Originators Are Having a Different Discussion

With rates rising, the sales conversation has to become broader

Insider

Contributing Writer

Loan officers have the ability to sell a combination of product, price, and service. 2021 wrapped up a great two years of volumes, profits, and incomes, but the focus has turned to 2022 and what the year might hold. The start of the year came with discouraging news for anyone hoping that lower rates would continue. The pent-up demand by consumers for restaurant meals, travel, automobiles, and all types of consumer goods has jumped out of the gate. With it came talk of an expanding economy. And inflation.

The Federal Reserve Bank of the United States (aka, the Fed) has a few missions, one of which is the stability of our economy. When the economy begins to expand too fast, inflation and asset bubbles can get out of hand, threatening this stability. That’s when the Fed will step in and raises interest rates, which helps cool down the economy and keep growth on a more orderly path.

At the end of January and early February, the Fed made it clear that multiple rate increases were in the cards for 2022. Originators should know that when the Fed discusses raising interest rates, it is referring to the federal funds rate, also called the federal funds target rate. Through its actions, it sets a target rather than the actual rate, but its goals are evident. At its regular meetings, the Federal Open Market Committee (FOMC) sets a target range for the federal funds rate, which acts as a reference for the interest rates big depository commercial banks (think Wells Fargo, Chase, US Bank, Bank of America, and so on) charge each other for overnight loans.

When the Federal Reserve raises the federal funds target rate, it increases the cost of credit throughout the economy. Readers of Mortgage Banker Magazine know that higher interest rates in general make loans more expensive for both businesses and consumers, and everyone ends up spending more on interest payments and less on other items. Companies that were going to borrow money to expand may shelve projects if the costs are too high. Higher rates encourage people to save money to earn higher interest on their bank accounts. This reduces the supply of money in circulation, which tends to lower inflation and moderate economic activity. In other words, if your client is saving money in the bank, they’re not spending it on a car.

Guaranteed Rate Hikes

Experienced mortgage loan originators are adept at selling payment, lifestyle, and products rather than rate. But rate is still a discussion topic… It always has been and always will be. If the Federal Reserve, over the next several months, continues to raise the targeted Fed Funds rate, how will that impact mortgage rates and your client’s costs?

A $300,000 30-year, fixed-rate mortgage at 3.5 percent costs roughly $185,000 in interest over the 30 years. Monthly payments of principal and interest are about $1,340. There isn’t a 1:1 correlation between overnight Fed Funds and 30-year mortgage rates. Average interest rates have already exceeded the 5 percent mark in some areas. Let’s be conservative and look at the situation when average rates are just 4.50 percent. The interest costs go to $247,000 over those 30 years on a monthly payment of $1,520, or a difference of $62,000. That averages out to $172 per month.

MLOs are having a different discussion with borrowers than six months ago. Borrowers are being encouraged to make a larger down payment using savings from the last few years, therefore lowering the amount borrowed and therefor the monthly payment. Down payment assistance programs are all the rage. Borrowers and originators are walking through their credit reports to improve their credit score. Lenders will usually provide lower rates to borrowers with better scores. “Buying down” the rate is an option for some borrowers. Paying discount points will lower the interest rate for the life of the loan. MLOs know that if your client is going to be in the home for a long period of time, paying points makes sense.

A mortgage is one of the few financial transactions where a borrower can lock in a future price now. In a rising rate environment, this is being encouraged. Instead of a 30-year mortgage, 20-year, 15-year, and adjustable-rate mortgages are back on the table. This is where a trained loan officer working for a reputable lender will take the time to work through various options with borrowers and add value.

MLOs are having a different discussion with borrowers than six months ago.

MLOs will remind their client of the tax advantages of paying money in interest instead of rent, which creates wealth. Or, perhaps put the person into a 15-year mortgage, or an adjustable-rate mortgage, with a lower interest rate. Perhaps the client will buy a smaller home. It is not as easy a discussion to have as has been the case over the last few years, but MLOs need to be prepared for it.

No one predicted the impact that the pandemic would have on interest rates, property values, the shift in the workforce, or what our economy would look like coming out of it. Once again, however, trained and compliant loan officers are adding value every day through educating and coaching their clients. MLOs using the right technology are “stepping up their game” and showing borrowers that it is an advantage in dealing with a human rather than obtaining financing over the internet.