As everyone is starting to realize, the economy is slowing due to the Federal Reserve tightening (raising rates), Tariff battles, and inflation creeping into our daily lives.
What should not be a surprise is we are 10+ years past the last recession. The historical average recovery period is 7 years.
In the mortgage industry we all basically get money from the same place to lend to clients. The competence and service we provide is the differentiator for clients. Unlicensed Bank Originators and Licensed Non-Bank Originators, spend 6-8 hours working with a client. The client spends 15 – 30 years with their advice. Based on the automated underwriting systems (AUS aka LP / DU), the final rate is realized after application. Clients are better served not to worry about an 1/8 or a 1/4 percent up or down. Get the best product for your needs and choose a Loan Originator that is licensed by your state and that focuses on need and not rate. Rate will be what it is based on the verified data in the mortgage application.
Mortgage companies generally compete on the basis of Competence, Service, or Rate. There is a prudent balance for new home buyers. Rates are set by secondary markets and the risk / financial dynamics of the company offering them. Unfortunately many companies are not aware of their risk profile nor the data that impacts their net margins. I call that driving with a blacked out front windshield and no speedometer.
The relationship between the rate a client gets and the rate prior to risk premium and allocation of costs to close generally has a fixed “spread” or margin. There is no special in the mortgage rate market. If you reduce rates past what natural spreads state without cutting costs or lending to higher FICO, LTV, DTI borrowers, there is a consequence down the road. Most Mortgage Originators do not care; however, their consequence is finding a new employer down the road.
In reality, as the economy slows borrowers have higher interest payments on credit cards, their job may fall prey to downsizing, etc. As a result, the risk premium required in pricing mortgage loans should go up not down. Best case, the margin stays the same but the rates will rise proportionately with the market or ignoring sustainable growth will claim its first recessionary mortgage company victim. 366 Mortgage Companies failed https://ml-implode.com/ starting in 2006 (6 years after the recovery) with the capitulation in 2008. Many of you have some of these companies on your resume. Learn from their mistakes.
At the end of every economic cycle I see groups of mortgage companies panic and artificially reduce rates to create a short-term increase in volume. If they did the analysis, they would find this does not change the trajectory of an economic cycle’s impact on mortgage volume. It’s sort of like flapping your arms while falling off a mountain. Flapping may make you feel better but gravity has its own plan that you will not alter the outcome.
My advice based on my learnings from three successful recession crossings, focus on client need and remember origination volume does not pay the bills. Revenue and Competence is the safe bridge to cross uncertain waters.
The product you put your client in is not just another closed loan, it’s the foundation for your client’s family and future.