The Unwinding Free Fall
To the new and the old, the fresh and experienced:

Shock and Awe or Boiled Frog?

Depending on where you sit and your level of self-awareness, it’s either. Like a gold bug who trumpets that it’s a great time to buy gold and eventually is right, the doomsayers heralding the rise in rates and end of the bull bond market are eventually right.  It is never for forever, even though it feels like it; markets are cyclical and we are beginning another cycle.  Higher rates are here and will be a constant pressure underneath like a volcano ready to burst for years to come.

Historically rates are still very low and we need to continue to demonstrate that with 50 year rate charts and affordability index charts. It’s the cost of housing that really drives monthly costs and every day that too has pressure bubbling up underneath, but not the strong economic trend that we can confidently ride. Therefore a continuing education by our industry and the real estate brethren out there as to the healthy, safer terms available in today’s market is vital.

The steepness of the yield curve foretells a few things. First it confirms that something is going to change; either fixed rates will come back down dragged by the anchor of low Fed driven short term rates or, more likely, the Fed will stop printing cash overtime and allow the anchor to spring loose and allow short term to rise. For most of us we are seeing historic spreads. 15 year rates a full point below 30 year ( I can remember times of .25% spread) and 5 year arms are almost 2 points less than a 30 year in some cases.

These shorter term Fixed and ARM loans are typically the strength of the Banks, especially the smaller savings and loans and credit unions. It makes sense as it is their primary reason to exist --  match funding short term deposits to loans and invest in their local community. They don’t  worry about going public or driving growth and revenue for private equity owners. This steep curve favors them beautifully and they will take share.  But most banks hate the origination process but need the asset on their balance sheet—that’s where mortgage bankers come in. Bankers have no tolerance for losing money in these refi to purchase transitions. They hate that the top producing originators and managers can make more then them; so they tighten, restrict, and slash.

Compared to the mid-90’s when the charts last inflected like this, there are some significant changes. We have been through the wild times that have caused a lock-down of flexibility in terms and qualifications. So these products today will look very similar, mid-term ARMS with 2/2/5 caps will be the norm and 680 FICOS with 43% back ends will be expected. Wall St should be able to match this box over time and will eventually give the banks a run for it, but if you don’t have access to good bank partners you will miss out for many quarters. PLUS it’s impossible to compete with a bank that pays its people less than half and can make up whatever value for the asset they want and then price accordingly.

One thing for sure is that mortgage bankers and brokers will need to see more deals to land what they need to survive. Once the refi troughs are empty everyone will head for the same narrow fields. Too many will lose patience and quit because the work will be just too hard and their expectations too high in winning over new customers. Refis spoil you and make you soft to the types of battles you need to win going forward.

If you still have the purchase skills in your repertoire and have kept them honed to some degree, it’s time to take them out and give them the attention they need. Don’t fight or complain about it, just embrace it like an old friend. Many do not have these abilities and will be lost. If you also happen to be open to some change, the ability to be curious and  observe the new world around us and how the new generations view the home buying process will present endless new ways to implement your tools. Being comfortable with technology, especially mobile, is vital. Lots of proactive communication and ability to analyze and present with it will be needed.  Just a simple phone call or in person meeting and a handshake won’t be enough. Being and expert and mastering the details while being a great communicator through web, text, video and email too are essential. Those who are willing to kiss more frogs and do it in an efficient and smart way will survive and succeed.



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Great post as always

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