Mortgage rates storm – how to weather it

Don't expect a winter rates wonderland, analyst suggests

Mortgage rates storm – how to weather it

For more than 20 years, Mortgage Capital Trading Inc. has been offering an array of tools and guidance to help its clients thrive “under any market condition,” officials boast. The current climate has thrown some wrenches into the works – causing a decline in mortgage lock volume of nearly 5% -- yet the company has emerged as a study on how best to weather the storm.

Mortgage Professional America reached out to Andrew Rhodes (pictured), senior director/head of trading at MCT, for his insights into the current market and what might lie ahead.

“From what we’re seeing with the interest rates continually increasing, the three data points everybody is talking about are housing supply, interest rates and affordability,” Rhodes said during a telephone interview. “The housing valuations haven’t come down and that’s because there’s not enough supply in the market to have that natural fall-off. You’d think with rates being higher there would be less people out there, but the volume is what it is based on.”

Something’s gotta give

One thing’s for sure, albeit hazy in predicting: “Something’s gotta break,” Rhodes said, “but I don’t know what that is.”

Like everyone involved in mortgages, MCT has not emerged unscathed from the market downturn. The company this week revealed a slight decline in mortgage lock volume in August of 4.76% over the prior month. Company officials attribute the drop to an increase in mortgage rates though the last month.

Feeling the pinch

As a business model, MCT is closely tied to rates. A hedge advisory service, the company assists lenders “of all shapes and sizes” to control their interest rates exposure conditions. Its 250-odd clients run the gamut, from those with loans between $10 million to $15 million a month to behemoths with volume of up to $1 billion a month, Rhodes said.

“We’re not immune to overall industry contractions,” Rhodes asserted. In addition to the dip in originations, the company has also experienced some client drop-off: “Lenders have been falling off due to natural attrition – getting acquired, things like that,” Rhodes said. “Our goal is to help the lender as much as possible in their endeavor to stay in business because that, in turn, keeps us in business.”

Assistance to residential mortgage lenders runs the gamut, tailored to the more autonomous, to the smaller lender needing a bit more hand-holding. “We’re always talking to them on what the can do in order to look at the current environment and how they can look at new potential or products down the road to bring in more originations,” he said. “We’re here as a support to the capital market side of a lot of the lenders. We help out with a vast array of capital market functions with all the different lenders we work with.”

That’s where that calm-and-steady approach comes in, yielding a model of calmness amid the meltdown: “The summer buying season may have provided a nice backstop to prevent lock volume from dropping further this month,” Rhodes noted. And yet Rhodes is a realist in terms of the post-summer landscape: “If we continue into this restrictive territory through the winter buying season, we could see additional contraction through the rest of 2023.”

Touting its innovation for the mortgage secondary market, the company serves the breadth of the industry, from investors to lenders. In its corporate literature, the company boasts of its technology and know-how in assessing how mortgage assets are priced, locked, protected, valued and exchanged “…offering clients the tools to thrive under any market condition.”

Nobody got the memo on higher rates

Still, nobody could have predicted the aggressive action taken by the Fed in raising the federal funds rate, which has contributed to a one-year high for mortgage rates. With nonfarm payroll jobs growing slightly higher than expected and the unemployment rate ticking up from 3.5% to 3.8%, the Fed may reload its economic ammunition to fire up more rate hikes in what’s left of this year, Rhodes said.

Those hoping for a Christmas miracle in terms of a rates reversal should instead brace themselves for a winter of discontent: “We’re going to move sideways if not slightly contact a little bit in originations for the rest of the year,” Rhodes said. “I was looking at the Fannie Mae projections, and they’re showing a slight decrease in originations as well throughout the end of the year – in Q3, $429 billion and Q4 $410 billion.”

To reiterate, no sudden turnaround should be anticipated for the remainder of this year: “Depending on what happens in the economy, I think we’re going to continue to see a slight contraction in overall originations going into the winter months,” Rhodes said. “Like the Fed keeps saying ‘it’s all data dependent.’ If something happens in the economy and rates start dropping off, then you’ll see a pickup in originations, but I don’t foresee that happening. Throughout the rest of this year, we’re definitely going to see sideways and likely more contraction.”

The key is not to panic, as Rhodes advises clients: “People we talk to understand it’s cyclical and it’s going to come back at some point in time,” Rhodes said. “But telling that to an LO is a harder conversation to have,” he said of loan officers. “They want it fixed right now, and that’s just not the way.”

To beleaguered loan officers, he advised looking into temporary not buydown products, long-term locks and the like to keep things humming across a rocky landscape. “It’s really trying to increase the purchase production out there, making sure you have good capacity to bring that type of business into your shop is definitely beneficial,” he said. But it’s easier said than done, he suggested: “Talking to LOs and telling them it’s going to be 7% for the next three to six months – they’re not stoked about that.”

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