Selling Mortgages in a High Rate Environment

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 

Most AI advice for loan officers is either a feature list with no compliance grounding, or a compliance memo with no growth plan. This sales manual is both — a chaptered, action-checklist playbook that follows your actual sales funnel from first contact to lifetime retention. Every recommendation accords with applicable regulatory compliance standards. 

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?

Explaining Interest Rates to Borrowers

QUESTION 

I am a new loan officer working for a mortgage broker. I graduated from college two years ago, and I still live with my parents because I can't find a decent job. A friend became a loan officer and said I should do it too. So, I got involved as a side hustle. I've been doing this for nine months. 

At this point, I have made loans for a few family members and a good friend, and I have 6 loans in the pipeline from real estate offices. My borrowers always talk about the rates. It's probably their number one question. They then ask me to explain how rates are determined. No matter how I explain it to them, they get confused, and I don't blame them. The rate is always changing and seems unpredictable. 

How should I explain interest rates to my borrowers?

Thank you! 

A Newbie Loan Officer 

OUR COMPLIANCE SOLUTION

We recommend:

LENDERS COMPLIANCE GROUP, established in 2006. It is the first and only full-service, mortgage risk management firm in the United States. It specializes in residential mortgage compliance and provides the largest suite of compliance solutions for banks, non-banks, credit unions, independent mortgage professionals, and mortgage servicers. 

BROKERS COMPLIANCE GROUP, the first full-service, mortgage risk management firm in the United States. It specializes in outsourced mortgage compliance and offers a full suite of services to mortgage brokers and mini-correspondents. 

OUR ANSWER 

For my response, I am going to assume that your loan applicant is not particularly interested in the secondary and capital markets, the factors that determine mortgage rates, or the securitization factors that affect them. 

That said, I am going to assume that you want a straightforward explanation that you can provide to your loan applicants. I hope to offer a non-technical view that they will understand while you are sitting with them to take the loan application. 

As a new loan officer, please note that when the applicant is sitting down to take the application (or interacting with you online), the point of sale is often a make-or-break moment. 

The point of sale is the most important part of loan sales because it is the primary point where trust is established between the loan officer and the applicants. If you can't explain how mortgage rates are determined, you can lose their trust in your expertise, a factor that could determine if they go with you or somebody else. 

Components that Determine Mortgage Interest Rates

There are essentially two significant components that determine mortgage interest rates: market and economic conditions, and what I'll call personal and lender-specific influences. 

Let's consider each of them. 

Market and Economic Conditions 

Several market and economic factors affect the baseline for all mortgage rates and are largely outside a borrower's control. 

Let's discuss! 

Bond Market & Treasury Yields 

Mortgage rates are directly tied to the yields on U.S. Treasury notes, particularly the 10-year Treasury yield, and mortgage-backed securities (MBS). These are considered "safe havens" for preserving financial assets. When investor demand for these safe-haven assets increases – most often during times of economic uncertainty – yields, and thus mortgage rates, tend to fall. Conversely, low demand pushes rates up. 

Now, this may confuse your borrowers. So, you should tell them that these financial instruments work inversely to interest rates because their "fixed coupon" payment becomes more or less valuable as new such financial instruments offer different rates. So, when market rates rise, existing bonds with lower fixed payments become less attractive, and their prices fall to a competitive yield; and when rates fall, existing bonds become more valuable, and their prices rise. This inverse relationship means if you sell an old bond when rates are up, you'll get less; if you sell when rates are down, you'll get more. 

Inflation 

High inflation leads lenders and investors to demand higher interest rates to offset the erosion of the purchasing power of future payments. When inflation is low, rates tend to be lower. 

An example would be when high inflation prompts the Federal Reserve to raise interest rates, making mortgages more expensive (for instance, from 3% to 6%). Hence, a buyer of a $300,000 home pays more monthly, and when investors demand higher yields on bonds to compensate for their future earnings, they buy less. At the same time, low inflation allows for lower borrowing costs, stimulating spending and investment.

Morrie the Mortgage Mavin - A Thanksgiving Moral

Audio Podcast

Substack Audio & Article

QUESTION 

On Thursday, we will celebrate Thanksgiving – everywhere else in this country but not at my company. We are still having hard times, even if the news says otherwise. Sometimes, I need some perspective on why we get up each morning and do what we do, even when times are rough. I have always felt the mortgage industry is essential to the country's economy. However, I have friends who have been laid off. I am worried about my future and theirs. 

Still, I am committed to my work. I am thrilled every time an applicant is approved for a loan. It makes my dedication all the more meaningful. I'm nearing retirement, and I want to believe that the next generation will feel as I do about the importance of our work. I want them to have hope. We may need some coaching from you about why our work is so important. 

You can be our Morrie the Mortgage Mavin! 

Please give us some hope on this Thanksgiving.

Why is the mortgage industry important to the country? 

SOLUTION 

We recommend our AI Policy Program for Mortgage Bankers. 

We are the first compliance firm in the United States to issue a policy program for Artificial Intelligence (AI) for mortgage banking entities.  

While there are myriad standards and best practices to help organizations mitigate the risks of traditional software or information-based systems, the dangers posed by AI systems are in many ways unique. With appropriate controls, AI systems can mitigate and manage compliance risks. 

RESPONSE 

I have been called many things, but never Morrie the Mortgage Mavin. I laughed heartily when I read my new title. Our column goes back almost 20 years, and it has been a labor of love. I am grateful that it is embraced by so many thousands of readers and subscribers. 

Albert Einstein once said that we should 'strive not to be a success, but rather to be of value.' The mortgage industry consists of two main markets: the primary market, where loans are originated by residential financial institutions and issued by lenders like institutional investors, banks, and credit unions, and the secondary market, where these loans are sold to investors. Professionals in this industry perform tasks like underwriting, loan origination, and loan servicing to facilitate property ownership and investment. And, these market participants strive to be of value. 

Think of it! You are part of an immense economic endeavor encompassing, among other things, the primary and secondary mortgage markets, GSEs, loan origination and underwriting, loan servicing, and specialized lenders. If that is not a major financial sector that influences broad economic conditions and government policies, I don't know what is. 

Let me put it this way:

You would like the next generation to have hope about their importance. 

I believe you need not worry about them, because their hope for the future will lead them to develop new ways to grow the mortgage market, whatever the challenges. The same human nature that moved you to seek value also moves them.

 

It’s best to appreciate what you have rather than wanting what you do not have. The future is theirs to shape!

 

As Epicurus said, 'Do not belittle what you have by desiring what you have not; remember that what you now have was once among the things you only hoped for.' (My translation.) 

If your colleagues want to know the important of the mortgage industry, tell them that it enables homeownership. Mortgages allow individuals to purchase homes without paying the full price up front, which is essential for most people to become homeowners. 

Tell them that the mortgage market and the broader housing market it supports are a major financial sector in the U.S. Activity in the housing market, such as new home sales and construction, has ripple effects throughout the economy, influencing household spending and employment. Thus, the work they do drives economic activity. 

The U.S. mortgage market, with over $13.5 trillion in debt, is the largest and most important credit market for American households, accounting for over 70% of total consumer debt.