Mortgage Market Update – Rates Continue to Ease

By Douglas Katz

I am back after an unintended week off, but some interesting things going on it the market now.  I am also launching a new format, so I hope that you enjoy it.

General Commentary

  • Fed action this week resulted in another 0.25% to the Federal Funds Rate.  This was much more muted action than previous increases and there is plenty written about what this will do to things like credit cards and car loans, but less about housing.  The reality is that lenders usually price these actions into their pricing days before the actual move.  We did NOT see major changes in mortgage rates and these continue to trend favorably.
  • Inflation was less, but I do highly recommend that applicants look at their household expenses.  As a lender, I do provide some recommendations but Fair Lending and other regulations prohibit me or any other lender from not lending to a qualified borrower regardless of the overall reality of the situation that a product might put a borrower into.  We only lend on a specific set of criteria.  Many of the day-to-day costs that effect true household cash flow are NOT captured.  Borrowers NEED to manage this in a volatile environment where recession looms.
  • Mortgage rates continues to crawl downward, but any move in that direction is a good one for both buyers and sellers as the former can afford more and the latter can get a better price or sell faster with more potential buyers.  Refinances are even beginning to show some signs of recovery as the buyers who got hit with the highest rates take advantage of new rates.  Some will find that they may be stuck as they need to wait until their property has met lender seasoning requirements, i.e. the length of time from purchase to refinance.  In many cases, this can be 3 or more months with 6 being most common.  We are seeing a shift to 1-year in some cases, so make sure that you know before you apply.  Also, as a lender, I do want to remind anyone who borrowed in the last few months to know what impact their deal could have on the originator.  Often times, their commission is taken from them on deals refinanced before a pre-determined amount of time.  It may “just be business” for you but a person who did a good job for you also needs to make a living.  At least call them first as they can salvage something from the two transactions.
  • Based on what you see hitting the news wires, the entire housing market is a ticking time bomb with double digit potential drops.  I do not think that is unreasonable, but inventory shortages are preventing the cycle from fully playing out.  In general, housing values are hanging tough with minor declines.
  • Anyone looking to borrower now should get their file ready.  Rates and market conditions do NOT work on your timeline.  If you are serious about getting the best rate possible, it is important to set the table and to be ready.  I all too often get interested borrowers who respond to training indicators.  This is a recipe for failure.
  • If you are buying, the above recommendation is even more critical.  Remember, prices are dropping but inventory is not increasing to meet demand.  If you want to be ready with the best offer possible when that perfect house comes along, it takes effort.
  • Sellers have gotten a bit of a reprieve due to inventory, but this maybe fleeting.  For now, there are still buyers and more will enter the market in spring, especially if rates continue to drop.  Staging and other activities like simple repairs that were laughed off in the boom are becoming necessities.  While there may be the desire to DIY or reduce costs to maximize profit in the current housing market, this will likely lose you money and opportunity.
  • Rates dropping is a huge benefit to divorcing couples, but many people delay their move until they feel completely ready or they are forced into it by the court ordered timeline.  This is bad planning and should be avoided.  They should move decisively when the time is right to maximize the benefit of the transaction.  This only happens when you work closely with a qualified lender, preferably a divorce specialist, who can provide the appropriate advice.
  • I also always recommend that the divorcing couple understand the option to sell.  Many divorcing homeowners do not want to accept that this could be a necessary move and are unprepared for the process and ignorant to their options to buy something else.  In the same manner that you may have a lender more or less on retainer, you should have a realtor who you trust to act in your best interests to provide updated information on the option to sell.  In this market especially, you MUST have an idea of what this option looks like.
  • I want to highlight a recent post that I made about the report that I provide my clients when the situation warrants it or upon request.  It is an amazing tool to deal with the complexities of divorce and buy or refinancing a home.  There is too much information to share share so I encourage you to check it out if you are splitting or you have a friend, family member or client that it would benefit.
  • Non-QM and hard money type lending is not immune to rate changes.  While the move slower, the rates have been pretty decent lately.  Often times, they are similar to if not better than the conventional alternative.  Investors should update assumptions just like residential buyers as they may find some opportunities that did not work before.
  • Guidelines are where this market is seeing the most turmoil.  It is much quieter as the market is smaller and the media tends to not cover it, but the guideline and program changes.  Any investors who have not looked into loans lately may be surprised at current leverage rates and allowable transactions.  Unlike the residential world where there is some standardization, the investor world is much different.  If you want to know more, we will be having a webinar on February 22nd where we will be providing an update as to what we at Redleg Funding are seeing.
  • I need to address short-term rental.  While a subset of the above, this is where everybody seems focused and it is profitable.  It is also falling out of favor with lenders.  Many are quietly quitting the short-term rental market and investors are getting surprised when they apply to finance or refinance their next property.
  • Flips are getting more scrutiny especially in the area of ARV.  Values are changing and lenders do not want to be underwater if they need to take the property.  Expect lower leverage rates for sure, but also expect conservative valuations from lenders.

I always end with a reminder that we have discounts available for veterans, first responders and law enforcement. Make sure that you check out the section of the page covering our commitment to those who served with discounted mediation services.  My lending partner also offers a discount as well, so if your buying or refinancing check it out.

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