“It’s going to be competitive — thin margins, little business and LOs getting out of the industry,” Dave Krichmar, banker at Legend Lending Corporation, said of the mortgage industry in 2023.
Krichmar, whose $100 million-plus origination volume in 2022 consisted of 77% purchase loans, expects LOs to be working longer hours to find referral partners, trying to close loans faster than the others and diversifying their mortgage product offerings to combat an industry that shrank by more than half this year.
Low origination volume in the industry likely translates to continued layoffs in the industry, which is why LOs, including Krichmar, plan on strengthening their own niches to look for where business is at.
Mortgage demand picked up in recent weeks due to rates declining to 6% levels and a massive backlog of homes under construction, as mentioned by HousingWire‘s lead analyst Logan Mohtashami in a recent column. It’s positive news for an industry that has recently dealt with a lackluster amount of inventory.
But there’s no sugar coating it – the industry will never look like the pandemic banner years again. At least not in the foreseeable future, unless another pandemic would create favorable conditions for the housing market. Rates will be volatile, concerns of a prolonged recession are looming and affordability constraints are weighing heavily, especially on first-time homebuyers.
In turn, LOs will be fighting for a piece of the mortgage pie with less rate-sensitive mortgage products, just as they did in 2022. Whether it be through social media, connecting with real estate agents or going back to old-fashioned ways of knocking on people’s doors, they’ll have to focus on the purchase market going into the new year.
Mortgage products expected to get love
“What tends to happen is, whenever there’s a lot of recession talk, that’s not when you generally see brands rolling out new products,” Shant Banosian, EVP at Guaranteed Rate and one of Scotsman Guide‘s top LOs, said.
“I think we’re going to head into next year with a very similar product set as we have right now,” Banosian said, adding there has been a huge demand for home equity products.
Home equity products will be the name of the game in 2023, Nick Smith, managing partner and CEO at Rice Park Capital Management, said.
Savings rates have plunged to near all-time lows and credit card utilization is going up — a clear indication that consumers are under pressure, either because of some softening in the economy or because inflation is eating into their household budgets, he explained.
“Once credit card utilization reaches its maximum, in order to maintain their lifestyles, consumers will need to monetize their assets, and the biggest one that most people own is their home,” Smith said.
Demand for non-qualified mortgages (non-QMs) — loans for borrowers who fall outside the traditional conforming loan credit box, such as self-employed borrowers, gig workers and real estate investors, is not going away any time soon, LOs said.
“In the past two years, we’ve been working hard on qualifying people, churning and burning,” Kevin Dwyer, mortgage banker at SouthState Bank, said. “Now you need to work on who will be buying in this market. If it’s affluent people, do you know how to read self-employed tax returns?”
With agency refinances almost non-existent, non-QM can help protect volume and referrals, Tom Hutchens, EVP of production at Angel Oak Mortgage Solutions, wrote in a HW column on the outlook for non-QM next year. While there are challenges of extreme volatility in the secondary markets, which lead to dramatic changes in pricing, “referral partners know they can count on you to save deals others don’t,” Hutchens noted.
“I think right now, non-QMs are pretty popular,” Thuan Nguyen, CEO of Loan Factory and the top loan originator on the Scotsman Guide for the last two years. “The newly released Freddie Mac’s Home Possible mortgage and Fannie Mae’s HomeReady mortgage to help first-time homebuyers and low income borrowers will become popular,” he added.
HomeReady and Home Possible loans are Fannie and Freddie’s flagship affordable mortgage programs, which are geared toward lower-income, lower-credit score borrowers looking to build wealth through homeownership.
Temporary rate buydowns that lower mortgage rates during the initial period will be products LOs will be pushing for, as well as diversification of mortgage products that include renovation products or construction loans.
People won’t want to sell their house that they have a great payment on with a low interest rate, Michael J. Barnes, LO and branch manager at Mann Mortgage said, noting quality renovation products or construction loans are what’s going to set most LOs apart.
