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Everyone in residential lending knew that, at some point, rates would move higher. The historical lows that we saw in March and August of 2020, when the yield on the U.S. risk-free 10-year Treasury Note was in the mid-.5 percent area, were unsustainable. Mortgage rates edged higher in 2021, but literally shot up from January into early May of 2022, catching everyone by surprise as the 10-year yield moved above three percent.
In addition to higher rates, lenders have been faced with a shortage of homes for sale. Multiple bids for homes are commonplace around the nation. In addition to their 30-year mortgage in the two percent range, lenders either have had to quickly “dust off” programs that are able to capture or attract more borrowers who need some type of financing. or they need to create new programs.
Non-vanilla product talk was all the rage at the recent Mortgage Bankers Association Secondary Marketing Conference. Lenders are looking for secondary market outlets and premium pricing for ARMs, home equity products, non-QM, second homes, investment properties, and other non-conforming products. They are also looking for extended locks, lock and shop programs, rate buydown products, and construction financing options. But a new animal has entered the discussion: programs designed to create the impression of an all-cash buyer, something sellers prefer.
The program gaining the most attention is one that simulates an all-cash buyer. In a derivative of a traditional bridge loan, private equity investors have signed various agreements with lenders to offer cash to buyers when someone is bidding on a home. The programs, offered under a variety of names depending on the lender and investor, allow a person (or family) to make an all-cash offer on a home, therefore removing any financing contingencies and increasing the competitiveness of the bid.
These short-term programs allow a borrower to buy a home without having to sell their current home first. A parent can use the equity in their home to fund a bridge loan for their child. A buyer can use multiple properties as collateral for the loan. A gift is also acceptable from a family member for the down payment. There are many ways for a borrower to obtain a bridge loan when working with private money that a conventional lender will not accept. There is often a combined loan-to-value (CLTV) maximum using the equity in the existing home and the new home, often 75 percent.
But critics say that companies and lenders providing cash are merely allowing borrowers to “rent a bank statement.” Loans are often limited to conventional conforming programs, and do not include jumbo financing. Interest rates and fees tend to be high, and terms may be stringent.
Lenders’ clients not only face competition from all cash buyers, but also from large companies who specialize in owning single family real estate. These companies typically do not obtain traditional home mortgages for their properties but finance the business with some equity through stock sales and debt through long-term bonds. Higher rates impact these companies as well since bond interest rates tend to rise and fall along with home mortgage rates. When rates rise, monthly mortgage payments go up and some would-be borrowers no longer qualify for a loan. Companies face a similar constraint from the bond market, and as rates have gone up, the less attractive it is for companies to purchase houses, actually a benefit for lenders’ clients.
One type of institutional buyer simply facilitates a typical family’s purchase of a house. The company collects a fee and in exchange, it stands ready to buy the house if the regular buyer cannot secure financing or is delayed in obtaining the loan. These companies, like the long-term investors, will finance their purchases through a mix of stock and debt. So as rates have increased in 2022, these companies need higher fees to make a profit and home purchases through these companies have declined.
STRATMOR knows that potential home buyers have been dealing with an overheated purchase market and are willing to do things to win deals. Most will say that it is a small segment, relative to the overall trillions of home loans. And clients face several obstacles in the current market: Not enough cash, no home equity line of credit, and few can afford both payments if they buy a home before selling their existing home. Lenders should be positioned to provide affordable solutions to these home buyers.
STRATMOR clients have either emulated the programs or signed strategic agreements with a variety of companies for this cash offer/ guaranteed closing concept. Most predict that the market will “normalize” eventually, but the cash buyer model has traction despite the fees and potential underwriting complexities. Companies such as Pacific Private Money, Ribbon Cash Offer, Open Door, Homelight, LeadOff, and Offerpad are often mentioned. And lenders have created their own “name-brand” programs: New American Funding (Buyer Accepted), Evergreen Home Loans (CashUp), Fairway (Cash Guarantee), and Homepoint (Cash Compete) represent a sample.
They all have various fee structures, underwriting guidelines, restrictions, and escrow costs. The different programs offer restricted loan plans, often excluding jumbo amounts, and warehouse arrangements differ. And they all have different selling points and enhancements, differentiating themselves from the competition.
Despite critics saying these programs are merely “renting a bank statement,” they are something that all lenders should be aware of, especially when their clients are competing against them in buying a home. As interest rates stabilize, and inventory loosens up in over-bid markets, their use may diminish. But giving clients options is never a bad thing for lenders and loan officers in a tight market, as is knowing industry trends.
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