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When the Dust Settles: 3 Tips for a Post-Refi World

In what was an entirely unprecedented year, 2020 ultimately saw a total of 15 reductions in mortgage rates. Starting the year at 3.67%, the average 30-year fixed mortgage rate would fall a full percentage point to 2.67% by year’s end. An avalanche of refis followed as homeowners looked to capitalize on historically low rates.

Then, starting in November, good news about COVID-19 vaccines started emerging from pharmaceutical corporations. While it will take the better part of 2021 for vaccines to circulate among enough of the U.S. population for the country to see true recovery, we’ll see a cautiously optimistic economy — and, at some point, the likely end of last year’s low rates.

As Freddie Mac’s chief economist Sam Khater recently said, “The forces behind the drop in [mortgage] rates have been shifting over the last few months, and rates are poised to rise modestly this year.”

Way back in September 2020, TMS likened the refi boom to a temporary sugar high that would inevitably slow down. While no one knows precisely when it will happen, we know rates will eventually begin to rise. And when they do, the refi avalanche will settle, and lenders will have to get back to their bread and butter — purchases.

One of the best things lenders can do right now is to think about the unthinkable, preparing for lower refi volume and margins. To help that thought process go smoothly, our industry experts at TMS have complied some great tips to help lenders prepare for this impending shift.

Tip #1: Increase Government Loan Capacity

The loan market always tilts heavily toward conventional loans — in general, it’s a good rule of thumb to estimate that about 80% of all home loans are conventional, leaving about 20% for government loans. In principle, this should remain true in 2021 — conventional loans will still get the lion’s share of the market — but some important factors will likely precipitate a moderate shift that lenders should be prepared for.

Home values grew steadily in 2020, and experts expect this to continue throughout much of 2021 — one source estimates that home values will appreciate by as much as 10.3% by November.

For many first-time homebuyers — of which there were more than usual in 2020 — higher home values means reduced affordability. First-time borrowers who might otherwise have been able to afford conventional loans just saw their target home’s price rise by tens of thousands of dollars, and, with higher DTIs and less cash on hand for down payments, find themselves only able to afford government loans. When the time comes, will you be ready for this customer?

Likewise, as new home inventory continues to dwindle, many first-time buyers will find themselves looking at homes in need of repairs and/or renovations. This leads us to Tip #1.5: Be Sure to Have Renovation Products on Your Menu. Demand will likely rise for FHA 203(K) loans, so make sure to anticipate this segment of buyers’ needs as well.

As government loans become more appealing to more prospective homebuyers, be sure you’re outfitted with the staff and capacity to handle the uptick. Down the road, first-time borrowers become second- and third-time borrowers — be there for them now, so that in the future, they think instinctively (and positively) of you.

Tip #2: Prepare to Give Quick (<24-Hour) Pre-Approvals

In lieu of pre-approvals, prospective buyers referred to banks and brokers often end up with pre-qual letters. Pre-quals are relatively inconsequential — all they mean is that a possible underwriter has done a very quick scan of the buyer’s financial situation, and pledged interest in underwriting a loan. No actual underwriting has taken place.

Instead of pre-qual letters, TMS suggests going straight for pre-approvals. Pre-approvals are much more meaningful than pre-qual letters, and mean that, assuming the borrowers financials are in good shape, lenders will be that much more likely to win the loan.

With regard to pre-approvals, speed is of the essence. Today, it’s all about instant gratification — people know what they want, and they want it now. Be prepared to give out pre-approvals within 24 hours of being approached by realtors. If you do, you’ll begin nurturing good relationship with realtors, who suddenly know that you’re an efficient, reputable lender. But if, instead, you drag your feet, realtors will become suspicious of your credibility, and start looking elsewhere.

This constitutes Tip #2.5: Don’t burn your bridges with realtors. If you say you can turn around a pre-approval within 24 hours, make it happen. Be true to your word; set expectations high and be prepared to meet them. When realtors think of you as sound and solid, that means much better relationships, and much more business over time.

TMS suggests staffing up on operational capacity to make sure pre-approvals can get done fast. When refis are no longer all the rage, you’ll have formed good relationships with realtors, who will refer you the business you need to continue to thrive.

Tip #3: Don’t Be Afraid of Manual Underwriting Options

When doing government loans, AUS approval is golden — it shepherds loans through the underwriting process with minimal overlays, and makes them very appealing to correspondent lenders. True, correspondent lenders love AUS-approved loans that meet certain FICOs. But, conversely, the idea that non-AUS, manual underwriting is uniformly unappealing to correspondent lenders is untrue.

Coming out of COVID-19, many borrowers will have taken hits to their credit scores, and suddenly become ineligible for AUS approval. Their loans will become non-AUS, manually underwritten loans, which, yes, means more work on the way to closing the loan.

But correspondent lenders like TMS do purchase manual underwriting loans — with no overlays. When faced with the prospect of moving forward with a non-AUS-approved loan, do so with the confidence that correspondent lenders will still be interested.

Be Prudent & Agile in 2021

As TMS anticipated, 2021 should see a steady rise in mortgage rates, and consequently, the refi faucet slowly turn off. The purchase market will once again be lenders’ bread and butter, although with slightly modified, post-COVID conditions. Expect a rise in government loans (and the various repair/renovation products that accompany them); be prepared to give out sub-24-hour pre-approvals, keeping your realtor relationships strong in the process; and embrace non-AUS underwriting options — correspondent lenders like TMS understand the situation and know that non-AUS is not a scarlet letter.

A little forward-thinking will go a long way toward making 2021 a more comfortable pivot back to purchases.

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February 2, 2021