Rate lock volume was down by 68% in November year over year, indicating homeowners are discouraged from moving because selling their home and buying another could mean giving up their low mortgage rate and taking on a larger monthly housing bill. This has created a “lock-in” effect across the country.
“When you have an interest rate in the high 2% level and low 3% range, which many people do now, why would you want to sell your house?” Barnes said. “Instead, they’ll be seeking to renovate their homes.”
Mortgage products, such as construction permit loans, have been gaining traction for borrowers in neighborhoods where housing activity is up, Dwyer said. In pockets of Atlanta, Dwyer sees a recovered market where $550,000 townhomes are getting multiple offers and people are shelling out for renovation projects and custom home builds for their second homes.
“People are getting bigger loans, and when families expand, homeowners are doing large renovations projects and custom home builds for their second homes,” Dwyer said. This explains why Dwyer’s been offering construction permit loans and expects to see that portion go up next year to achieve his goal of $100 million in origination volume in 2023.
Adjusting to a “new normal”
LOs are aligning their strategies to target the purchase market, as rates are not expected to drop in a meaningful way in 2023.
Nguyen plans on utilizing his proprietary platform to partner with Realtors after his refi-dependent sale volume dropped to a staggering 20% this year. He hit a record $2.47 billion in sales in 2021, but the broker isn’t even expected to hit $500 million in 2022, as more than 90% of his business came from refinances.
The new features added to Nguyen’s software for Realtors include the capabilities to send weekly market newsletters to Realtors, updates on the borrower’s application process, and referral case tracking – all efforts to increase the number of transactions that Realtors close with Nguyen.
“We have subscriptions that go out to Realtors weekly,” Nguyen said. “Out of the 27,000 transactions, we have about 8,000 Realtors that closed transactions with us. So the system will put them into a database and email them every week with market updates.”
Technology and customer service are key things that Nguyen is focusing on to claw his way back up to originating more than $1 billion in volume in the new year.
Banosian, top LO at Guaranteed Rate, plans to expand his footprint in new markets, in addition to strengthening his relationships with partners.
After his core group of clients moved to new markets — ones where his team wasn’t connected with local partners — he turned to the old-fashioned way of building relationships with the local players.
“The more transactions you do in a certain market, you get to know all the players. It’s not an easy or quick thing; it’s the long game we are in,” he said. Banosian believes 2023 will be a better business environment due to pent up demand, especially in the spring, which is when he expects to see a strong purchase market.
“Although the Fed has been raising rates, income levels across the country are up. I think the stock market will recover. So I think the purchase market is going to be strong, [although] home prices are going to remain propped up due to a lack of inventory,” Banosian said.
Despite some cautious optimism from some LOs, mortgage rates forecasts point to a conclusion that rates will not be as low as the 3% levels seen in early 2022.
The 30-year fixed rate mortgages are expected to average 6.3% in 2023, peaking to 6.5% in the first quarter and gradually coming down to end the year at 6%, according to Fannie Mae’s forecasts.
The Mortgage Bankers Association‘s projection is lower. Rates would average 5.2% in 2023, going as high as 6.2% in the first quarter before declining to 5.2% in the fourth quarter.
This also means the LOs who don’t have the tech to bring in sales or a strong partnership with Realtors will have to take on more loans with reduced compensation to make ends meet.
“Loan officers have to and are preparing [for the idea that] they may end up doing more deals for less compensation,” Krichmar said, referring to those as lead or referral comps — a term used for reduced commission file.
If LOs took one or two lead comps in the past two years, there would be more LOs doing all their loan originations — as lead comps to stay in the industry, he explained.
Home sales for 2023 are forecasted to be lower than 2022, interest rates are expected to inch up past 5% and concerns of a prolonged recession are looming. As such, LOs who have gone through the cyclical mortgage industry say the next 12 months will be a “bumpy period adjusting to a new normal.”
“We’re in a different market from six months ago. While we’ve been working hard in the last couple of years; we’ve been working on a different skill set [needed today],” Dwyer said. “You have got to have a plan and execute on that plan.”
