2023: THINGS ARE IMPROVING THE QUESTION IS BY HOW MUCH?

By Mathew Schulz President/Owner at Firelight Mortgage, Board of Directors at the Colorado Mortgage Lenders Association

Goodbye, sayonara, arrivederci, hasta luego, verabschiedung, get the heck out of here 2022! I think that we are all ready to embark on a new year, get 2022 behind us and start to thrive again in 2023. Yet, how is 2023 going to look? If you listened to my forecast presentation for 2022 last January, you would know that I have no business making predictions – however in my defense, I would say that just about everyone got it wrong last year! Whether it was predicting where rates would be in 2022 or 2023, or transaction volumes, most economists missed the mark. How badly they missed the mark made things hurt even more. I got my low to mid four percent prediction range for rates from the Mortgage Bankers Association, and shockingly, we were at that point by February, not to mention topping out close to seven percent (for a standard conventional 30-year fixed purchase mortgage) in October. Fortunately for us, rates have come down to the high five to low six percent range on conventional loans and mid to high five’s on most government loans –please refer to your own mortgage advisor for more accurate rates and fees. But how and why did this happen?

Inflation

If you have been reading these articles, you may have picked up that I am very upset with inflation, she and I are not good friends presently. As a reminder, mortgage interest rates, by definition, come from mortgage-backed securities. These securities are bought and sold as bonds. Simply stated, a bond is an investment tool that is secured or guaranteed by something. Our mortgage bonds are secured by the homes the mortgages are written on. Bonds, in general, do not have a large rate of return based on being a “safer or guaranteed” investment tool. If bonds don’t make much money in the first place, when inflation is bad (the cost of goods going up substantially and quickly), those bonds make even less money. A thought that our mortgage bond investors do not like, generally yielding lower bond prices and higher interest rates.

Forecasts

The rubber meets the road where we think rates will be later this year. Below are the Mortgage Banker Association’s predictions for the next three years. Again, I want to remind you that the economist’s get it right less than they get it wrong.

Items of note are the rate predictions for the rest of this year hitting 5.2% and getting to the mid-four percent range in 2024 and 2025. While I am not a “consumer confidence index” expert, I believe that if rates can get back to the low five percent range (the fours being frosting on the cake), the sticker shock that buyers have faced recently - along with a bit of the “spoiled child” attitude around rates in the twos and threes - would go away and a lot of buyers would feel more comfortable selling their existing homes (homes that likely have financing on them that are in that two to three percent range) and buy another home. This is where upgrading homes becomes less painful than it is now, and renters may be more attracted to purchasing as well.

It is also appropriate to note several things that have made buying more appealing than it has been in the past couple of years despite interest rates. Today’s market has come back to a much more neutral buyer/seller market. One is no longer competing with 10-15 other offers. One does not need to offer tens of thousands of dollars above the asking price. One is not being asked to pay tens of thousands of dollars in appraisal gap coverage. These are benefits that bring that cost to purchase back to the reasonable range.

Preparing For 2023

My last thought to prepare you and your clients for the mortgage environment in 2023 is to discuss how banks are preparing themselves for a wave of loans that will be paid off in the first 12-24 months of their conception that were originated in 2022 and early 2023. While mortgage origination volumes have been substantially lower than standard volumes, there have been many transactions still completed since the beginning of 2022. With rates already .5-1.0% lower than their peak in October of 2022 (and rates expected to continue to fall) banks are hedging against these loans being refinanced “prematurely” into lower rate mortgages. How does a bank accomplish this? A bank will create interest rate options that highly incentivize borrowers to “buy down” their interest rate at the inception of the loan, paying discount points to get these lower rates. The incentive comes in making it incredibly affordable and enticing to buy down that rate. In a typical market, it might cost roughly .5% in discount fee to lower one’s rate by .125%. From a cost/benefit analysis perspective, this typically is not a strong value. However, in our present environment, banks are only charging .1-.3% of a discount fee to lower the rate that same .125%, making it a strong value to ultimately buy down the rate anywhere from .25-.75%. When the borrower starts their loan at an already lower than market rate, even if rates do come down, the likelihood of a borrower refinancing to lower their rate is greatly reduced. Also, by receiving discount fee at the inception of the loan, even if the loan does payoff early, the bank has collected several thousands of dollars to help offset the cost to produce that mortgage. This is a conversation that all lenders should be having with their borrowers and you as real estate agents should be advising your clients to ensure they are receiving quality mortgage advice from a skilled and experienced mortgage loan originator.

Please remember that there is always opportunity in adversity. After originating mortgages for twenty years and seeing several difficult up and down cycles, I have learned that it isn’t always the smartest or even the hardest working agent or originator that survives these cycles, it is the agent or originator that can remain positive and optimistic. A person that will find those opportunities and use them to the fullest. A person that can adapt to change and thrive. Remember, in these times, the inexperienced, the part-timers, the one transaction a year agents and originators tend to fall out of the pool. You will be the one receiving a larger piece of a smaller pie and loving every bite!

Mathew Schulz, CML, is the President of Firelight Mortgage Consultants in Greenwood Village, Colo., a mortgage company that he has owned for 15 years. He is also a board member and past president of the Colorado Mortgage Lenders Association. You can reach him at mschulz@FirelightMortgage.com. Matthew provides a regular look into the market called MMG Weekly. Click here if you’d like to subscribe.

InterestRates 30-YearFixedRateMortgage(%)3.95.35.76.66.25.65.45.25.04.74.44.43.26.65.24.44.4 10-YearTreasuryYield(%)1.92.93.13.83.53.33.23.02.92.72.52.51.53.83.02.52.5 MortgageOriginations Total1-to4-Family(Bil$)6896784803983334975175414706285955864,4362,2451,8882,2792,468