As Rates Rise, Mortgage Originations Need To Vary Portfolio

Lenders, what are you going to do next?

A hand moves a chess piece on a non-traditional chessboard.

Contributing Writer

As we move through 2021, rates are going to do whatever rates are going to do. But how lenders react, or be more proactive than their competitors, will be what matters. And it may require some thinking outside of the box, a little more difficult on a Zoom call, but becoming easier as employees return to the workplace and can actually informally chat. Lenders have a variety of tools at their disposal which can be used to help new clients or retain old ones. For example, why should every loan originator care about the age of housing in their area? Do you, as a lender or vendor, have a product to help previous clients with renovations? The median age of owner-occupied homes across the U.S. is 39 years, according to the 2019 American Community Survey. New York comes in at 60 years (Washington DC is 79 years, but is not a state) and the states bottom out at Nevada which has the newest at a median age of 23 years.

The age of housing is an important remodeling market indicator. We all know that older houses are less energy-efficient than new construction and ultimately will require remodeling and renovation in the future. And your previous clients, like the ones you gave 2.75 percent 30-year fixed-rate loans to last year, may need a renovation loan, or another product if they use their homes for more purposes or require additional space.

King Cash

Which brings up the topic of cash out refinances. The housing market has been a solid gainer for most of 2020 and halfway through 2021. A cash-out refinance swaps out a borrower’s existing mortgage with a new loan for more than the current mortgage (provided the borrower has equity built up in the home), with the difference going to the borrower in cash, usually for home improvements, paying off credit cards, or other financial needs. Borrowers can usually “cash-out” up to 80 percent of their home’s equity. Loan officers should be well-versed in their company’s programs. Yes, the rate will be higher for someone that you financed in the last year, but if they need the cash, and the rate is lower than their credit card rate…

Affordable Housing Effects

Financing existing housing stock is only one part of the equation that lenders are tuned into. Creating new housing opportunities is important to the new Biden Administration, and originators should know what is happening in Washington DC. Housing is included in the overall Infrastructure bill, as it should be given the role housing plays in stable communities. First-time home buyers are reliable neighbors and consumers. Small businesses are supported by more customers, and stable housing represents economic stimulus and economic development for all businesses.

While it may not be directly relevant to your current clients, it is important for mortgage loan originators (MLOs) to be aware of what is being proposed to support affordable housing. The plan’s overview calls for the funding to “produce, preserve, and retrofit more than 2 million affordable and sustainable places to live.”

Any plan that includes building or preserving more than 1 million housing units should matter to MLOs. One million units that in theory are affordable, resilient, accessible, electrified, and energy-efficient. The plan would also improve the infrastructure of the roughly 1.2 million units of public housing that currently exist. The plan will provide tax credits, competitive grants, and other forms of support to spur partnerships between local government, nonprofits, and private developers, and it will leverage the government’s money with resources in the private sector.

In The Zone

The plan tries to address some of these nonfinancial barriers by also focusing on eliminating exclusionary zoning laws, the structural policies on minimum lot sizes, parking requirements, and preference for single-family homes that often prevent affordably priced development from being legally and economically feasible. And create a new grant program that awards funding to communities that remove these barriers. While there are details to work out, housing as infrastructure is an economic driver.

Programming Variety

Lenders are training their loan officers on down payment assistance programs (DPAs) for borrowers. (They vary wildly from payments that are forgiven, those that are deferred, or even those that are subsidized in some manner until eventual resale of the mortgaged property.) HELOCs are on the training menu as well as an alternative to cash out refinancing. (The HELOC is a second mortgage that provides access to cash based on the value of the home, and is often thought of as a credit card tied to a home’s equity.)

Some loan originators are marketing second mortgages to their existing clients, another lien taken against a property that is already mortgaged. (It is usually a lump-sum loan with a fixed term and rate. Homeowners may use the money from these second mortgages for any purpose.)

Other MLOs are turning leads over to their reverse mortgage departments. Homeowners, aged 62 and older, saw their collective housing wealth increase by $234 billion to a record of $8.05 trillion at the end of 2020, according to data provided by the National Reverse Mortgage Lenders Association (NRMLA) and data analytics firm RiskSpan. A reverse mortgage does not require the homeowner to make any loan payments. Rather, the entire loan balance becomes due and payable when the borrower dies, moves, or sells the property.

Dig Deeper

As we head into the summer months, the press and many lenders will focus on the purchase market. But MLOs who are aware of these trends and programs, and how to take advantage of them for their clients, will come out ahead. Everyone talks about the weather, but knowing how to plan for it makes the difference between looking stylish and soaked shoes. MLOs and lenders can’t control interest rates, but MLO training on a variety of products will make the difference between another good year and losing your clients to someone who can help them.