QUESTION
We have been watching mortgage rates rise and rise, yet there seems to be no end in sight. I am a loan officer with a large mortgage lender. My pipeline has been shrinking due to the rate rise. This is not my first ride on the interest rate roller coaster – I got into this game in 1997 – but it seems much more uncontrollable now, more difficult to explain to my customers.
I can't look them in the eye and give them a good explanation other than what we all read in the news. This is getting serious. At our sales meeting, we tried to come up with a sales strategy to explain why rates are rising and, really important, how we originate loans in such an high rate environment.
Your name came up because you have many clients and can shed light on how lenders are grappling with the high rates that are causing borrowers to postpone financing plans. You have a broad perspective and could share some ways to help our customers move forward.
What can we tell our borrowers about why rates are rising?
SOLUTION
AI FOR MORTGAGE LOAN ORIGINATION
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ANSWER
Like you and many others, this "is not my first ride on the interest rate roller coaster." In fact, my roller coaster ride goes all the way back to the 1970s. In those days, we went from about 7% in the early 1970s to over 11% by 1979. But rates continued to rise! By the early 1980s, the rate was over 16.5% and stayed in the double digits for most of the decade. But I know of loan rates then going to over 18%. When rates came down to about 10% in 1989, we broke out the champagne!
And now? The 30-year fixed is averaging 6.58%.
As the saying goes, "context matters." I took my handy HP 12c, calculated the average rate on 30-year fixed mortgages, and laid out the possible contributing factors. I think my outline provides some perspective.
Here's my take on things. In the 1970s, the average 30-year fixed rate was 8.9%. The rate peaked in 1981 with an annualized average of 16.6%, and for the whole decade the average was 12.7%.
But context matters! In 1970, the median sales price for a single-family home was $23,900; in the 1980s, it jumped to between $46,200 and $76,000 (depending on new construction vs. existing home sales); and in the 1990s, home prices rose again to between $79,100 and $149,442.
And now? The average SFR price is hovering over $521,000.
So, to put a fine point on it, in 1980, a homebuyer facing a 15% interest rate was borrowing against a principal that was only roughly 2 to 3 times the average household income. Today, a buyer facing about a 6.6% interest rate is often borrowing a principal that is 5 to 7 times the average household income! This makes the modern monthly mortgage payment highly sensitive to even minor interest rate fluctuations.
On to your question!
You ask the compelling sales question about the current mortgage rate: how to explain to your borrowers why the rates continue to rise? I will answer with some economics and offer a few ways to keep a trusting relationship with borrowers.
The first step is to address the economic reality. No equivocation. No politics. No mincing words. Borrowers know when a sales pitch is creeping into a discussion on economic reality. In the most important long-term investment of their lives, they are sensitive to nuances. You are not a forecaster, but you can be direct and clear.
My view, which I give below, is not a forecast and should not be relied on for tax, accounting, regulatory, legal, insurance, or investment advice. I hope it helps to improve your ability to provide excellent service to your customers at the point of sale.
WHY
ARE RATES ELEVATED RIGHT NOW?
The immediate driver: bond yields, not the Fed directly.
The 30-year fixed rate rose to 6.81% last week, the highest in a year, reflecting a surge in global bond yields after Fed Chair Kevin Warsh offered little guidance on whether or when the Fed might raise rates to combat elevated inflation. Given that kind of response from the Fed Chair, it is no wonder your customers are a bit skittish.
Mortgage rates track the 10-year Treasury yield far more closely than the Fed funds rate itself, and that yield has been climbing. So what are the underlying causes?
