per month). Refinance transactions accounted for 46% of total volume in the quarter.
Although paychecks were fatter in Q3 than a year ago, the increase in refi production meant a 0.9% decrease in per-loan commissions from the third quarter of 2019, to 106 basis points. In other words, LOs were incentivized to churn refi loans and vanilla purchase loans, which yielded an average of 110.8 basis points in profit in the third quarter.
It’s really about efficiency and prioritization, according to John Meussner, a production manager at Mason-McDuffie Mortgage Corporation. “Regarding capacity, we’re (my team, not my company) turning away difficult borrowers, shoppers, those who take up exorbitant amounts of precious time,” he said in an email.
Meussner told HousingWire that a mortgage applicant last week was seeking a small loan amount on a condo, so his team spent a half hour after the application going over fees and the finer points of the loan.
“The borrower continued to shop, continued to ask for more disclosures with numbers so he could shop, and I simply asked him to go to another lender, explaining [that] my team doesn’t have time to work on loans that aren’t committed to closing with us,” Meussner said.
“We had a lower rate and lower fees than the other offers he had, yet he didn’t trust us. We don’t have time for flaky shoppers that have zero commitment. There are too many good customers out there that want a good deal and will let us do our jobs without taking up hours of additional time – that’s where our focus is.”
The condo owner will have to eat an additional $3,000 in loan costs and a 125 bps increase in the rate “because he didn’t trust us to do our job,” said Meussner.
Mat Ishbia, the president and CEO of United Wholesale Mortgage, said there were three common reasons for loans hitting the wall – the appraisal; that the borrower changed his or her mind or didn’t qualify; or, most commonly, that closing times were too long and the borrower was tempted by another lender.
“Every day that loan sits out there, people call them to solicit them,” he said, noting that UWM’s pull-through rate was about 82%. “It’s such a competitive market and there’s such a disparity in closing times, that creates a lot of the fallout.”
James Kleimann is the Mortgage Editor of HousingWire. You can reach him at [email protected]