From adjustable-rate loans to buydowns, Massachusetts mortgage lenders looked for different ways to make sure buyers could still afford homes. iStock photo illustration
High interest rates have calmed residential lending. But demand still persists, and lenders say they have gotten creative in attracting buyers in the current high-rate environment.
Mortgage rates between 2 percent and 4 percent between 2019 and 2021 had people scurrying to buy houses, said David Lazowski, the president of retail sales in Eastern Massachusetts for Fairway Independent Mortgage Corp.
“In 2019, 2020, 2021, you had an incredible environment for anyone that was in the mortgage banking industry. Banks, credit unions and independent mortgage banks like us had more business than we could handle. In fact, the industry wasn’t even built to handle all that volume,” Lazowski said.
Mortgage Volume Halved Since Spring
But after several years of rosy markets, mortgage volume has been halved this year.
Data compiled by The Warren Group, publisher of Banker & Tradesman, showed that total residential purchase and refinance mortgage volume in Massachusetts went down by 45 percent, to $33.24 billion, in the first eight months of the year, compared to $61.01 billion originated in the same period last year. The number of residential mortgages decreased by 42 percent to 82,526 from 142,870 originated from January to August last year.
Particularly in the spring, residential mortgage volume in Massachusetts dropped by 56 percent to $9.88 billion in the first quarter of 2023, from $22.57 billion the same quarter last year, while the number of mortgages fell by 60 percent, to 18,875 from 46,939.
Many homeowners who might have moved to a bigger house or downsized to a smaller one in other years as their lives changed are holding on to their houses instead, contributing to the lack of supply of homes on the market. Some recent homebuyers in vacation spots are also opting to put up their properties for rent, instead of selling them as they get called back to the office.
“For example, if a person has a rate of 3 percent on their house, you don’t have a really good incentive to move out now to let’s say a larger house because that will more than double your mortgage payment. So, people are saying, ‘Hey, maybe I’ll just stay where I am,’” Lazowski said. “Because of that, the inventory of what’s for sale has diminished greatly.”
The pandemic refinance boom have also left few homeowners with mortgage rates above current averages – around 92 percent as of this summer, according to Redfin economists – cutting down the number of potential refinance customers.
Lazowski noted that because of the slowed homebuying and refinancing, the industry had too much capacity and experienced layoffs of loan officers in the country. From having 179,428 loan officers in the U.S. in 2021, lenders have reduced loan officers to 99,924 in the second quarter of 2023.
He said the number of loan officers will continue to drop as lenders realize that there are “too many” officers and support staff when there are only “half of the amount of transactions going on” in the market.
Lenders Got Innovative
In the face of affordability challenges and a lack of housing inventory, lenders and loan officers are getting creative on their mortgage offerings, helping prospective home buyers afford their house payments.
Lazkowski’s company, Fairway Independent Mortgage, adapted to market condition by offering temporary interest rate buydowns and a product it calls “cash guarantees.”
In a temporary buydown, a homebuyer can lower their interest rates for up to three years, to give them relief to get into the homes as the lender buys down the interest rate by several percentage points.
Fairway’s “cash guarantee,” on the other hand, works when a borrower shows that they qualify and can buy the home, but for some reason cannot close, the company takes a step further and buys the house for them upfront.
“That’s how confident we are that if a borrower qualifies, and we can buy the home. That’s very unique to our company,” Lazowski said.
“That’s how we dealt with this in the past spring, and that’s how we’ll deal with it in the next spring, by showing borrowers how they can afford payments and helping them get their offers accepted,” he said.
Other homebuyers have opted for adjustable-rate mortgages, where the loan’s interest rate is fixed for a certain period – whether three, five, seven or 10 years – and will adjust after.
An ARM loan is ideal for a homebuyer who plans to move out after a few years as it has a lower rate than a 30-year mortgage, Lazowski said, but not ideal for long-term buyer as there is no guarantee that interest rates will go down after the specified time period.
Nika Cataldo
“For some people, ARM makes sense. But the interest rate buydown is also a way for people to afford homes without doing the ARM product because they still have a 30-year mortgage that way. It just gives them a lower payment for a year or two and then they can refinance if rates do come lower. But ARMs are definitely being utilized as well,” he said.
So, are people still buying homes? Absolutely, said Lazowski, noting that he still sees 10 to 30 offers being made in a single property currently.
“In the entire country, there are only a million homes for sale. And there is demand for 3 million homes. As the rates went up, not everyone could afford to buy a home so that affected demand,” he said. “But there’s still enough – plenty of demand.”
