In an environment where 30-year fixed mortgage rates are racing towards 8%, loan officer pipelines are thinning dramatically.
Originators who primarily served move-up buyers with high credit scores and strong down payments are struggling to find clients. But LOs who cater to first-time homebuyers’ needs – offering FHA loans and down payment assistance loans — are faring better, Michael Ullmann, producing branch leader at Movement Mortgage, explained.
“So what I am seeing is that Loan Officers, myself included, who have worked a lot with first-time buyers and have working knowledge of various programs – whether it be FHA, Home Ready/Home Possible, bond programs (DPA/grant programs). They are staying busy relative to the market,” Ullmann said.
About half of Ullmann’s production this year comes from VA and FHA loans as well as mortgages that require down payment assistance. Most years that number is closer to 30%, said Ullmann, who’s been an LO since 2012.
It was a similar story for Steve Miller, branch manager and senior loan officer at Embrace Home Loans. About 60% of his clients are first-time homebuyers, and more often than not they are using FHA loans, VA loans and DPA programs.
“Borrowers are unfortunately extending their qualifications beyond where they would have been in the past at lower interest rate environments,” Miller said. “For example, if the same borrower had a 40% DTI ratio before when rates were lower. Today, in a higher interest rate environment, they might be pushing the limit to a 45 or 50% DTI ratio to achieve the same type of home in a higher rate environment.”
Affordability is “absolutely getting crushed right now,” Miller added.
FHA loans have become a strong option for borrowers who have lower FICO scores or need to qualify with a slightly higher debt-to-income (DTI) ratio. Mandatory mortgage insurance premiums were reduced to 55 basis points (bps) for most borrowers in February and FHA loans tend to come with lower interest rates than conventional loans.
A myriad of down payment assistance programs — offered through state housing finance agencies, cities and counties — make it possible for first-time buyers to stop renting and own a home without a large down payment. Non-mortgage bank lenders have also rolled out DPA programs where the lender would cover 2% of the required 3% minimum down payment on a conventional loan.
But because of the high monthly payments borrowers shoulder with higher mortgage rates today, Miller sees about one-in-four prospective borrowers back out of a transaction.
“I wouldn’t say there’s one particular number (rate) [that triggers borrowers to back out],” Miller said. “I think that’s part of the conversations that we’re having to have more regularly in understanding what the overall financial picture of the borrower looks like and the impact the new mortgage payment will have on their finances. Ultimately it’s education and planning that is key to the success of the transaction.”
Loan officers told HousingWire that they were quoting very-well-qualified borrowers around 7.7% on Wednesday, with lesser-qualified borrowers receiving quotes north of 8%.
Mortgage rates – which loosely follow the yield on the 10-year Treasury – have the possibility of crossing over the 8% mark for even the top tier of borrowers soon.
“There are scenarios where loans have a rate of 8% or more currently. Rates for investment properties are over 8% as well as conventional loans for borrowers who don’t necessarily have the best credit are more than 8%. Is an 8% mortgage rate going to slow down business for all loan officers? My opinion is no, but it’s certainly not going to help anyone, especially those loan officers who have already been slow this year,” Ullmann said.
