November 24, 2022
  • November 24, 2022

Opinion: Why we need a mortgage rate reset

By on May 24, 2022 0

Writing about the banks and passbooks of the 80s, I began to see a pattern emerge regarding customers and the refinancing of loans and rates. They were so tall; then so low. I started thinking about farming. Farmers know you can’t keep putting the same plants in the same soil season after season. You are killing your soil. You ruin the balance of nutrients. You work too much chemistry. It retards plant growth and yields. It changes the way they grow.

We have overworked our soil and it needs rest. Housing Wire expert Logan Mohtashami keeps saying we need a reset. He said in a Tweet earlier this month: “I think part of the confusion around the higher rates is that some people expected demand to be destroyed more quickly. That’s why I emphasize that higher rates need time to work their magic.

First crop rotation: owners stay in their house for 30 years

Rates have been falling since 1981 when it was crop rotation to adjust for inflation. In the early 1980s, rates were above 18% for a fixed rate loan. Most people have paid these loans for 30 years, on time. Some moved and in the process got better rates. Refinances weren’t marketed then as they are today, nor were they the norm for a homeowner.

Back then, the real estate agent found a house and the buyer went to their bank and got a loan. It is a customer of an agent, and a customer of a bank, carrying out a financial transaction and a contractual purchase transaction. Most of the time, the banking relationship was established before the house was found. The client bought a house to stay in for 30 years. It was considered a one-time transaction — a growing season.

Several harvests per year: Buyers and refinancing

The internet, online banking and other lenders have made the word “refinance” the one that has grown our industry. Look at one person who bought a single-family home in the mid-1990s – she had outgrown the starting house and needed the “forever” home she dreamed of.

What if this loan turns into three to six loans? When rates were 8% in 1995, this client bought this house forever. They went to their bank and got a 30-year fixed rate loan.

In 2004 they heard they could refinance, maybe cash out. Some took a chance with a popular ARM loan and got a rate of 6.5%. It saves them $200 a month and feels great.

ARM loan managers start calling them in 2008 for a locked rate or a lower fixed rate. They gladly accept 5.50% fixed. It saves them an extra $150 per month, and that’s stable in this wild upside-down market.

In 2017, they think they’re paying too much when their buddies get 4%. Thus, they go to an online bank to find out the rates. Twenty people call them and they lock in at a flat rate of 4%. During COVID-19 rates were 3.25% and with nothing else to do the owner can save money and restock again – rates will never be that low again, is- it not? Fixer called again in June 2021, equity was high, rates are at 2.4% and, man, you gotta do this one. That’s as low as rates go.

For 25 years, this person was a mortgage customer with six different mortgage companies, each saving him over $100 a month. Even if the owner moved or made a purchase in the middle of this process, one of the refis would have been a purchase. And that purchase likely required more refinancing when rates fell.

Some of these people have obtained second homes or investment properties. Rates have been falling steadily since the 1980s. When rates rose, it was only small jolts that interrupted the borrower. Homeowners have always had a good reason to refinance.

It’s time to reset

Now the prices are up. They rose more than the news could keep up with. By the time they said 4.5%, rates were really over 5%. Now the owner will sit for a couple of years.

We need a reset and a reset that will continue through 2023. For the borrower, rates have always come down. The borrower saved hundreds per month each time. We drained the soil and ran out of places to grow our crop. The market fixed it for us.

But the seeds are still stored for the next harvest. People are still buying houses.

The inflation market of 2022 settled it for us. Houses are more expensive and prices are skyrocketing. Refinancings represent less than half of the business done today. Repairers and refi shops are in a dry spell.

How are the fields cleaned? We are waiting. After a year or more of these rates, things will be different. For starters, there will be fewer of us – loan officers, banks, brokers. Layoffs, consolidations, acquisitions, mergers and partnerships will change the landscape.

Technology, artificial intelligence (AI) and eventually cryptocurrency will change the transaction. Rates will eventually fall, opening the door to the next boom. The hundreds of thousands of homes sold in 2022 and 2023 above 5% will want to save that $200, so withdrawal refinances and ARM loans all need to be reset.

The survivors

There are fewer mortgage officers doing all the work. The people who remain are the survivors. The companies that remain are those that have combined resources and people. The technology they have prepared will be efficient and user-friendly. Relationships will be long-term and lead to long-term business partners.

Marketing and customer incubation will involve training, advice and long-term contact long after the transaction. Processing will be expedited with automated VOEs and instantly verified bank statements. UW will be easier and faster with day one certainty. Virtual documents will speed up and make disclosures and closings less cumbersome. Mortgages will be easier to make and to complete.

The field will be primed for the seeds to sprout again. They will grow quickly and abundantly. Refinances will take over the market. There will be more loans than we can effectively process for years.

New business and old business will create a new refi boom. Builders will have more inventory. House prices should stabilize. The new relationships with real estate agents and lenders will be beneficial for all parties. We will make hay when the sun shines. We will reap what we sow, and it will be good for our business.

BJ Witkopf is a Mortgage Specialist at Assurance Financial.

This column does not necessarily reflect the opinion of the editorial staff of HousingWire and its owners.

To contact the author of this story:
BJ Witkopf at [email protected]

To contact the editor responsible for this story:
Sarah Wheeler at [email protected]