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If I told you, with 100 percent certainty, that mortgage rates were going to increase in 2022, and that there is absolutely nothing that you can do about it? Let’s follow that up with two pieces of good news. Namely, no one can tell you that with 100 percent certainty. When 2020 began no one was predicting the impending pandemic, nor its impact on rates, volumes, and the housing market. So, any forecast, while useful, should be viewed skeptically, and despite the overwhelming prediction that rates will move higher as we move through the year, they certainly won’t move in a straight line. The pent-up demand by consumers for restaurant meals, travel, automobiles, and all types of consumer goods has jumped, leading to an expanding economy, inflation, and higher interest rates.
The second piece of good news is there are many things that lenders and originators can do, and should be doing, in a rising rate environment with margins and volumes dropping. Yes, volumes will drop. We are in the early stages of a classic down cycle. We all knew that as the industry lent money for home purchases and refinances at less than three percent for 30-year fixed rate mortgages, and less than 2.50 percent for 15-year terms this time would come. So now what?
Lenders, through their mortgage loan officers (MLOs), can sell a combination of product, price, and service. Last year wrapped up a great two years of volumes and profits. For time in 2020, lenders were pricing products to slow volume down as their back-office staff was unable to handle the surge in business.
But now, STRATMOR workshop attendees have indicated that they have reduced their margins to stem the loss of overall volume. These workshops tell us that operation staffs, simultaneously, have a renewed focus, not on grappling with a wave of volume but on improving their lender’s automation and processes. There is increased interest in using technology to improve efficiency, such as automated employment and income verifications.
Depository banks and credit unions are moving staff and teams to other areas such as auto lending. Lenders, independent mortgage banks or depositories, are having MLOs and refinance teams shift to the purchase loan process through training and by shifting their thought processes. For example, a typical refinance is centered on the expiration of the lock date for closing the loan. Purchase business, however, revolves around the contract expiration date with an oft-cited 95 percent target for closing on the contract date.
As teams accustomed to refinance business change their thinking, there is more talk about purchase contracts, signatures, gift letters, and grants. STRATMOR workshops indicate that lenders are training their staffs on first-time home buyer challenges rather than merely quoting a rate and price for a refinance.
These moves are not a walk in the park. STRATMOR clients continue to report operational challenges. Appraisals, and their delays, are still high on the list of hindrances. The actual processing of purchase loans is not without difficulties (our clients suggest that 25 applications per processor per month is the current workload, giving processors a pipeline of 35-40 of loans at any given time), and then there is the underwriting.
Marketing money is being shifted. Targeting purchase business is different than targeting refinance business. Purchase loan ad spending is often through different media. Referral business is mined, real estate agents courted (despite a lack of inventory), and small builders are being given sales pitches.
Mortgage executives’ jobs are always challenging, on the way up and on the way down, in any business cycle. Expansion and contraction present a different set of problems. While the technology tools and communication tools have evolved, the same basic issues abound. In addition to the usual management challenges, our workshop participants point to employee engagement and a return to the office as major issues. Lenders have shifted from “hiring everyone” to “not paying overtime” to “not replacing exiting employees” to grouping employees into tiers and cutting staff as needed.
But companies and managers aren’t the only ones adapting. Some MLOs are easily shifted to discussing payment amounts, a lifestyle of owning versus renting, and products rather than rate. For example, a $300,000 30-year, fixed-rate mortgage at 3.5 percent has monthly payments of principal and interest of $1,340. If mortgage rates go to 4.50 percent, that creates a monthly payment of $1,520, or an increase of $180 per month. MLOs are coaching each other on how to discuss that with potential clients.
Yes, MLOs are having a different discussion with borrowers in 2022 than in 2020 and 2021. Larger down payments are being encouraged using savings from the last few years so as to lower the amount borrowed and therefore the monthly payment. Down payment assistance programs are popular. Borrowers and originators are walking through their credit reports to improve their credit score. “Buying down” the rate is an option for some borrowers, with discount points lowering the interest rate for the life of the loan. Managers are reminding MLOs that if a client is going to be in the home for a long period of time, paying points makes sense.
In a rising rate environment, longer rate locks are being encouraged. Instead of a 30-year mortgage, 20and 15-year and adjustable-rate mortgages are back on the table. Experienced MLOs will take the time to work through various options with borrowers and add value. MLOs will remind their client of the tax advantages of paying money in interest instead of rent, which creates wealth. 15-year mortgages, or adjustable-rate mortgages, are an option for lower rates than a 30-year fixed-rate mortgage. Perhaps the client will buy a smaller home
A change in business climate and cycle is never easy. But we all knew it was coming. “In the trenches” discussions with borrowers may not have been as easy as they’ve been in the last few years, but MLOs need to be prepared for it, and lender management teams in are training them. Trained and compliant loan officers are adding value every day through educating and coaching their clients. And lenders are using the right technology to “step up their game” to improve efficiency and lower costs, redirecting marketing budgets, shifting the mindset of their employees toward customer service in a purchase environment, and adjusting prices to remain competitive. It is what management is all about!
For an expanded discussion on “what’s next,” read STRATMOR Senior Partner Jim Cameron’s article in the February Insights Report.”
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