While we’ve had many false starts of rising rates over the past few years, this time it looks for real. In the past few months, mortgage rates have risen about one-half percent. That’s not much and it’s still well below historical averages. The Fed expects to raise the Fed Funds rate four times this year. Since the Fed doesn’t directly control mortgage rates and mortgage rates move in anticipation well ahead of the actual event, some of that future increase is already baked into today’s mortgage rates.
What’s the Good News?
Having been in the mortgage business for over 40 years, I’ve been through lots of these cycles. What I’m observing now is no different than what I’ve seen in the past.
Rising rates mean: newer, innovative loan products; wider interest rate variation among lenders; lower credit standards and a shift away from big banks and toward mortgage brokers and non-banks.
Innovative Loan Products:
In the past few months I’ve seen a major trend toward alternative or non-traditional mortgage products. Instead of relying solely on income as we have for the past several years, I now see make-sense loan programs enabling borrowers to qualify based on factors such as reserves in their savings and retirement accounts; monthly cash-flow verified solely with bank statements; residual income; and; rental income of their investment property. We even have “stated income” programs again for qualified borrowers. These changes are particularly favorable toward self-employed borrowers.
Wider Rate Variation Among Lenders:
An overall reduction in the number of loans being originated leads to more competition among lenders. As lenders compete for a larger share of the smaller pool of borrowers, I’m witnessing the largest variation of rate and cost among lenders in the past several years. Some cut rates or costs more than others to attract more borrowers. As brokers, we know who has the lowest rates and costs.
Lower Credit Standards:
When lenders have more business than they can handle, they raise the qualifying standards. When they need to increase loan volume, they lower their minimum credit score requirements, raise the loan-to-value ratios and become a little more liberal in their overall qualifying criteria.
A Shift from Banks to Mortgage Brokers:
The big banks typically offer only the most conservative products and the most stringent underwriting criteria. Regulation may prevent them from offering non-traditional loan programs and from lowering their underwriting standards. As such, the momentum shifts toward mortgage brokers and non-banks that have access to a much wider array of lenders and programs, lower rates and more flexibility. Self-employed borrowers may benefit greatly.
Don’t be alarmed that these factors will lead to another meltdown like we felt nearly 10 years ago. Remember that the pendulum swung so far in the other direction that it became difficult for even well-qualified borrowers to get a loan. The new programs have many safeguards built into their guidelines. Underwriting must still make sense. A favorable credit history, good reserves, steady employment and sufficient equity are all evaluated. A borrower deficient in one area, they may be required to be more efficient in another.
As mortgage brokers, we are aware of the new products, the lenders that have the best rates and costs, and have the experience and expertise to get loans approved in a timely, efficient manner. If you have had difficulty refinancing in the past, it’s times to give it a new try while rates are still low.
By Richard Cirelli
Richard T. Cirelli is president of RTC Mortage Corporation in Laguna Beach.