Ready, Set, Refi?

But Ishbia believes a larger wave, perhaps even a tsunami, may soon be at hand. He doesn’t know how long the burst will last, maybe three months or maybe three years. “But I’m going to be ready, and we’re going to be ready at UWM, when nobody else is,” Ishibia said on the call. And when it does come, he said, “it’s going to be pretty big.”

The UWM chairman doesn’t know exactly at what rate the floodgates will open, either. But he suggested that 5.875% could be the point at which the boom begins.

What’s Up

Joe Garrett, one-half of the banking and mortgage consulting firm of Garrett, McAuley & Co., picked up on Ishbia’s remarks in a recent company newsletter and asked his readers, “Are you, or will you be, ready?” So I decided to ask around to see if folks are doing anything to be ready, and if so, what exactly are they doing to prepare?

Plaza Home Mortgage co-President Jeff Leinan is not pinning his hopes on a surge in refis. Instead, the privately-owned San Diego-based wholesale and correspondent lender is looking for “significant growth” in the purchase money sector, which Leinan calls the company’s “strong suit” given its broad array of loan options and its strong relationships with brokers.

“If rates drop to the mid-5s or lower, our industry will see a significantly larger purchase boom because affordability will improve and unlock lots of golden handcuffs that have been keeping sellers and inventory out of the market,” Leinan says. “There’s a lot of pent-up demand out there,” he adds, citing a recent study that found 89% of owners would consider a move within the next 12 months if rates dipped below 6%.

Not that Plaza is turning its nose up at refis. Far from it. But Leinan doesn’t believe the pool of anxious borrowers who are ready to jettison their higher-rate loans is as large as some prognosticators think. Only half of the 2023-vintage mortgages would be eligible to refi if rates dipped below 6%, he says.

By the MBA’s projections, that’s roughly $650 billion worth of loans that might be in the money. At 6% or lower, then, as many as 3.8 million borrowers would be eligible to refi. That’s a powerful lot of business. But the Plaza executive says he’s not confident they all will pull the trigger.

“About half that number were eligible in the past and didn’t refi. The question is why?” Leinan says. “Maybe their economic circumstances are an issue, or they have small balances and are close to paying off their loans. About a third of that number have had their loans over 15 years. But if they haven’t done it by now, what is the likelihood they will in the future?”

Service At The Ready

“We are ready,” says Toby Wells, president of Englewood, Colorado-based Cornerstone Servicing, which administers 60,000 or so mortgages.

As a division of Cornerstone Capital Bank and a third-party subservicer, the company always tries to keep its loan officers in front of its customers. And with the new data-based systems that are available today, it’s much easier to identify those seeking lower rates.

“It’s a lot different from the old days,” Wells told me. Cornerstone is still pushing leads to its loan officers, but now it’s in “a much better position” to evaluate those customers who would truly benefit. “We’re not just making annoying outbound calls to all our customers just because mortgage rates are lower,” he explains. “Rather, based on known credit information, income, and other data, we’re contacting customers who are likely to refinance.”

There are “numerous” new tools to help companies like Cornerstone evaluate their portfolios, says its president, and it is making use of a number of them.

With this obvious caveat — it all depends on how low mortgage rates decline — Buddy Hardiman, president of Middletown, R.I.-based Embrace Home Loans, believes the entire industry “should prepare” now to refi borrowers who purchased their homes between late 2022 and all of 2023.

Toward that end, Embrace, one of the largest full-service lenders in the country and licensed in all 50 states plus the District of Columbia, has developed a separate “manufacturing process” for fulfillment to support refinances. And Hardiman says he has “options to create capacity” without the need for hiring internally. That’s “something we believe will allow us to scale effectively when capacity needs to be expanded,” he says.

When rates do improve the Embrace leader is expecting borrowers with heavy debt loads to seek out cash-out refis. “With consumer debt at record highs and the cost of living putting an extra strain on finances,” he says, “we should see cash-out refinance opportunities for consumers to help alleviate these burdens.”

Currently, home equity lines of credit are a “very popular choice” among those with low-rate first mortgages who want to access their homes’ equity. As prime rates have risen, HELOCs have been less attractive, Hardiman says. “But they continue to be a good option for some homeowners looking for interest-only payments” and consumers should be more drawn to them as rates improve.

No Flood Warning

Still, Embrace doesn’t see a flood of refis on the horizon — or even a huge jump in purchase lending — largely because most owners are all but locked into lower rate loans, the so-called “lock-in” effect. Pointing to a recent Redfin report, Hardiman notes that 88.5 % of all homeowners have loans with rates less than 6 %, and 78.7 % of them have rates below 5 %. Consequently, he says, they’re not likely to refi or sell and move up (or down).

