Refi Party May Be Over

Sun, Jun 14, 2009

Articles

If you are a mortgage loan originator, the rapid spike in mortgage interest rates over the past month should be a wake-up call.

Take a look at this chart showing BankRate.com’s 30-year-fixed mortgage index over the past month:

30 year fixed mortgage rates

Yikes!

Sure, mortgage rates have come back down over the past couple of days but keep this in perspective.

Look at the BankRate.com 30-year-fixed mortgage index over the past year:

30 year fixed mortgage rates

We are now basically back to where we were in December, before the second leg of the big mortgage rate drop kicked in.

How long will it take for the 30-year-fixed mortgage index to get back into the 6’s where we were Last October and November before the first leg of the rate drop around thanksgiving?

Who knows?

The mortgage market has been anything but stable this decade.

Here’s the BankRate.com 30-year-fixed mortgage index over the past 5 years:

30 year fixed rate mortgages

Not exactly a smooth line!

But you can see that 30-year fixed rates spent a lot more time above the 5.67% line than below it over the past 4 years.

History has also shown us that mortgage rates tend to go UP a lot faster than they come down because interest rate spikes are based on FEAR. It usually takes awhile for the financial markets to realize that the sky is NOT falling before they feel it is safe to reduce interest rates.

At the risk of sounding like an “old fogey” I was in the mortgage business back in 1994 when 30-year-fixed interest rates shot up two full percentage points in only TWO MONTHS, from 7% top 9%.

Needless to say, that killed the refi market DEAD!

To put that in perspecitve, that would be the equivalent of 30-year fixed rate mortgages jumping from 5% a month ago to 7% by the end of next month.

As you can see above, 30-year fixed mortgage interest rates at 7% are literally “off the chart” over past 5 years — but we could get there again. In fact, I think we WILL get there again … it’s just a question of WHEN.

Why am I so pessimistic about mortgage rates? Because the federal government is spending money at a historically unprecedented rate. All that money flooding the economy is almost certain to cause inflation, and higher inflation means higher mortgage rates.

The “refi boom” we have been enjoying over the past 6 months was never going to last forever, but it’s easy to forget that when the loan applications are pouring in faster than you can handle them. We’ve just had a quick reminder of just how fast a refi boom can go away.

Personally, I think that’s a good thing because I hate refi booms!

Yes, you read that right. I hate refi booms.

Why?

Because loan originators start to confuse luck with skill. It doesn’t take any skill to to refinance somebody into a 4.75% mortgage from a 6% mortgage — it’s just being in the right place at the right time (i.e. being an L.O. when mortgage rates drop). I saw this first-hand when I tried to hire loan originators in 2007 and 2008 — they didn’t have a clue how to work with clients and figure out their best mortgage financing options because all their years of “mortgage experience” consisted solely of taking loan apps during the previous refi boom.  They never had to learn the mortgage programs and do any loan consulting.

When mortgage rates go up, the ”no brainer” app takers get washed out. Only the true mortgage professionals can survive. I like that.

Another thing I hate about refi booms is that the entire mortgage industry gets bogged down with loan volume. Underwriting turnaround times go from days to weeks. Everybody is cranky. Sure, they are making lots of money, but they are also working lots of extra hours to keep up with the flood of business.

I much prefer a mortgage market where everybody else is slow but we are still busy. That way we can get our loans closed fast and banks are happy to get our business (rather than weeding out their mortgage broker lists).

So how do you stay busy in the mortgage business when the refis go away?

Focus on the PURCHASE mortgage market! Even in the current housing crash people are still buying homes.

And as I mentioned in my previous post … Realtors are hurting for business so now is the perfect time to start building relationships by helping them increase THEIR business.

As I said before, you gotta give before you can expect to receive, so bring something to the table. I know there’s money to be made in refi’s … I’m not saying to get out of that business entirely … but if you want a LONG-TERM career in the mortgage business, diversify your marketing efforts and start building up a referral base of Realtors so that you still have a good pipeline of loans if (when) mortgage rates spike up and stay there.

Last 5 posts by Steve Tytler

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