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As interest rates sank to ultra-low levels after the housing bust, the mortgage industry has become more dependent to an extent on refinance business from clients seeking to save money and cut interest payments. And, while industry experts predicted a lower volume or refinancing business in 2015, banks and mortgage lenders are still profiting from small waves of refinancing opportunities. However, don’t over rely on refinancing to continue to support volume. To be successful in the future, mortgage lenders will need to refocus their business efforts on driving purchase volumes higher.
While a decline in refinance volume may be challenging, the good news for your business is that as the housing market and general economic conditions continue to improve, first-time homebuyers, move-up households and vacation buyers are finding themselves in a position where they are willing and able to buy homes.
For the last two years, prognosticators have forecasted this shift from a refinance-dominated market to a purchase-driven one, and the normalizing of home price growth, increased rates, record-high rents and the improving economy are helping to bring this prediction to a reality.
Higher rates may entice lenders to think outside the box
But, it’s the anticipated rate increase that will serve as one of the major catalysts for a purchase-dominated market. After almost a decade long ultra-low interest rate environment, if rates increase only slightly, the number of people who can benefit from a refinance will dwindle considerably.
As rates began to rally, expect to see more lenders start to think outside of the box with their lending products. Once-conservative lenders will begin to lower their margins and increase their risk tolerance in an effort to keep volumes up and cast a wider borrower net. The Federal Housing Administration (FHA), along with Fannie Mae and Freddie Mac, have already started to do this with recent guideline changes targeted around more affordable lending products.
Have the proper checks and balances
No matter what products you currently have available on your lending platform, it is imperative to have the right operational processes in place to fully evaluate and understand the risks involved. Make sure you’re prepared by ensuring you have the proper underwriting tools, overlays and other checks and balances in place.
For example, at Castle & Cooke Mortgage, we originate FHA loans for borrowers with a FICO score as low as 580 under some circumstances. However, we do have stipulations clients must meet, such as requiring the borrower to have six months reserves, no more than 150 percent payment shock and one year in the same line of employment, all of which signify a borrower with lower default risks than their credit score would indicate.
Expanding credit can be a double-edged sword. After years of being in a reactive environment, expanding access to mortgages is something the industry needs to prepare for with the upcoming increase in new purchase volume. Although lending standards were not strict enough prior to the housing crisis, we are now in one of the tightest credit markets in over a decade. Understanding there is a medium ground between having liberal lending standards and being too conservative is key to responsible and sensible lending in the upcoming market shift.
Danny Jasper is senior vice president of Capital Markets for Castle & Cooke Mortgage LLC, one of the nation’s leading independent mortgage lenders with 38 locations. He leverages more than a decade of experience in investment, research and analysis to expand Castle & Cooke Mortgage’s market share and oversee its pricing analysis.
This article originally appeared in the October 2015 print edition of National Mortgage Professional Magazine.