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Residential lenders in Massachusetts think a challenging, high interest rate environment will continue to weigh the mortgage market down in 2024, pushing lenders to be more resilient and creative to attract more business.

Local lenders said that they are also looking for other growth areas outside of purchase and refinance mortgages, with the expectation that anticipated interest rate cuts from the Federal Reserve will have minimal effects in bringing down mortgage pricing.

Marty Connors, president and CEO of Rollstone Bank and Trust, said the housing market remains difficult for lenders due to fewer homes  for sale. With residential lending comprising a third of the bank’s loan portfolio, he is expecting a “somewhat flat” year for mortgages, compared to 2023.

“While rates are expected to drop, they’re still higher than they have been for the past few years, and people are reluctant to borrow at high rates. The higher rates can even make it difficult for solid applicants to qualify for a conventional fixed-rate mortgage,” Connors said.

Mortgage Market Down Or Up?

A Zillow survey in July found that 80 percent of American mortgage-holders reported having a rate of less than 5 percent. Those with mortgage rates above 5 percent – only around 20 percent of respondents – were nearly twice likely to consider selling their homes than those paying a rate below 3 percent.

From a peak of 7.79 percent in the fall of 2023, Freddie Mac data shows that the average interest rate on a 30-year fixed-rate mortgage has come down to 6.66 percent as of the week ending Jan.11.

But many homeowners are too discouraged to sell and purchase a new house or refinance their current mortgage due to these still-high rates, said Jon Auger, executive vice president and chief retail lending officer at $6.2 billion-asset Middlesex Savings Bank. Only when rates reach 5 percent could there be a possible “refinance boom,” Auger said.

But according to Andrew Marquis, a Lexington-based regional vice president at Cross Country Mortgage, the mortgage market may not be all doom and gloom this year, and could present upsides. Some people may go ahead and enter the mortgage market this year before rates drop to 5 percent – a scenario where falling loan prices could lead to a surge in buyers and competition in the housing market.

Massachusetts lenders say they expect some growth in their loan portfolio, but high residential mortgage interest rates driven by Federal Reserve policy will put a damper on the mortgage market this year. iStock illustration

“In terms of credit pull volume in the past two weeks, which I look at as pre-approval applications, we are up nearly 100 percent year-over-year… which shows me that more buyers are willing to step foot into the market this year,” Marquis said, noting that 96 percent of his team’s loans originations are in Massachusetts, while the rest are scattered across New England.

Marquis, one of the top loan originators in the state in 2023 according to data from The Warren Group, publisher of Banker & Tradesman, said that A credit pull is a process where a lender requests the homebuyer’s credit scores from monitoring agencies as part of a pre-approval of a mortgage loan.

“I think there is a growing optimism on the horizon for buyers and, hopefully, sellers because the biggest challenge has been low inventory. So if more sellers are saying, ‘OK, I have a 3.5 percent [mortgage rate] and I did not want to trade up for a 7 percent, but I am willing to do it for a 5 or 6 percent,’ as that rate gap narrows, I think, hopefully, more sellers will enter the market,” Marquis said.

Lender Strategies for 2024 Mortgage Market

No matter the tides of the rate environment this year and how it affects mortgages, lenders are looking for other growth areas and are becoming more creative in their strategies to attract borrowers.

Auger, of Middlesex Savings Bank, said home equity loans may take the stage this year in banks’ portfolio of strategies as most homeowners may not be ready to sell their homes, but may need cash for renovations or other spending. Because home equity loans can move with the Fed’s rate cuts due to their short-term nature, they can have attractive borrowing rates, he said.

“If [the Fed rate cuts] happen, it will probably not have an immediate impact on the mortgage market. But it could trigger a little more in home equity lending because it’s short term lending,” Auger said. “We are staying positive on the [home equity loans] side. My best estimate is that our home equity portfolio [at Middlesex Savings] will grow by 10 percent to 15 percent in 2024, as it did this past year.”

Home equity loans are secondary mortgages where homeowners can borrow against the equity of their homes to generate cash.

When trying to find ways to offer borrowers lower interest rates, Auger said, another strategy, is to explore selling mortgages on the secondary market, which, in some instances, can help in reducing a loan’s interest rate or down payment, or even generate flexibility in a borrower’s monthly payments.

“Secondary market pricing can vary widely by transaction and customer. Fannie Mae and Freddie Mac factor things such as the borrower’s FICO score, [loan-to-value ratio], number of units, occupancy, etc. into the pricing. My pricing, as a bank, does not. Given this, whether I can save a given customer any money or not by selling their loan, and how much if so, varies by each customer. In some cases, my rate is lower, in some cases, the secondary market price is. Sometimes the difference is small, only 0.125 percent, sometimes as much as 1 percent,” Auger said.

For Rollstone Bank’s Connors, he said his bank is currently developing new loan products that will help homebuyers “qualify for mortgages more easily and give them more flexibility in payments.”

Marquis said his team is aiming to grow mortgage volume by 20 to 25 percent this year through different marketing strategies such as education events, outreach, social media marketing and constant follow-up with referrals.

“In my best estimation, 2024 will be a challenging year in the industry. Not as challenging as 2023, but still challenging overall. Rates will come down slowly, so this will introduce some refinancing business. As rates reduce, I do believe it will bring more buyer demand as well. Without a significant increase in inventory, this increased demand will make it harder for buyers to secure properties given the increased competition,” he said.

Loan Officers Kept on Standby

Compared to when the mortgage market was booming in 2020 to early 2022, offering interest rates at 3 percent to 4 percent, mortgage loan volumes and the number of loan officers have been cut in half.

Middlesex Bank’s Auger said lenders were still reducing their numbers of loan officers , but the pace has slowed since the peak of interest rates last year.

Nika Cataldo

At his bank, he said, the loan officers are being cross-trained in other departments, helping other areas such as in online banking, processing online certificates of deposit applications.

“We have the team spending a couple hours a day helping out with that extra volume [in CD applications] so that we are able to keep them busy and fill in needs and other areas of the bank. We want to keep the team intact for when that mortgage volume comes back,” Auger said.

For mortgage companies purely servicing residential loans, Cross Country Mortgage’s Marquis said that because officers are fighting for fewer deals, older loan officers may see this as an opportunity to retire, or some will only work reduced hours.

“What we might do is to furlough. Instead of working 100 percent [capacity] or 40 hours a week, we will cut [them] to 80 percent and do 32 hours. Once the market picks up in late February or March, we can get them back to full-time,” Marquis said. “These people are seasoned, trained veterans. We do not want to lay them off, and go through rehiring and retraining when it gets busy again. Right now, what we do is we say, ‘Hey, just take a little time with your family.’”