Flip The Script: Mild Recession Brings Opportunities

Of course, origination volume is expected to drop this year with the Mortgage Bankers Association (MBA) forecasting a 15% decline from 2022. But keep in mind, loan originators, that doing just two transactions a month puts one in the top 15% of income earners in the United States. Of course, this is dependent on the loan size, but for the most part, doing two transactions a month as a loan officer brings in a higher income than most jobs in the U.S.

Success At A Price

It means loan officers are sort of stuck, says Barry Habib, an entrepreneur and mortgage coach for MBS Highway.

“They’re still making enough so they have to stay in the game and the alternatives are not great, but they may have created a lifestyle that requires them to make some more money than this,” Habib said.

Watch The Interest

He encourages loan officers to let their competitors’ heads spin with this doom and gloom until they leave the industry. These refi boom loan originators were never up for playing hardball anyway. The deals they leave behind are up for grabs for the remaining LOs, and many are expected to leave.

Vaughan has already gotten a few calls from real estate agents who were working with a loan officer who left the business and now need to send their clients elsewhere. His Dallas-based branch, Trademark Mortgage, was happy to pick up the extra leads.

“That’s why it’s important, now more than ever, to not withdraw,” Habib added. “Really lean in and demonstrate that you understand these market conditions.”

Flip The Narrative

It’s hard to see what’s really happening without any friends with 10 or more years of experience in the industry, so here’s what they’re saying: Inflation is going to drop in a meaningful way over the next few months, bringing down mortgage rates. What this may mean is more buyers entering the market.

Habib is the most optimistic, saying, “It will unleash a horde of buyers into the marketplace.”

Inflation slowed on an annual basis for six straight months, easing to levels that existed before the pandemic. Meanwhile, PayScale’s Salary Budget Survey, found on average, a planned base salary increase of 3.8% in 2023.

Home prices are not expected to have a major drop due to low inventory levels, but the MBA predicts values will remain stagnant allowing household income to catch up to property values. Redfin, on the other hand, is more optimistic predicting a 4% drop in home values.

Banosian said this year will continue to be a seller’s market because housing inventory is so low, but buyers should have an easier time getting under contract with less competition.

“They’re gonna be able to have things like home inspections, mortgage contingencies that they can utilize to protect themselves,” Banosian said.

No Guarantees

But none of this is guaranteed, of course. Zillow economist Orphe Divounguy said this all depends on the severity of this recession and if the Federal Reserve can pull off a soft landing.

“Historical evidence shows that the 30-year-fixed mortgage rate tends to follow the yield on 10-year treasuries,” Divounguy said. “But the yield on 10-year treasuries depends on how investors feel about recession risk, right? So inflation and recession risk is going to play a key role in determining where the 30-year-fixed rate is going to end up.”

Data from the S&P Global U.S. Purchasing Managers Index (USPMI) also indicates a recession is coming. This means the Fed could be forced to pivot and drop interest rates once again. But economists, like Divounguy, are not quite sure if that will be the case considering consumers have never been in a better position at the start of a Fed tightening cycle.

“Consumers were in a much better financial position with extremely high savings before the Fed started raising interest rates,” Divounguy said. “Then we saw savings dwindling rapidly. Right now, the savings rate is below 3%. It was above 7% last year. We’re also seeing credit card balances increase a lot recently. So if the U.S. consumer can weather the storm, then we could still avoid a recession. And if we avoid a recession, then mortgage rates will not decline by much more than they have already.”

Habib is confident the recession will be mild, saying that rates will begin a rapid deceleration on May 10 and cause a resurgence in purchase activity. If rates move down to 5%, he said that should bring one-and-a-half million more people into the market.

Vaughan agrees that a mild recession benefits the industry, but if it becomes too broad, unemployment ratchets up, and consumer sentiment becomes dismal, that could be problematic.

“A little recession is good for us, and too much is bad,” Vaughan said. “So the million-dollar question is where on that scale are we ultimately going to land.”

First-Time Buyers Return

Throughout the past two years, move-up buyers took center stage while first-time buyers were impatiently waiting on the sidelines. Now these move up buyers are comfortably sitting at home paying a 2 to 3% interest rate, and first-timers are gearing up to enter the market.

According to NAR’s most recent data, 31% of purchases are first-time home buyers compared to when rates were at 7.25% and first-time buyers made up 26% of purchases. Now Habib anticipates that the percentage of first-time buyers will continue to increase to 33% or 34% as mortgage rates decline.

Zillow’s Divounguy agreed that this is the best time in three years for first-time home buyers to get into the market. However, affordability remains a main barrier for many purchasers and they’re waiting for rates to stabilize before moving in.

At Vaughan’s Dallas branch, they’ve been seeing more and more first-time home buyers or those who have little to no money to put down and less than perfect credit, looking for FHA loans, USDA loans, and VA loans.

