Interest rates fell this week more than most analysts expected, and the 10 Year Treasury Yield is down to 4.67% – surprising everyone, given that we heard so many predictions about the 10-Year staying above 5%.
Here are a few reasons why: (1) The Fed announced yesterday that they are not raising rates (and many analysts think they are done raising); (2) More and more prominent analysts and hedge fund managers are predicting a recession and lower rates soon; (3) There are clear cracks in the labor market; and (4) Consumer and manufacturing surveys are yielding surprisingly negative results.
It may not last, as a big BLS jobs report is coming out tomorrow that is often inaccurate, but it moves the market every time.
Perfect Borrower; Perfect Family; Perfect Rate Shopper
A young man and his wife called our office last summer. He worked for Chevron with a great income and excellent job security. She stayed at home with a baby and another on the way. They had 800+ credit scores, $650,000 in the bank (from the sale of a home and family money), $155,000 of income, no consumer debt at all, and an interest in buying a $435,000 home in Houston with 25% down. So, yeah – life is tough for some people. 😊
They well knew how qualified they were too, and they had applied with three other lenders before calling JVM (“because it was so easy”) – and ALL they cared about was getting the lowest rate. Nothing else mattered – not service; not closing on time; not education; not reputation; not anything – just Rate, Rate, Rate!
So yeah – ANYONE could have pre-approved them and funded their loan – as cleaner borrowers do not exist, and technology can do 90% of the work. But – the only lender that did fund the loan was the one that was willing to lose money.
Real Estate Brokerages Want To Be Mortgage Banks
Real estate brokerages, agents, iBuyers, and lead gen firms have been eyeing the mortgage business for years now, and I don’t blame them. Mortgages can look easy from the outside and it is the agents (or firms) themselves generating most of the leads, so why not capitalize off of it?
Some brokerages and firms are buying and setting up actual mortgage banks (like Zillow and Redfin) and some are setting up consortiums where they work with loan officers who will compliantly pay a referral fee to the agent or brokerage that referred the borrower. We are seeing this surface much more lately in light of the threat to commission income (from the NAR lawsuit) and the relatively low volume in the real estate realm.
But there are problems…
Low Margins And Rate Shoppers
It is extremely expensive and complicated to run a mortgage bank, margins are tighter than ever, and most mortgage banks are losing money or barely breaking even.
So, while anyone could pre-approve the “perfect borrowers” I described above, few people can fund their loans because of their rate demands.
And, if a loan officer has to pay a referral fee equal to 1/2% of the loan, the rate would have to be raised by 1/8% to cover the cost – given that most mortgage banks are operating at breakeven margins already.
And there is NO way clean borrowers are going to take a 1/8% higher rate when it is so easy to shop and apply for a mortgage nowadays.
In other words, mortgage banking margins are simply way too low to ever be able to pay a referral fee without having to jack up the rate – which will push borrowers to other lenders.
The only areas where this might not be the case are where average loan amounts are relatively low (under $300,000) and/or where competition is sparse (away from large metro areas).
Complexity Of Running A Mortgage Bank
We meet almost weekly with outsourcing and tech firms to analyze ways to cut costs and improve efficiencies, and it takes an enormous amount of brainpower and experience to do so.
We implement outsourcing and new tech constantly too because if we didn’t, we could no longer compete. There are also enormous capital and regulatory requirements that make running a mortgage bank about 1,000x more difficult than it might look.
And – there are also enormous risks of loan buybacks (this is huge), regulatory audits, fines, and having too much overhead during downturns. So, yes, brokerages and other firms can align with or even set up their own mortgage bank, but they need to know what they are getting into – and very few do.
This may be the biggest factor of all in markets like this, and it is the real reason why brokerages can’t just throw anyone in their offices to act as a loan officer: about 30% of our locked loans involve unusual financing now.
This includes bank statement loans, bridge loans, asset-based loans, temporary buydowns, DSCR (rental income) loans, hard money loans, seller-carries, 203k (rehab) loans, and myriad other products. And it is not just about understanding all of those products and the related guidelines, it is about knowing which lender/investor to send the borrowers to, as there are now many of them, and all of them have different rates and guideline variances.
And even for traditional financing, we face issues constantly: Do we re-score somebody with a 739 credit score so we can get a better rate? What happens if someone’s credit score falls 30 points from the time of pre-approval to when they go into contract – so their rate is now way higher than what they expected? What if rates shoot up 1/2% and borrowers no longer qualify in their desired price range? Will every investor accept the borrower’s Restricted Stock Units (RSUs)? How do we compliantly come up with an extra $2,500 needed to close? How do we get debt ratios down 2% so the borrower will qualify?
Experienced lenders also have to know how to spot potential deal-killing issues on the fly such as: (1) garnishments on a paystub; (2) a “leaky roof” mention on a purchase contract; or (3) transactions on an asset statement that could open cans of worms – like back tax payments.
Other recent issues that have put deals in jeopardy are skyrocketing insurance costs as well as property taxes.
We have some extremely bright team members who can manage all of these complexities, but it takes years of experience and serious brainpower.
So, come on in Zillow! I’d say the water’s warm, but it is actually boiling from all the risks, complexity, and competition. You may in fact close a few loans, but I suspect you will lose a lot more from failing to manage all of the complexities I describe above or because rate shoppers will run away screaming…