If there is a bright spot in the COVID-19 crisis, it’s that historically low interest rates have made now a good time to refinance a home to save money, according to local experts.
A trio of local mortgage lenders spoke to the Business Journal in late May about the state of the current mortgage business, which they say is booming, but not because of new mortgage purchases.
Rather, the lower-than-ever interest rates — slashed by The Federal Reserve to stimulate growth during the current pandemic-related recession — are incentivizing existing homeowners to seek out a refinance.
Refinancing is when an individual (or business) works with their lender to revise the terms of an existing loan agreement, usually when the interest rate environment has changed significantly, leading to potential savings on debt repayment going forward.
People can choose to refinance into a shorter-term or a longer-term loan. The former involves long-term savings on interest but a higher monthly payment. The latter lowers monthly payments but may increase what people owe in interest in the long term. It’s an option many debtors whose household income is affected right now, or who are worried about it being affected, are electing in order to keep paying their bills, according to Dan Grzywacz, senior vice president of West Michigan operations at Mortgage 1 in Kentwood.
“I’m seeing people who are interested in going back to a 30-year and having a lower payment in case they run into some financial difficulties in the future,” Grzywacz said. “Some people are taking advantage of the 15-year, low fixed rates, but some people are like, ‘I want the security of a low payment, so bring me back to a full 30-year,’ going from a four-and-a-quarter, four-and-a-half (percent), to, let’s say, three-and-a-quarter percent and saving $150 a month.”
Grzywacz said his team members’ phones started ringing off the hook about refinancing starting when the pandemic hit.
Although he was pleasantly surprised with the number of mortgage purchase applications his office processed in April and May, he said the numbers are down compared to last year.
“People want to buy houses, but in some instances, it’s the sellers who are not wanting to show houses; they are kind of uneasy about this,” he said. “There’s still activity out there, but it’s down from this time last year. I suspect it’s going to open back up and bounce back after this virus situation is over.”
Grzywacz said loan purchase applications also are down because the lower supply of homes on the market means there is less choice, and the prices are higher because low supply tends to cause bidding wars.
He added the number of closings is down because many people applied for pre-approval before losing their jobs, and lenders won’t approve mortgages for people who are on unemployment (unless the household has another steady earner) because their situation is fluid and they are a poor risk.
It’s currently important that borrowers’ credit scores are higher than 670 if they expect to secure a home loan, too, Grzywacz said. When the pandemic hit, many lenders took programs for lower-credit score buyers off the table due to the risk factor. Even after the government came in and “helped stabilize the industry” through the CARES Act and Federal Reserve actions, some of those programs have not yet come back, he said.
Scott Setlock is senior vice president, mortgage and consumer loan department head at Mercantile Bank of Michigan.
He said the bank experienced an increase in refinance applications at the start of the pandemic in March, when interest rates “decreased meaningfully.” Applications are still higher than usual but not as high as in March.
Setlock said Mercantile experienced “record months” in March and April, and a vast majority of closings during that period were refinance transactions.
“Most clients are driven to refinance by the prospect of improving their financial position, whether it be via lower monthly payments or reducing the number of years remaining on their mortgage,” he said. “In either case, the refinance can reduce financial stress, which can be very helpful in the midst of a pandemic.”
Purchase applications at Mercantile dropped in April as a result of the stay-at-home order and inability for real estate agents to show homes, Setlock said.
“The pace of purchase applications has increased since May 7, when Realtors were able to resume operations. As a result, we are on pace for a similar number of purchase applications in May 2020 compared to May 2019,” he said. “While some prospective homebuyers will put themselves on the sidelines due to a lost job, lower income or simply lower confidence, we are encouraged by the early activity in the purchase market.”
Setlock said he believes refinances have provided a bright spot for clients “in an otherwise uncertain world.”
“Refinances can act as a stimulus for the economy, as homeowners have more discretionary funds to spend on entertainment, vacations, etc.,” he said.
He added there are still some “terrific” down payment assistance programs available for clients who qualify. “These programs can assist with up to $8,000 in down payment support,” he said.
Andrew Clarkson, vice president of regional mortgage production for Lake Michigan Credit Union, echoed what the others said about the volume of refinancing during this crisis.
“When the pandemic hit, we were experiencing that week the start of a refinance boom. We had applications pouring in at crazy rates, unlike anything we’ve ever seen,” he said.
Clarkson said interest rates have decreased every year since he started working at LMCU in 2012, and this is the all-time lowest point.
“It’s kind of like a broken record (when I tell my clients), but I’m saying it because it’s true,” he said.
Clarkson said mortgage purchases at LMCU during the time when real estate offices were shut down dropped by about 50%, and although his department is still doing transactions, he is hearing a lot of apprehension from about 10% of borrowers about whether they’ll be able to return to work or be laid off permanently as the pandemic drags on.
For prospective homebuyers who feel they can still afford to take on a mortgage, Clarkson recommends they shop around to make sure they are working with a lender whose qualification standards they meet.
He said there are three broad categories of mortgage lenders: big banks that are accountable to investors and hesitant to take on more risk; independent mortgage brokers with a revenue stream concentrated in mortgages, which are potentially being disproportionally affected by the current CARES Act requirements on mortgage payment deferrals and foreclosure forbearance; and portfolio lenders such as small banks, community banks and credit unions, which are offering the same products they always have in addition to having portfolios they don’t sell to investors, which allows them to follow baseline mortgage qualification regulations without additional “overlays.”
“There are still great products out there, but it’s not a one-size-fits-all (scenario),” he said.
Mortgage trends at local lenders
The following data is on mortgage purchase applications, purchase closings and refinances at three local lending institutions:
Lake Michigan Credit Union
Purchase closings Jan. 1-May 15, 2019: 2,518 units for $506.8 million in loan closing volume
Purchase applications Jan. 1-May 15, 2019: 4,554 units for $1.05 billion
Total applications (purchase and refinance), Jan. 1-May 15, 2019: 5,925 units for $1.35 billion*
Purchase closings Jan. 1-May 15, 2020: 2,300 units for $523.9 million in loan closing volume
Purchase applications Jan. 1-May 15, 2020: 3,917 units for $1.05 billion
Total applications (purchase, refinance) Jan. 1-May 15, 2020: 12,362 for $3.1 billion*
*Part of the reason for the much higher 2020 numbers — in addition to the number of refinances — is that home values again increased year-over-year.
February 2020 purchase and refinance revenue for the month before the pandemic: $105 million
April 2020 purchase and refinance revenue: $203 million
Total mortgage purchases YTD through April: 1,365 for $240 million in revenue
Purchase business: Down 40% YTD over last year, with 1,365 purchase closings in April 2020 compared to 2,150 as of April 2019
Mercantile Bank of Michigan
Purchase applications in April 2020 were about 50% lower than what they were in April 2019, with a “noticeable improvement” after May 7 when real estate agents were able to resume operations.
The bank is on pace for a similar number of purchase applications in May 2020 compared to May 2019.
Sources: LMCU, Mortgage 1, Mercantile Bank