“All the loan officers are having to work harder to make less money,” Will Savage, a loan originator at PMC Mortgage said of the mortgage business that has downsized as a result of an explosive mortgage rate run-up. With rates more than doubling from January, the issue of affordability has made it hard for his clients to pull the trigger on buying new homes.
And he doesn’t expect the situation to improve dramatically next year. For Savage’s client who wanted to buy a $700,000 retirement home in the South Carolina area and has a $500,000 pre-approved loan, she will have to sell her home in Ohio to make ends meet.
“Where rates were in January, she would’ve been able to do both,” Savage said. “Lots of people are getting pre-approved for mortgages but they’re shocked at the monthly payments they have to make,” he added.
As with borrowers challenged by the affordability hit, LOs are expecting another tough year as – purchase mortgages will continue to be the name of the game. With refis drying up and purchase mortgages down 15% from 2021, layoffs have swept the industry. Many have permanently left the mortgage market in the face of extreme headwinds. The mortgage industry could contract by 100,000 jobs over the next year.
While Savage and other LOs that plan to stay in the business are hopeful that buyers will return in 2023, a further drop in origination volume, lack of housing inventory and uncertainty over mortgage rates add to looming concerns, even despite an anticipated drop in housing prices next year.
The housing market by the numbers
Home purchase mortgage originations are projected to slip further to $1.6 trillion in 2023 from an expected mortgage origination activity of $1.9 trillion in 2022, according to Freddie Mac. For 2023, home price growth is expected to slow to -0.2% next year, from an average of 6.7% in 2022 and 17.8% the previous year, according to the government-sponsored enterprise.
“Next year’s market is going to depend on one factor, which is inventory,” said Matt Topping, a senior loan officer at Movement Mortgage.
“If we get more inventory, loan officers are going to have a decent year; if we don’t, then we won’t.” If more homes are brought to market and buyers accept the higher rate environment, borrowers would have more options to choose from and be better positioned to negotiate contracts with contingencies, Topping explained.
Total housing inventory stood at 1.25 million units, falling to a 10-year low at the end of September, according to the National Association of Realtors (NAR).
As Logan Mohtashami, lead analyst at HousingWire would say, this is a “savagely unhealthy housing market.” To return to normal, Mohtashami advocates for housing inventory to reach a range of 1.52 million and 1.93 million units.
“More choices are good; in my opinion, the best way to fight inflation is with more supply,” Mohtashami said in a recent commentary. “We got into a historically bad area with supply post-2020 and are working our way back to normal,” he said.
Most LOs agreed, it’s highly unlikely that rates will fall back to the 3% levels in the foreseeable future, and people will inevitably have to move as they go through different stages in life — such as marriage, work relocation, having children, divorce or a spouse’s death.
The higher rate environment will become the new normal. “If they need to move, they’re going to have to pull the trigger and bite the bullet,” Savage said.“There are also some people that think they might see more price reductions,” said Trudy Kelly, a senior loan officer at Churchill Mortgage.
While some have pushed the pause button for buying a home, some are waiting it out until the winter season since “there’s more room for price reductions due to less competition,” she said.
Market experts are mixed on which direction mortgage rates are likely to move in 2023. “With inflation still rampant, the Federal Reserve will likely continue hiking interest rates,” Redfin economics research lead Chen Zhao said in a blog post.
“That means we may not see high mortgage rates — the primary killer of housing demand — decline until early to mid-2023.”
The Fed’s hikes don’t directly influence mortgages, but rates tend to move higher as policy grows more restrictive — resulting in higher costs for prospective homebuyers.
Fannie Mae expects the 30-year fixed-rate mortgage to drop to 6.6% in the first quarter, 6.5% in the second, 6.4% in the following quarter and ending the final quarter at 6.2%. Freddie Mac forecasts rates to average 6.4% in 2023.
Since the 1980s, the 30-year fixed-rate mortgage has typically fallen during recessionary periods. Historically, fewer borrowers sought mortgage financing with reduced economic activity and higher unemployment rates.
“We’re gonna see a lot of loan officers and realtors leave the business,” concluded Lonnie Glessner, senior vice president of residential lending at Draper & Kramer Mortgage. “Total volume is going to be down but that also means I can have more market share. I’m not worried.”
To navigate inflationary headwinds, many loan officers will expand product offerings — from adjustable-rate mortgages (ARMs), which disappeared during the record-low rate environment, to mortgage rate buy-downs as rates rise and the current sellers’ market tips over to the buyers’ side.
Staying in the game
A buy-down is a mortgage financing technique where the buyer obtains a lower interest rate for the first few years of the mortgage funded by the seller or builder.
Churchill Mortgage’s Kelly Lee recently crunched the numbers on an interest-rate buy-down for one of her clients in suburban Portland, Oregon, with the hope of unlocking seller-buyer standoffs.
If she could get the seller to sign off on a $15,000 concession to pay down her client’s interest rate by 1%, she could lower the monthly payment by $340 a month, significantly better than asking the seller to lower the actual listing price by at least $30,000, which would generate roughly one-third of the savings created by a rate buy-down.
“What’s more important: what you pay for the home or what your monthly payment actually is?” Lee asked. “My client ended up saving substantially by going the buy-down route, while the seller retained full equity.
“Everyone won. We’ve been more aggressive with this tactic over the last few months with noticeable results, and I think you’ll see it become even more prominent as interest rates tick up.”
Loan officers like Draper & Kramer Mortgage’s Lonnie Glessner plans on offering reverse mortgages in one of his offices located at Estes Park, Colorado. The average age of the population there is 62.
Reverse mortgages, a loan available for seniors aged 62 and over to borrow money against their home equity, is a flexible option to help seniors get the most out of the equity in their home and live a better retirement.
Offering diverse products and getting licensed in other states to reach a broader client base is what LOs are increasingly seeking in a margin-compressed industry. Christian Hernandez, vice president of mortgage lending at Guaranteed Rate, plans to be more aggressive with her social media presence.
“I use TikTok, Instagram and LinkedIn to post educational videos on the documents people need when applying for mortgages and scenarios that borrowers can expect when buying a home,” said Hernandez. It’s important to “create an emotional connection with potential clients,” as it helps her create leads.
Hernandez also plans to get licensed in Texas and Florida, where she can continue with the same business tactics online.
Going back to the basics to search for referral partners is engrained in loan officers’ minds as they enter into 2023. This includes checking in on clients’ home anniversaries to see if they’re planning to sell their home, whether their friends and family are in the market for a new property or simply to make sure they could pay for their new roof replacement.
“Right now it’s going back to our roots,” Savage said. “If applications are lower than last year, only selective real estate agents are doing business where 20% of them are doing 80% of the business.”
The cyclical nature of the industry means rates will go back down again after reaching the peak. “That means when rates drop, we’ll have refis from all these purchases we’re getting from these referral partners and hopefully rates go down in 2024,” Savage added. “It’s all about the long game.”
This article originally appeared in the December 2022/January 2023 issue of HousingWire Magazine. To read the full feature, click here.
