The mortgage industry is in transition — a product transition. In 2020 and for most of 2021, the bulk of mortgages were rate-and-term refinances. Yes, the purchase loan market was robust, but a sizable percentage of all loans were refis due to historically low interest rates. If it were not for two key issues in the housing market, affordability and availability, purchase loans would have made an impact sooner than they did.
The mortgage product shift started in fourth-quarter 2021 and continued into 2022. November 2021 was the last time a 30-year fixed interest rate below 3% was recorded, according to Freddie Mac data. Since then, the rate climb began and has not stopped, creating a gradual upward trend for mortgage rates.
Rising rates are never good. There are headwinds facing the mortgage industry. The perfect storm has been brewing for months and it is turning into a full-blown industry tsunami. High inflation, global unrest, rising rates, and labor and supply shortages all influence the affordability and availability of homes for sale.
Staggering prices
The housing industry has seen unprecedented appreciation for residential properties. U.S. home values rose faster than ever in 2021, according to the National Association of Realtors. The median sales price for an existing home was $346,900, up a staggering 17% from the prior year. This makes it exceedingly difficult for first-time homebuyers, hence the affordability issue. The classic high-demand, low-supply market impact is pricing many would-be homebuyers out of the market.
Directly related to the affordability discussion is the availability impact. Labor and material supply shortages combined with high demand from buyers have many markets reporting inventory shortages in the residential housing sector.
This has created a seller’s market in many areas of the country, with multiple offers above the asking price being the norm. The economies of scale will reach an eventual tipping point, and the cost of buying a new home will be so high that it will shift to a buyer’s market that includes more days on the market and price concessions. Clearly, the housing market is not there yet, but buyers should not anticipate another year of double-digit appreciation. Housing experts expect prices to start normalizing in third-quarter 2022.
So, let’s reevaluate where the mortgage industry is now. To be successful in 2022, the industry should focus on four products to capture the market’s full potential. These products are purchase loans, cash-out refinances, adjustable-rate mortgages (ARMs) and downpayment-assistance (DPA) loans.
Rising equity
Let’s take a quick look at each of these products. Mortgage originators know what a purchase loan is, but not everyone knows how to sell and package them effectively. Over the past couple of years, many mortgage professionals could barely handle the record pace of refinances, and quit calling on Realtors and homebuilders. Each mortgage professional should evaluate their understanding of purchase loans, revise their marketing plan and reengage with referral partners to create a steady book of business.
Retraining and implementing goals and objectives from your revised marketing plan will be an effective way to get a fair share of the purchase mortgage business. For mortgage brokers, reach out to your lenders for guidance and assistance on maximizing the market shift to purchase loans.
In many areas of the country, homeowners have seen massive appreciation over the past several years. If homeowners sell and want to buy in the same area, they lose the equity they earned on their home because they are buying back into a high-priced market. The homeowner may choose to use their equity for other purposes such as home improvements, debt consolidation or purchasing another property.
This is the conversation that is at the forefront of many homeowners’ minds. Across the country, there are people who love where they live but want to use the equity in their home for something positive. Here’s an astonishing number: The average U.S. homeowner has $207,000 in tappable equity, an all-time high as reported this past June by data analytics company Black Knight.
Qualifying homebuyers
Does anyone remember ARMs? Seriously. In a low mortgage rate environment, ARMs are rarely used. There is an interesting trend taking place in the mortgage industry, however. In January 2021, only 2.2% of all closed loans were ARMs. In December 2021, this share had doubled to 5%. It was not a sudden jump; the trend line showed a gradual increase throughout the year. These mortgages help create lower payments and qualify more buyers in a rising rate environment.
Many lenders over the past two or three years stopped doing ARMs due to historically low rates. Training will be at the forefront of all lending companies that are reengaging and redeploying this product. One key change, the London Interbank Offered Rate, or LIBOR, a key benchmark for rates and rate changes, is no longer being used. In the U.S., ARMs are mainly utilizing the Secured Overnight Financing Rate, or SOFR, for rate setting and movement. As the industry becomes more knowledgeable with the ARM product, sales teams will be better equipped to explain the benefits and risks to future borrowers.
Meanwhile, many in the industry have shied away from DPA loans because they were deemed too complex to understand or too difficult to process. This just isn’t true. With affordability at an all-time low, today’s borrowers need all the help they can get. For example, a top reason why millennials are not buying homes is the lack of a downpayment. A DPA loan can eliminate this concern.
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One thing that is always certain for the mortgage industry is change. The business is always in some form of transition. As the market evolves, mortgage professionals need to shift their focus to the tools the industry has to offer borrowers.
For mortgage companies that have been around for 20 to 30 years or more, their success can be completely tied to their ability to gauge and adjust to current market demands. Utilizing the right loan products will be a key factor in whether you achieve sustainable success while adjusting and changing when needed. The winners are those that recognize the needs of the market. Let’s all make 2022 a record year for loans. ●
