Mortgage

With charges at 6%, what’s subsequent? Mortgage vets weigh in

Even as mortgage rates broke the 6% barrier as measured by Freddie Mac, the market is likely to stabilize soon and some are even expecting the 30-year fixed to back down to the mid-4% range by next year.

Rates have been low for so long that many current mortgage industry workers have not seen 6% pricing for a 30-year fixed rate loan. But some of the industry veterans that National Mortgage News spoke with recalled double-digit mortgage rates in the 1980s and 1990s, at one point as high as 18%.

“Let’s not forget that, historically, rates around 6% are actually good,” said Aaron Davis, CEO of title and settlement services provider Florida Agency Network. “But the industry will probably have an emotional reaction in the very short term before things begin to stabilize.”

It took 15 years for rates to drop from the 6% range down to the 3% area and just a few months for that to reverse, Davis noted.

Nor does the current rate reflect the entire market landscape. “If anything, competition for homebuyers is down, and prices are starting to drop as well,” said Jim Paolino, CEO of LodeStar Software Solutions. “I won’t be surprised to see things stabilize soon, so now is not the time for the industry to panic.”

But for some people, the optics are likely to appear worse, especially if the Federal Reserve increases short term rates by as much as a full percentage point in the coming week as several are now expecting following the recent inflation report.

“History tells us that it takes six months for a rate hike to work its way into our economy and take hold,” said Melissa Cohn, regional vice president at William Raveis Mortgage. “And we’re still not even six months into our first rate hike, and we’re about to have another major rate hike next week.”

The Fed Funds Rate is likely to top out at 4% or even 4.5%, Peter Norden, CEO of Homebridge Financial Services predicted. “But with that said I think long-term rates are getting near their top if they aren’t there already.” They should remain at that level through the middle of 2023, the consensus sentiment among the people National Mortgage News spoke with.

Until inflation cools, rates are likely to rise but not by much, added Tom Hutchens, executive vice president of production at Angel Oak Mortgage Solutions, who forecasts rates topping out at about 6.5%.

Norden thinks the Fed will succeed in stopping inflation, but “hopefully without anything more than a mild recession. And I thoroughly believe that by the second quarter, you’ll start to see a pretty substantial drop in rate going through the rest of the year.”

But the Fed’s raising short term rates is only part of the equation for higher mortgage rates. Quantitative tightening is underway as the Fed is allowing its mortgage-backed securities portfolio to run-off, reducing competition for those bonds. That is also adding to the upward pressure on rates, Hutchens pointed out.

“The whole real estate market is just in a period of adjustment because rates went up quickly earlier this year,” he continued. “Now they’re continuing to rise not as quickly, but they’re still rising.”

Meanwhile, there’s still an inventory shortage, and with higher rates, people are more likely to hold on to their current home and its 3% mortgage rather than list, Hutchens pointed out.

That is likely to keep some upward pressure on prices even as potential buyers fall out of the market. But enough people are active to keep the housing market moving, just not as many as a year ago.

“Instead of there being 20 people trying to buy your home, now there are three or four,” said Richard Pisnoy, principal at Silver Fin Capital Group, a mortgage brokerage. “But there’s still three or four and that’s because there is no other home to purchase, there’s no inventory there.”

Additional rate increases will add to the market’s uncertainty, especially because many believed things would level out in the low 5% area, Davis said.

“This new headline won’t help the market’s rattled psyche,” Davis said. “But, as has happened so many times before, it won’t be long before businesses and consumers alike take a longer view, and the market does, indeed, find firmer footing.”

The general thought is higher rates benefit outside of the conforming scope like non-qualified mortgages. But Hutchens pointed out that when rates for government-sponsored enterprise loans rise, they go up for Angel Oak’s non-QM customers as well.

At the start of the year, the rapid rise caused disruptions in the secondary market for non-QM, and two lenders, First Guaranty and Sprout, reportedly had to close their doors because of issues around selling their production.

But even though rates are still rising, the moves are not as abrupt and so non-QM lenders are able to function in the secondary market, Hutchens said.

For Cohn, one of the industry’s top producers in 2021, rising rates means she keeps doing what she has been doing over her long career.

“I like to market the product that is best suited to the client,” she said. “I try to educate them on the various options that are available in the marketplace.”

Adjustable rate mortgages have picked up in popularity in recent months. But ARMs “are not best suited for everyone and not available for every buyer,” Cohn said. “For example, on the conforming loan at a higher loan-to-value, a fixed rate is really your only good opportunity.”

Homebridge is primarily a purchase-oriented company, but it too has felt the pain in the current market. And the purchase market has slowed more because of affordability, Norden said.

But in tandem with his belief that rates will drop next year, a “fairly large” refinance market will emerge as this year’s buyers look to save money at that time.

That is the long-term view. The next few months are a different story.

“It’s going to be a rough winter, there is no question about it,” Norden said. “We have battened down the hatches, as they say, pretty dramatically.”

Homebridge has let 20% of its overall staff go. “And I’m hoping that’s where it can end,” said Norden. “But we’ll adjust to whatever the volume numbers are. It’s imperative to do that.”

As a mortgage broker, Silver Fin has less control of what rates it can offer. But it works with many lenders that are not just competitive in terms of the types of product they offer, but in pricing as well, Pisnoy noted.

So 6% is not a “make or break” number for Pisnoy. People aren’t focused on a specific interest rate level.

“Most people aren’t well versed in every single interest rate that’s out there,” Pisnoy said. “So if someone says, ‘oh, it’s 6%,’ some people might say ‘wow, that’s high. Remember when it was 3%?’ I don’t think that they’re focused that much on an actual number itself.”

Most importantly, it is how lenders react to the market that matters.

Norden has been through numerous market cycles “and it’s really how you adapt to markets, you’ve got to adapt and you’ve got to react quickly.”

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