Business is at a “dead stop,” said a retail loan officer in Michigan. With mortgage rates nearly doubling from the start of 2022, the LO, who has more than 20 years of experience in the industry, says it’s painful to see deals simply disappear. People just aren’t moving, and who’s trying to get a refi now?
“I go into real estate offices and Realtors have zero listings for the week,” said the LO, who requested anonymity to protect the business of her partners. “I feel bad trying to convince somebody that it’s a good time to buy and get a mortgage. Am I really doing my fiduciary duty by trying to convince them?”
During the past 18 months — when refis were low-hanging fruit — the LO closed around $3 million a month. This month, she is lucky to have $2 million in her pipeline thanks to closing deals on a construction loan, a condo and a vacant lot. And it’s going to get worse.
“Next month I’m expecting to close $400,000 and nothing lined up for November,” she said.
The Michigan LO’s struggling business is a microcosm of the mortgage industry, where loan officers can no longer string together deal after deal as they did during the pandemic. With rates firmly in the 6% territory as a result of the Federal Reserve’s goal to combat inflation, many LOs must hustle to win business outside their usual stomping grounds.
LOs interviewed by HousingWire said that most of their past clients don’t have a reason to sell their houses and that prospective buyers are waiting on the sidelines unless life happens — job relocations, marriage, divorce, pregnancy and death.
Housing prices started to inch down in July, but were still 14.5% higher than last year. With mortgage rates at an elevated level, it’s no surprise that rate lock volume hit a three-year low in August.
“The premise of a mortgage rate lockdown is simple: so many American households have such low mortgage rates that some will never move once rates rise, which then locks up housing inventory,” said Logan Mohtashami, Lead Analyst at HousingWire. Mortgage rates moved up so quickly and then held for an extended period, people not moving has become a real risk, he wrote in a recent column.
Mark Gelbman, a loan officer at Caliber Home Loans in Michigan, sees first-time homebuyers and owners who need to move as the biggest victims in a higher rate environment.
“Homeowners need to move because of family size and jobs,” Gelbman said. They can’t make that jump to expanding into a bigger house because of higher mortgage payments, he explained.
One of Gelbman’s clients, who has been on the market for at least a year, was priced out in 2021 due to “overbidding.” Overbidders have exited the market, but the client now faces a different problem — her monthly mortgage payment would be far outside her comfort zone.
“If the first-time homeowners are not moving because they can’t afford to, it freezes up the entire lower end of the market,” Gelbman said. Addressing a shortage of inventory is a serious concern, especially as fall and winter approaches when total inventory traditionally drops.
According to Mohtashami, the country has been experiencing a “savagely unhealthy housing market,” with inventory levels at around 1.16 million, below the 2019 range of 1.52 million to 1.93 million.
The mortgage industry was on a “sugar high” in the last two years, added Lonnie Glessner, senior vice president of residential lending at Draper & Kramer Mortgage. Finding out why people are moving is important, he said.
“Just to move to a larger home, better neighborhood, people aren’t going to be doing that anymore because the payment of their mortgage is going to go up substantially.”
By virtually any measure, homeowners today are financially in a strong position. Credit scores are at record highs, and equity positions have never been stronger. Despite the market slowdown, it hardly resembles the subprime mortgage crisis of 2007, loan officers and mortgage brokers said.
But for loan professionals, relief doesn’t pay the bills. The reality is sales opportunities will be fewer for the foreseeable future.
Mortgage rates from the past two years were “outlier numbers,” Fahad Janvekar, loan officer at Fairway Independent Mortgage Corporation said. After spending a couple months at a refinance call shop, he moved to focus on purchase mortgages in November 2021.
Janvekar, like many other LOs, is looking for unique circumstances where people have to move out of necessity. While some LOs plan on moving to the broker channel for higher margins or exiting the industry, those planning to stay in the retail business are offering more loan products or getting licenses in other states to cast a wider net for borrowers.
Glessner will close his first renovation loan in 10 years and plans to tap into the market of reverse mortgages, a loan available for seniors aged 62 and over to borrow money against their home equity. One of his offices is located at Estes Park, Colorado, where he sees demand for reverse mortgages.
“I’m going to start offering reverse mortgages because I know the average age of people there is 62. That’s going to be a new market for me,” he said.
He also closed one bank statement loan this year, a non-qualified mortgage (non-QM) loan, which was expected to take off with accelerating home prices and higher interest rates pushing borrowers outside the Fannie Mae and Freddie Mac credit boxes.
“One of my concerns with non-QM lenders is, will they still be around when they are closing?”
As rates rise, lenders are struggling to sell in the secondary market as investors are seeking higher yields. This liquidity problem caused non-QM lenders including First Guaranty Mortgage Corp and Sprout Mortgage to shut down.
The downcycle is going to shake out LOs who weren’t in the industry for the long haul, said Dana Fox, loan officer at Lake Michigan Credit Union. “LOs that remain will get stronger and better. I’m going to work through it. I produce, I have 20-plus years of experience and I’m very involved in the local Board of Realtors.”
LOs, including Fox, say it’s hard to predict how long mortgage rates will remain elevated and it won’t be until the first quarter of 2023 to get a clear picture of which direction they’ll move.
It’s time to go back to the basics, Glessner said. “Going through client databases, checking in with homeowners to see what’s going on in their lives, getting referrals and that’s where the old-fashioned forward calls could help. It’s all about relationships.”