Any rate below 6% will “seriously energize” borrowers who have loans with rates just 50 basis points higher, offers Larry Goldstone, president of capital markets and lending at BSI Financial Services. They’ll be drawn not just to rate-and-term refi, though. Lower rates, he says, should also “trigger a wave” of folks who have been waiting to take cash out of their appreciated houses or get out from under high-rate second mortgages.

Moreover, Goldstone doesn’t buy into the premise that borrowers with 3% mortgages will never give up their low-rate loans, prepay, or even sell and move to another joint. “Feeling ‘loan locked’ is a psychological problem that borrowers will get over if they wish to change where they live,” he told me. “I’ve seen this before. Most Americans are, by nature, on the move. If they take a new job in another state or simply want to move across town, they’ll trade down or trade up to do so.”

BSI, which originates and services and sub-services mortgages and sells mortgage loans to permanent investors, is “absolutely” preparing for when the market breaks loose from the doldrums. “We are planning to recruit loan officers and back-office support staff,” says Goldstone.

“We are already carrying excess staff capacity in anticipation of an increase in first mortgage lending. Our strategy includes focusing on self-service by providing a seamless experience for borrowers who submit applications online, which allows us to scale without adding staff. We also are sharpening our call center capabilities to allow us to quickly identify borrowers who are eligible to refinance to be routed to a loan officer for a conversation.”

The Irving, Texas, company also is investing in technology and data analytics to allow it to produce more loans per employee. Internally, BSI’s data warehouse allows the company to segment borrowers into categories so it can present them with relevant offers for specific loan types. And it can stratify the data by the borrower’s rate, location, credit score, original LTV and estimates of current LTV. Externally, meanwhile, it employs software to identify the location of mortgage notes, recorded deeds of trust, and other key documents that help qualify borrowers “as seamlessly as possible.”

“All of this information helps us better understand and serve our customers,” Goldstone told me.

Joe D’Urso is another who isn’t convinced a new refi wave is on the way, “At least not in regard to timing,” says the president and CEO of TitleEase, the Providence, R.I.-based national title services firm. But if it comes, he’s pretty sure the mortgage business can handle it.

Tech Initiative

“While some players will probably not be ready,” D’Urso says, “the industry as a whole has done an excellent job of staffing up in prior years to meet extreme volumes and I believe it can do so again.”

How well individual players respond remains to be seen. But the TitleEase leader believes technology will be a key factor. And on that front, there’s a “long way to go,” he told me.

When loan volumes were soaring several years ago, most lenders and service providers were too busy to make deep investments in process improvements and technology enhancements,” he says. “Even though there is generally less free cash to make those investments when volumes diminish, technology needs to be embraced now more than ever.”

As D’Urso sees it, if there is another wave, there will be the usual haves and have-nots. “The companies that have embraced technology to make their processes more efficient — as well as those that have broadened their offerings with ancillary business lines — will be the winners, while the others will be behind the eight ball and struggling just to tread water.”

On that score, he is reminded of the famous Warren Buffet quote about the insurance marke: “You only find out who is swimming naked when the tide goes out,” Buffet said. To which D’Urso adds, “If a refi tide comes in, we’ll find out very quickly who is exposed.”

Insurance-Free Refis?

At this writing, details of Fannie Mae and Freddie Mac’s pilot programs to purchase “certain” refinance loans that do not come without title insurance are sketchy. But by now the experiment is well underway despite the loud protestations of the title business.

The “small scale, limited duration” pilot is expected to cut closing costs by an average of $750 — but up to $1,500 — on loans where “there is confidence” there are no prior liens or encumbrances on the underlying properties. Only mortgages with 80% of lower loan-to-value ratios in “select” geographical areas need to apply. Of course, the GSEs will charge a fee — an amount unknown at this time — to cover their risk.

The Federal Housing Finance Board has promised robust oversight. And well it should, says the American Land Title Association. Already at odds with attorney opinion letters, which Fannie Mae and Freddie Mac began accepting in lieu of title coverage in 2022, ALTA argues that the test expands the government-sponsored enterprises’ authority beyond their mission and charters. It also puts the agencies in harm’s way.

“If title concerns arise under the pilot, mortgage companies would expect the GSEs to settle the issue, exposing lenders and taxpayers to greater risk,” says ALTA President Diane Tomb. “The last time the GSEs engaged in significant risk-taking, they imploded the housing finance system and [the] American economy.”

Tomb also warns that if the pilot becomes standard operating procedure, it could decimate the title business, 90% of which is made up of small, local companies.

This winter, Fannie announced the full-scale availability of a one-step validation process under its Desktop Underwriter program for borrower assets, income, and employment with a single report. The process began as a pilot originally launched in 2017. Just thought I’d mention that.

~ Lew Sichelman