After several years of lax income documentation and fringe product debacles, the mortgage industry is putting its foot down when it comes to strengthening requirements for lending. Add to that a static interest rate, and 2007 will likely see a slight drop in overall mortgage volume, according to industry experts.
The Mortgage Bankers Association is forecasting total residential mortgage production in 2007 to be $2.39 trillion, declining by about 5 percent from an estimated $2.51 trillion in 2006. Total mortgage originations should decline an additional 4 percent to $2.29 trillion in 2008 and drop another 6 percent to $2.15 trillion in 2009. No matter whom you ask, the 2007 projections are notably flat, with a projected rate increase of 10 to 20 basis points by year’s end. But impending changes in the scrutiny buyers will come under when applying for a loan are crucial to keep the industry healthy.
“The big trend right now that we’re seeing are the lenders who have been so aggressive with their product and what they’ve been willing to do in the past,” says Victor Ciardelli, president and CEO of Guaranteed Rate. “We had a high rate of foreclosure or default, and 2006 really was a shake out for the fringe products that have really hurt a lot of Wall Street firms and numerous companies have gone out of business.”
Some of those fringe products were financing on 100 percent or not even requiring borrowers to provide income or have a decent FICO score. As a result, loans went into foreclosure and lenders in the marketplace lost hundreds of millions of dollars on such loans, says Ciardelli.
“Lenders are also looking harder at appraisals,” he continues. “Just because a property sold one year ago with a certain value doesn’t mean it still has that value. Appraisals are coming back lower on refinancing, and that’s a problem.” Ciardelli notes that the industry has significantly changed over the past few years with product tightening and lenders adjusting what they are willing to do to close a deal.
As far as overall sales for 2007, there really isn’t anything to celebrate other than the unlikelihood that sales will drop a great deal.
“We believe the interest rates are to remain within 1 percent higher or lower than where they are today,” says Ciardelli. “We don’t believe the market should significantly turn one way or the other. There’s going to be some adjustment being made, but it’s going to continue to be a purchase market in 2007; mortgage brokers will continue to consolidate and single players out who aren’t strongest in the market.”
By the end of the year, rates will be at 6.5 percent on a 30-year fixed mortgage, which is still near historic lows, says Jeremy Morgan, senior loan officer and VP at National Cooperative Bank. “We got spoiled by rates a few years ago at 5.25 [percent] and 5.5 [percent],” Morgan says. “Of course, we’d love to see them go down. Obviously, the housing market has cooled and we’re waiting to see what the Fed will do to boost housing sales, but that hasn’t happened yet and we don’t know if it will happen.”
The rate environment will continue to be favorable for the purchase market, says Howard Ackerman, senior VP at Fifth Third Bank. “Rates will continue at levels that will still encourage people to purchase homes.”
Another trend, says Ackerman, will be the diversity of product offerings on the market. “There are so many different loan programs now offered. What we really try to focus on is what the loan programs are that best fit the needs of the customer,” says Ackerman. “It’s not just about rates, it’s not just about closing costs. It’s about cash flow, it’s about risk tolerance, and it’s about how a mortgage positions itself within the rest of the financial portfolio. It takes more consultation than ever before.”
Steven Stapleton, VP and Chicagoland regional manager for National City Mortgage Co., concurs. “We are headed into, or maybe are in the middle of, a more traditional market and product mix,” he says. “The majority of buyers are opting for a 30-year fixed versus some type of short-term ARM.”
In fact, during the final two weeks of 2006, less than 20 percent of people looking at a mortgage were looking at adjustable rates, says Morgan.
In 2002 when housing was booming, prices were higher, and lenders were being creative trying to get people into homes, ARM was more popular, he says. “But buyers are now feeling the ramifications and are having to refinance, hopefully, or foreclose.”
One thing that will work in favor of the mortgage industry and, ultimately, real estate agents is a law passed by Congress in late-2006 that allows mortgage insurance premiums to be claimed as tax deductions for households earning less than $100,000 annually. The current legislation applies to new loans closed in 2007 only and will require another act of Congress to be extended beyond this year.
The change to the tax code means mortgage options that include standard private mortgage insurance will now become much more competitive and attractive, saving 2007 homebuyers or home refinancers an estimated $91 million when they file their 2007 tax returns, according to a recent industry report.
Not everything in the mortgage business is based on numbers, however. While Realtors can’t control the market, they can do a number of things to boost their ability to close deals, including building strong relationships with lenders.
“It’s important for Realtors to build relationships with lenders to insure that the customer is getting the best advice and service available,” says Stapleton. “A Realtor’s reputation is on the line with a customer, so if [the Realtor] refers the wrong lender, [the Realtor] suffers. The Realtor has to align with a mortgage lender who makes him look good, and ultimately stimulates the customer to thank him for the referral.”
Ackerman agrees. “It’s more than just a strong relationship; it is a true partnership,” he says. “We are entrusted by [agents] to secure the financing needed for agents to earn the commission on the sale. Both of us get paid when a successful closing occurs. It’s about a trust that comes once an agent feels they have someone that is knowledgeable, trustworthy and reliable. Otherwise, the agent fires the loan officer, but it’s not like giving a two-week notice; they just stop using them.”
Realtors are an important lifeline of business for the lender, says Ciardelli, whose company closed $2.2 billion in loans in 2005 and just over $3 billion in 2006. “We will bend over backwards and take care of that customer by getting the loan approved within one hour,” he says. “We also have checks at closing rather than waiting for a wire. I think it makes a big difference. We let the Realtors know we can close loans within 24 to 48 hours if necessary and, if they have a borrower who was unable to work with another lender, we will walk them through with our underwriters.”
Guaranteed Rate offers a Realtor Partner Advantage Program, providing tools such as discounted virtual tours and marketing materials to agents. “And we have other value-added factors that we offer at a less-expensive price,” Ciardelli says. “It’s more of a give-back to Realtors.”
A major change from a generation ago is the frequency at which people purchase homes. Many people prior to the Boomer generation may have stayed in the same house all their lives. But people now move every five years on average, making customer service, satisfied clients, repeat business and referrals more important than ever. C.A.
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Fifth Third Bank
National Cooperative Bank
National City Mortgage Co.