The Lending Issue: Ready, Set, Close!

by Melanie Kalmar

Past performance is the best predictor of future performance. It’s a business mantra that, like a lot of things last year, got turned on its side by the global pandemic. Yet the changes that ensued created exciting opportunities for the buyers, sellers and existing homeowners fortunate enough to leverage them.

After processing a record-high volume of loans and refinances in 2020, lenders are optimistic that the 2021 market will remain strong. They expect that historically low interest rates lingering through the second quarter will continue to motivate complacent buyers, sellers and homeowners to consider their options.

The low cost of borrowing money in 2020 suddenly made vacation homes, remodels, additions and move-up properties within reach for buyers who didn’t have those choices before the pandemic disrupted our lives. Still, lenders don’t expect the volume of loans in 2021 to reach 2020 levels, because much of the demand has already been met. They do, however, anticipate high volume.

To help you best serve clients in these uncertain times, we consulted with three of the city’s top lenders to find out their expectations for 2021 and what changes caused by the pandemic are here to stay.

A flurry of activity
“The pandemic was a huge game changer,” said Tracy Flanagan, vice president for residential lending at Blueleaf Lending/Midwest Community Bank. “It was devastating, but it did bring about the lowest rates in history.” Then, the question for lenders became, “How does it impact the three types of buyers?”

Flanagan recalled first-time buyers were anxious to find out if low down payment programs were still allowable. The answer was yes, and first-time buyers who still had jobs were not held back from the market. On the other hand, repeat buyers who accepted banks’ well-intentioned offers of forbearance (pausing payment on mortgages) were now wondering if it would ruin their chances of refinancing.

“Pausing your mortgage payment doesn’t make your credit score go down, but it does show lenders you’re not making your payment,” Flanagan explained. If you choose to refinance, they’ll want to know why. In some instances, consumers took forbearance as a safety net: They could afford their mortgage at the time, but they were uncertain about the future. In case they lost their jobs, they wanted to free up money for other purchases. “It took some people out of the market for the time being and didn’t affect others,” Flanagan said.

As it stands now, payments that were paused are being tacked on to the overall principal, adding to the life of the mortgage, said Drew Boland, senior vice president of mortgage lending for Proper Rate. However, the challenges didn’t stop there.
Purchasing or refinancing a loan became more complicated for self-employed, commissioned and hourly workers who experienced an unforeseen dip in income due to furloughs or shutdowns, even if they returned to work quickly. “They still have to prove they have the capacity to pay back on a mortgage,” Flanagan said, noting it involves averaging out their income from the past two years. “They will have the burden of showing the stable or higher income over the outlier of the dip of income from 2020.”

Despite all the hiccups, people still qualified for loans, Flanagan said. They just needed more documentation to prove it. “The mortgage industry never had a pandemic before,” she said. “It didn’t have any previous underwriting guidelines. Some guidelines were being amended as the pandemic continued.”

A look back
Boland recalls rates plummeting before the pandemic and the market freezing up for a moment as the state entered quarantine in March. “We saw rates go from the mid-3%s to 5% overnight,” he said. “It was a moment in time, but basically the market was panicking due to concerns about liquidity and uncertainty.” Despite operating at 40% capacity during quarantine, the industry experienced volume at unprecedented levels, and refinancing was “through the roof,” Boland recalled. “When quarantine was lifted, the real estate market in Chicago went crazy.” Once the Fed started providing stimulus, liquidity concerns eased and rates normalized, Boland explained. “Rates are still normalized,” he said.

The pandemic pushed the spring market into summer. “That is when we saw rates truly start to plummet,” Boland said, noting the spring market lasted from mid-August to Labor Day. “The industry saw a record number of loan applications, which created operational constraints.” The industry lacked the workforce necessary to keep up with the demand, which slowed down the process and kept rates artificially inflated for a short time, Boland said. After Labor Day, the market cooled, giving lenders a chance to increase their staffs. Then rates began approaching historic lows that would reach record-breaking levels later in the year.

What to expect in 2021
“Working from home has made people aware of their space, myself included,” said Stacey Roberts, senior mortgage consultant with Wintrust Mortgage. “They may want to update, remodel or add on to their homes. That’s going to create mortgage business in terms of financing those kinds of projects.” She described the volume of refis in 2020 as “enormous.” It was a record year for Wintrust and, she believes, for other companies, as well.

Although many consumers have already capitalized on the low rates, there are a lot of mortgages that still need to be restructured, Roberts said. She even expects consumers who refinanced a year ago to go through the process again.
What makes this refi boom different from those of past years is that buyers are seeking low payments at shorter terms — 15 to 20 years — rather than stretching out the lowest payment possible over 30 years.

First-time buyers become financially savvy
Low inventory coupled with enormous competition — not just multiple offers, but multiple double-digit offers — has caused first-time buyers to wonder if they have time to look and enjoy the process or if they need to have a sense of urgency, Roberts said. It makes buyers consider getting into a property, even if it’s not perfect, to start building equity at these low rates. It also has them asking who the lender is and if the listing agent has experience meeting closing deadlines — a concern that Roberts said didn’t exist before the pandemic.

Roberts is also seeing first-time buyers opt to put less money down on a home — 5% to 10%, as opposed to 20% or more — for a shorter term because they can borrow money inexpensively. “They put less money down and invest the money they would’ve put in their home in other investment tools,” Roberts said. “It gives them an opportunity to diversify instead of tying up a lot of cash into the equity of the home.”

It’s not a new concept for repeat buyers, but it is for first-time buyers, she said. Roberts believes low interest rates will continue to cause borrowers to save money in 2021 and shift where they put their cash. However, Flanagan thinks home ownership will continue to be a leader in terms of where people want to put their money. “You can anticipate interest rate fluctuations,” she said. “Interest rates don’t move. You’ll see a trend versus a sharp hit, like in the stock market.”

In terms of purchase business, people who were on the fence may buy for the first time or upgrade to a larger home or different neighborhood, because the low rates increase their buying power, Roberts said. “If rates move down 1%, it will incentivize people to make moves in the purchase market. As people decide to move, it will also increase purchase business by helping solve the low-inventory problem for first-time buyers.”

Flanagan expects to see borrowers in 2021 purchase bigger homes than they thought they could afford for a shorter-term mortgage, refinance to obtain a lower payment or use money from cash-out refinances to purchase investment properties and second homes or pay off credit card debt — a trend she saw happen in 2020.

“When you can get a 30-year loan with a 2% in front of it,” Boland said, “it’s a pretty good motivator to get out there and buy.”

How long will the good times roll?
How long the rates last depends on the speed of economic recovery, Boland said. “If the economy and job market recover faster than expected, then rates will move up faster than expected,” he explained. Regardless, he has never seen the Fed make such a definitive declaration of low rates as they are making now. “They intend to keep rates at or near historic lows until 2023,” he said. “That said, could rates peel off a quarter or half of a point? Absolutely.” He thinks it could happen in the next 12 months, but he expects rates will remain at the bottom through the second quarter and then inch up, but not drastically.

Off to a great start
The spring market started earlier — in the beginning of January, as opposed to in the middle — and Boland has already witnessed multiple-offer situations and buyers closing within a week of preapproval.

“While I’d like to say we’re starting to get settled into a new normal and have a better handle on what’s coming next, anything can happen,” Boland said. “That’s what 2020 taught us.”

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