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When writing about the ’80s banks and passbooks, I started to see a pattern emerge concerning customers and refinance loans and rates. They were so high; then so low. I started thinking about farming. Farmers know that you can’t keep putting the same plants in the same dirt season after season. You kill your soil. You ruin the balance of nutrients. You over work the chemistry. It stunts plant growth and yields. It changes how they grow.

We have overworked our ground and it needs a rest. Housing Wire’s expert, Logan Mohtashami keeps saying we need a reset. He says in a Tweet earlier this month, “I believe some of the confusion around higher rates is that some people expected more demand destruction faster. This is why I stress higher rates need duration to work its magic.”

Crop rotation one: Homeowners stay in their homes for 30 years

Rates have been on the decrease since 1981. It was a rotation of crops back then to adjust inflation. In the early ’80s, rates were above 18% for a fixed-rate loan. Most people paid those loans for 30 years, on time. Some moved and, in that process, got better rates. Refinances were not marketed then like they are today, nor were they the norm for a homeowner.

Back then, the real estate agent found a home and the purchaser went to their bank and got a loan. This is a customer of an agent, and a customer of a bank, conducting a financial transaction and contractual purchase transaction. Most times, the bank relationship was established before the home was found. The customer bought a home to stay in for 30 years. This was viewed as a one-time transaction —  one growing season.

Multiple crops per year: Move-up buyers and refinancing

The internet, online banking and more lenders made the word “refinance” one that grew our industry. Look at just one person who purchased a single-family home in the mid-1990s —they outgrew the starter home and needed the ‘forever’ home they dreamed of.

What if that one loan turned into three to six loans? When rates were 8% in 1995, this customer bought that forever home. They went to their bank and get a 30-year fixed rate loan.

By 2004, they heard they could refinance, possibly get some cash out. Some went risky with a popular ARM loan and got a 6.5% rate. It saves them $200 a month, and feels good.

Servicers of the ARM loan start calling them in 2008 for a locked rate or fixed, lower rate. They happily accept 5.50% fixed. This saves them $150 more a month, and it is stable in this wild upside-down market.

By 2017, they figure they are overpaying when their buddies get a 4% rate. So, they go to an online bank to shop rates. Twenty people call them, and they lock in at 4% fixed rate. During COVID-19, rates were 3.25% and with nothing else to do, the homeowner can save money and refi again — rates will never be this low again, right? The servicer called one more time in June of 2021, equity was high, rates are at 2.4% and, man, you must do this one. This is as low as rates go.

Over 25 years, this one person has been a mortgage customer of six different mortgage companies, each saving him over $100 per month. Even if the homeowner moved or made a purchase in the middle of this process, one of the refis would have been a purchase. And, that purchase likely needed more refinances when rates fell.

Some of these people got second homes or investment properties. The rates have gone down over and over since the 1980s. When rates increased, they were nothing but small blips that paused a borrower. Homeowners always had a good reason to refinance.

It’s time for a reset

Now, rates are up. They rose more than the news could keep up. By the time they reported 4.5%, rates were really over 5%. Now, the homeowner will sit tight for a few years.

We need a reset and one that will continue into 2023. To the borrower, rates have always been going down. The borrower has saved hundreds per month every time. We have drained the soil and run out of places to grow our crop. The market has fixed it for us.

But the seeds are still being stored for the next crop. People are still buying homes.

The 2022 inflation market fixed it for us. Homes cost more and rates are through the roof. Refinances are less than half the business being done today. Servicers and refi shops are in a drought.

How do we clean the fields? We wait. After a year or more of these rates, things will be different. For starters, there will be fewer of us — loan officers, banks, brokers. Layoffs, consolidations, acquisitions, mergers and joint partnerships will change the landscape.

Technology, artificial intelligence (AI) and possibly cryptocurrency will change the transaction. Rates will eventually come down, opening the door to the next boom. The hundreds of thousands of homes sold in 2022 and 2023 above 5% will want to save that $200, so the cash-out refinances and ARM loans all need to reset.

The survivors

There are fewer mortgage people doing all the work. The people left are the survivors. The companies that are left are the ones who combined resources and people. The tech they have ready will be efficient and consumer friendly. The relationships will be long term and lead to long-term business partners.

Marketing and customer incubation will involve education, counseling and long-term contact well after the transaction. Processing will speed up with automated VOEs and instant verified bank statements. UW will be easier and faster with day one certainty. Virtual docs will speed up and make disclosures and closings less cumbersome. Mortgages will be easier to do and complete.

The field will be primed for the seeds to grow again. They will grow fast and plentiful. Refinances will take over the market. There will be more loans than we can efficiently process for years.

New business and old business will create a new refi boom. The builders will have more inventory. Home prices should stabilize. The new relationships with Realtors and lenders will be beneficial to all parties. We will make hay when the sun shines. We will reap what we sow, and it will be good for our business.

BJ Witkopf is a mortgage specialist with Assurance Financial.

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

To contact the author of this story: BJ Witkopf at  [email protected]

To contact the editor responsible for this story: Sarah Wheeler at [email protected]