Featuring the perspectives of:
Jeremy Collett, Executive Director of Capital Markets, Guaranteed Rate
Derek Fertig, Senior Vice President, Fairway Independent Mortgage Corporation
Craig Garcia, President, Capital Partners Mortgage
Will interest rates continue to rise next year, and what impact will rates have on the market?
Garcia: Yes — until the signs that the Fed actions are having the desired impact on inflation and demand. However, once it appears that is working — 30-year fixed rates will not hesitate to come down — even before the Fed discusses lowering short-term rates.
Fertig: No one has a crystal ball obviously, but some of the most talented and bright minds in our world (think Barry Habib, David Stevens) are all calling for reduced interest rates. With that said, they are not forecasting rates to go back down to the 2%-3% range, but in the high 4% to low 5% range and stabilize. That would give our business a nice push as buyers who got turned off with rates going from 3% to 7% in such a short period of time, will now feel as though they are getting a “deal” as the same house at the same price will now have a 20% reduction in payment roughly over what is available right now.
Collett: We can make educated guesses, but rates are hard to predict. The Fed just raised its federal funds rate to 3.75%-4% on Nov. 2, indicating that more rate hikes are coming. We think that this cycle of aggressive rate hikes is coming to an end soon, dependent on inflation coming down. We could see the Fed raising rates by 0.5% at its December meeting, then 0.25% in 2023, until the rate sits at 4.75%-5%. If that happens, mortgage rates could fall.
What buyers should remember is that they can “marry the home, date the rate.” In other words, find a home they love and be prepared to refinance when mortgage rates come down.
What should homebuyers be watching regarding mortgages?
Collett: First-time homebuyers and communities that have traditionally suffered with affordability issues should keep a close eye on recent enhancements made by Fannie Mae and Freddie Mac. The current administration and Federal Housing Finance Agency (Fannie and Freddie’s regulator) have been laser-focused on opening up affordability and creating products that allow for further home ownership opportunities for this segment of the market.
Just (recently), they announced that four groups will see their upfront loan fees — also called guarantee fees or “G-fees” — eliminated when using conventional loans backed by Fannie Mae or Freddie Mac. These groups include low- to median-income first-time homebuyers, buyers using the HomeReady or Home Possible loan programs, buyers using the HFA Advantage or HFA Preferred loans and single-family loans that fall under the Duty to Serve program.
Fertig: Who they choose to work with. Lots of lenders are being forced to reinvent themselves with this current state of affairs. Many lenders are having serious, serious challenges. Most homebuyers start with a Realtor, not with a lender. Most Realtors have a long-standing relationship with a good loan officer who has the ability to perform and is battle tested through many different markets. Now is not really the time to get a home under contract and then shop with a dozen online lenders comparing offers.
Most of these online lenders have had 80-90% reductions of force, and I have heard horror stories of clients getting passed around from loan officer to loan officer, and the right hand is not talking to the left at handoff. This causes confusion, delays and in lots of instances missed closings. If the buyer and seller are able to do extensions and closing is delayed, that is best case scenario, but worst-case scenario is the buyer losing their deposit, and if they were renting a place, they gave notice to their landlord because their lender was telling them they were all good. When they weren’t all good, they were in dire straits trying to find a place to live at the 25th hour. I couldn’t imagine the stress that would cause someone. Now is not the time to reinvent the wheel but trust your network of referrals.
Garcia: The signs that the Fed may be winning the inflation war, which could be harmful to the economy, but would open the door to lowered long term interest rates.
What will be the biggest challenges and opportunities for lenders in 2023?
Fertig: Scaling their businesses and reinventing themselves once again. 2020 and 2021 brought a “boom” like we haven’t seen. The lending space needed to staff up at record paces and pay sign on bonuses, inflated salaries to attract top talent/poach top talent — for revenues to be cut in half and volume to be cut in half just 12 months later. Many if not all lenders were forced to reduce staff in order to stay profitable. If rates dip as some of the brightest minds predict, it will create a new wave and resurgence of buyers entering the market once again. Those lenders who took the time to spearhead best practices, refine their process and workflows will shine, and they will take market share, whereas those lenders who just reduced force by laying off the most expensive (and most talented) teammates will most likely struggle. Their seasoned loan officers will become tired of a clunky process and will lose top-tier talent to competitors who offer the ability to soar in the current market. It should be very interesting to see how it plays out.
Collett: There are several hurdles lenders will face in 2023, many of which carry over from 2022. The fluctuating rate environment continues to be a challenge for everyone, and I expect that will continue into 2023.
In addition to interest rate volatility and uncertainty around how the Fed will fight 40-year highs in inflation, lenders will still have to contend with profitability and cost control in this new, low-volume environment. We believe 2023 will be a year of consolidation for lenders, so expect a large uptick in mergers and acquisitions among lenders.
Liquidity remains an issue. The secondary market for the most part has been decimated by the enormous spike in interest rates. Falling deposit rates, lower asset prices and snail-paced runoff rates have created a major liquidity crunch that doesn’t appear to be going away anytime soon.
Different types of loan products, like ARMs and temporary buydowns, can help buyers ease into homeownership and take advantage of lower or more stable home prices without a long-term rate commitment. When rates come down, opportunities exist to lock in for the long term.
Garcia: Reduced mortgage market opportunity, increased competition, profitability challenges will be plentiful next year. It’s hard to imagine 2023 being worse from an increasing rate environment. Even if rates were to not fall but stabilize in this area — it could still improve opportunities for lenders and borrowers alike. The rapid, consistent rise in interest rates has created a mortgage bond market where investors are not willing to pay up for higher rates due to the fear of early payoffs, and hence leaving fewer opportunities for some borrowers to secure financing without paying higher fees. In some circumstances, the fees necessary to be charged to some borrowers cannot be charged due to regulations in place which did not foresee this type of a market. Some of these borrowers have been unable to get financing even when willing to pay the fees. A less severe straight line up rate market should improve this situation.