Spring EQ's CEO says the real story isn't what the Fed does next; it's the $250 billion equity market already moving
It is Fed decision day, and the mortgage industry is doing what it always does, waiting and watching to see whether the central bank will hold, hike, or say something that moves rates.
Most expect the central bank to hold rates steady today, which combined with the conflict in the Middle East, will likely keep 30-year mortgage rates in the mid- to high-6s for the foreseeable future.
Because many homeowners are sitting on low-rate mortgages, they are turning to equity products to manage debt consolidation, large purchases, or home improvement projects.
The CEO and executive chairman of Spring EQ said the obsession with the Fed's next move is obscuring the more relevant story for brokers.
Joe Steffa (pictured top), CEO and executive chairman of Spring EQ, said the current rate environment has been exactly what the home equity market needed. He said home equity originations are already on track to reach $250 billion this year, up from $225 billion last year and roughly $200 billion two or three years earlier.
And as long as rates stay in that elevated range, that's where the action will be, Steffa said.
"If you give me that range between that 5.5% and 7.5%, I think you do a ton of home equity all day long," Steffa told Mortgage Professional America. "Do I think that we are stuck in that range because of where inflation is, because of obviously the war going on right now? Probably."
A future rate hike?
Steffa believes that if inflation remains higher, Federal Reserve chair Kevin Warsh may decide that at least one rate hike is needed. Steffa believes that sends a message to both the markets and to his critics.
"My gut feel is you probably get one hike here to calm the markets a little bit," he said. "If you look at it right now with the Fed doing nothing, you're just seeing rates drifting higher. One hike. Say, 'Yeah, we're paying attention to inflation, get that under control.' Once that gets under control, then it gives Warsh a path."
Steffa said Warsh's credibility is another factor, with the White House publicly pushing for lower rates and the new chair needing to demonstrate independence.
"It gives him a little credibility that he's not governed by Trump," he said. "Trump's in his ear, saying ‘I want lower rates to solve this housing affordability problem.’ And it gives Warsh a path. Because Warsh is by nature a dove and he would like to cut rates, but he can't do that immediately given where inflation's been running."
However, Steffa doesn’t believe that a small hike or cut is going to change the math on the current equity market.
"I don't really care if rates go up or down 25 or 50 basis points," he said. "If the 10-year Treasury was 4.5% and 30-year mortgages were 6.5%, if they went down 25, there's still so much of that trapped home equity in those lower coupons. If they went up 25 or 50, so be it, no big deal."
Tapping the equity market
The reason the Fed's incremental moves matter less than they seem is the scale of the lock-in effect, and Steffa said the payment math explains why homeowners who refinanced at 3% are staying put regardless of what the Fed announces Wednesday.
"Take your average balance in our country for that $400,000 mortgage,” he said. “You've gone from a payment of $1,700 on a 3% 30-year fixed rate mortgage to a payment that's more like $2,400 to $2,500 a month. So you're up 50% from a payment perspective."
Nationally, Steffa said home prices are roughly 50% higher than they were in 2019 and 2020, and natural housing turnover has dropped from a historical 6% to somewhere between 3% and 4%, as the lock-in effect holds people in place.
In addition, the average age of homes in the US isn’t going down. The National Association of Home Builders reported in March that the median age of owner-occupied homes climbed to 42 years old, up from 31 in 2005.
With homes continuing to age and borrowers holding a low-rate mortgage, the HELOC product is the most logical product for many homeowners, Steffa said. While the current rate is closer to the historical average, he said that doesn’t really matter to someone holding a 3% mortgage note.
"A 6.6% rate on a 30-year is a middle-groundish type number if you look back 40 and 50 years," he said. "It's just because of recency bias. A decade or so from now we'll be so far removed from that 3% type world that if we were still at 6%, everything would seem normal."
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