“Just speaking for my business, we wrote less government loans over the last 18 months than we had in my prior 10 years in the mortgage business. So it definitely had an impact,” Vaughan said. “Those who didn’t have 20, 30, 40, or a hundred thousand dollars to bid over asking, they were essentially in a position where they had to rent. And I think that’s certainly softened here, and I believe that to be the case across the U.S.”

Banosian has already seen more buyers flock to his area in Worcester, Mass., which is in central Massachusetts about 50 miles west of Boston. According to realtor.com, Worcester is one of the most affordable cities in the U.S. and a top spot for first-time homebuyers.

“The market’s been super robust,” Banosian said. “Boston and the surrounding suburbs tended to slow down a little bit more. But Worcester was more active over the course of the fall in the wintertime, partly because of the amount of activity and development that has happened in that area is really just drawing people. And it’s frankly just much more affordable.”

Helping The Hard Borrowers

During the pandemic, loan officers, real estate agents, appraisers, and nearly everyone involved in mortgage transactions were slammed. There was no incentive in helping harder-to-qualify borrowers when there were already plenty of well-qualified conventional borrowers lined up outside the door. These move-up buyers were selling their homes that appreciated significantly, allowing them to afford the inflated homes on the market.

There was also no incentive to work with non-conforming loans, but this slowdown in business should afford everyone enough time to educate themselves on Non-QM and help those neglected borrowers.

“A lot of lenders and real estate folks were so inundated with super easy clean deals that they weren’t taking the time to really go and unpack complicated or seemingly complicated Non-QM loans,” Vaughan said. “Now you have a real opportunity to explore some Non-QM loans. That’s certainly a conversation that we’re having with a lot of folks, especially those wanting bank statement loans.”   

Habib is also anticipating that debt consolidation and HELOC loans will become more popular given the fact consumer debt reached an all-time high in 2022 and the average credit card rate is over 24%. So if a consumer has a $300,000 mortgage at a 3% interest rate it’d be crazy to refinance. But if they’re dealing with some outstanding debt, they might want to use the home equity line of credit methodology to tie up other loose ends, moving their interest rate from 3% to 5% or 6%.

“If you took an average home, 58% of it is equity and 42% is mortgage. You contrast that to 2008 where only 19% was equity and 81% was mortgage,” Habib said. “There is a tremendous opportunity for equity withdrawal, but in addition to that, you have a lot of opportunity on the purchase side.”

Picking Up Clientele

Even these well-established loan officers had their humble beginnings where they grinded to build up referral sources and new clientele. The consensus for the easiest and cheapest way to LOs names out there is by utilizing social media.

Google analytics shows that consumers are using search terms like recession, housing bubble, and inflation, so using those as buzzwords and addressing their concerns is a simple way to gain their attention.

“If we can speak to those people, it will produce a lot of social media activity and we can draw people to the top of the funnel with that,” Habib said. “But we can also have conversations that are more meaningful to our clients and help them overcome their fears. We can also gain more referral sources because potentially those real estate agents they’re working with don’t know how to combat those objections.”

Vaughan uses his colleague Kenneth Travis, coach at NextLevelLO, as a role model for others to follow when trying to build a social media following. He posts consistently, despite the fact he may not have good news to share. Sometimes he posts a silly Instagram reel or TikTok, but it grabs people’s attention and convinces followers that he’s a trusted source.

“The consistent person on social media will win over the perfectionist every single time,” Vaughan said.

Social media marketing is partially what Vaughan and Travis teach at NextLevelLos, as well as how to take the online, offline. More specifically, how do they turn those conversations, those comments, and those likes into leads, applications, and ultimately close loans.

Most of the content should be geared towards educating the audience.

Additionally, real estate agents are experts at selling real estate, but they may not know a whole lot about securing a mortgage. This is an opportunity for the loan officer to provide value to their referral partners.

“These agents are thirsty for knowledge,” Vaughan said. “They want to be smarter and better at their craft. And the only people right now that are providing them any information is typically their broker or Google, both of which I would say are probably not great sources of mortgage knowledge. So we really make it a great point to be a resource for our referral partners.”

Loan officers can also help their referral partners host first-time homeBuyer seminars. It will help get the word out about loan programs and create opportunities for these renters to become first-time home buyers.

Vaughan also suggests that loan officers look back into their own data and contact people who applied but weren’t able to convert into a homeowner. Now is the perfect time for these clients to get back into the market.

“Education is what people gravitate to when they want to know what’s happening in the market. Whether that news is extremely positive or whether it’s just the truth,” Vaughan said.

Banosian agreed, saying that people are craving advice more so than ever, both real estate agents and consumers. The most important aspect to this marketing tactic is to ensure people see the LO as an expert in the market, he said.

“You have to be able to communicate the data properly. And then two, make sure that you are showing them all their different options,” Banosian said. “That ultimately leads to referrals of friends, family, new business partners, all that kind of stuff, if you become a trusted advisor.