Loan originators aching to see a surge in purchase mortgage business this year may be waiting a while for satisfaction. While some observers claim the second half of the year will unleash a tidal wave of pent-up demand, many others just point to the explosion of unemployment claims and closed businesses and argue demand may very well not be bolstered by willingness or ability.
But refis, well … refis are another story entirely. For LOs,2020 may well be the year that refinance activity not only saves their brokerages, but saves the national consumer economy as well.
“My phone is ringing off the hook,” says Marc Summers,president of Advantage Mortgage Company in Clarkston, Michigan.
Donald Frommeyer, a mortgage loan officer at CIBM Mortgage in Indianapolis, agrees, but says today’s volume is nothing compared to what’s coming. “Refis are going to explode; we just don’t know when.”
These two industry leaders speak from experience traversing the roller coaster ride that the mortgage industry becomes in times of crisis.Summers is the president of the Association of Independent Mortgage Experts,which claims 40,000 members. Frommeyer is chairman of the 150,000-strong Originator Connect Network and is the former president and CEO of the National Association of Mortgage Brokers.
They differ slightly only on when the next trigger point will come.
Frommeyer said he has a thick stack of approved paperwork just waiting for interest rates to slip generally below 3%. He sees 2.75% as a likely target within eight months, as the nation works through the economic effects of the Covid19 coronavirus.
Summers said he expects rates to dip to the low 3s. He cautions that holding out too long might cause borrowers to miss out in what may well be a volatile lending market.
If the deal adds up today, do it, he is telling clients. And if rates fall farther, refi again.
Looking ahead, both warn that all the refi activity comes with risks and perhaps surprises.
Despite the Federal Reserve’s efforts to pump trillions into the market, there is a real possibility lender liquidity issues could create disruptions, warns Summers. No-fee loans and cheap rate locks will vanish, he said. In the Michigan region, some lenders have already dropped the 60-day lock in favor of a mandatory 45-day lock.
For these mortgage pros, concerns about early payoff penalties and servicer churn associated with refis are overblown. It’s a cost of business and smart operators don’t swim upstream against a tsunami.
CONSUMER DEMAND ALREADY HIGH
“Long-term, good results bring return business,” said Chasity Graff, owner and broker at LA Lending LLC in New Orleans. “I work mostly on repeat business and referrals and my email and phones are blowing up.I love it because it means I’ve made a lot of people happy.”
While some homeowners are trying to pull money out of their homes to pay bills, other clients are being strategic and eager to run various lending scenarios to see what works best.
“Borrowers are looking for ways to liquidate their assets and hold on to more of their income,” observed Graff.
At the end of February, the 30-year fixed rate mortgage had declined to 3.373%, an attractive level that opened the refi spigot. Less than three weeks later, however, that rate had surged, cresting at 4.113% on March 20.That put a crimp in the refi pipeline. The driving force in the uptick was upheaval in the bond market as investors fled to cash in the face of the pandemic, but some of it was also that lenders arbitrarily hiked rates to slow a crush of applications they couldn’t keep up with.
By the end of April, the bond market had reset and the 30-year mortgage rate dropped to 3.23%, with 0.7 points, the lowest level in the 49 years Freddie Mac has been keeping track.
Again, the phones were ringing with homeowners eager to talk refinancing but there is plenty of reason to believe the rate could go even lower.
Josh Lewis, co-owner and originator at Buy Wise Mortgage in Huntington Beach, California, pointed to the 10-year Treasury as the best gauge of where the 30-year mortgage rate should be. Historically, he explained,mortgages have been 1.7- 2% above the 10-year Treasury rate, which is floating around 0.6%. That is down sharply from 2.5% a year ago.
By that measure, a mortgage rate around 2.5% seems possible,great news for a nation eager to reap savings via a refi to lower rates.
PREPAREDNESS IS KEY
Increased refi activity represents an opportunity for the mortgage industry, said Graff.
“While I know many large lenders have shut doors and laid off staff with the credit tightening, most mortgage brokers I know are doing the opposite. We’re preparing for what’s to come,” she said.
That’s savvy, because the Association of Independent Mortgage Experts is already telling its members to prepare for a refinance tsunami starting in the third quarter and extending through the end of 2021.
She is ready. “We will help our economy come out of this. We can infuse cash into households quickly to make a local impact on retail sales,restaurant sales, all things local in the community.”
In California, Lewis said 80% of his business has become refis. That pays the bills but is not ideal, he said. In a healthy economy, he would like Buy Wise to have purchase volume outpace refis by a 2-1 margin.
That is just not going to happen in 2020.
Doug Duncan, Fannie Mae’s chief economist, put it this way,“Early indications are that the purchasing benefit of lower interest rates are being offset by the downturn in employment.”
The result is that fewer buyers are qualifying for mortgages; there are fewer houses on the market and home tours are stalled in many states. A willingness on the part of lenders to waive in-person appraisals is a help but fewer prospective buyers are getting to that step in the process.
Overall, forecasters at Fannie Mae see home sales declining 15% this year, a sharp reversal from the 1.1% gain the same forecasters had estimated earlier.
None of the mortgage pros are concerned long-term.
“There’s a backlog of buyers,” Lewis said, predicting “a strong back end of the year” driven by millennial buyers.
Still, a 22.3% decrease in privately-owned housing starts in March is worrying, said Bill Banfield, executive vice president of capital markets at Quicken Loans. He wrote, “We are now seeing the true effects of the coronavirus on the housing industry. Despite the fact that construction can continue during shelter in-place orders, home buying demand has plummeted and builders are seeing materially lower foot traffic. When the country reopens,the lingering effects of massive job losses could weigh on housing for an extended period of time.”
And that confluence means refi business is driving the mortgage industry short-term.