Increased competition among lenders
Whenever business is good in one sector, more companies jump in to get a piece of the action. Mortgage demand has increased to unprecedented levels, similar to what this industry experienced in the years leading up to the financial crisis of 2008. In 2020, lenders broke a record in loan originations, totaling $3.83 trillion. This is the highest loan volume ever reported and up almost three times from 2019 (before COVID-19 hit).
Naturally, more lenders jumped into the pool with business being so good. Lots of competition, while good for consumers by helping to keep prices in check, is usually not so good for business. Rocket Mortgage, for example, reported its numbers to be down for the second quarter of 2021. And some nonbank lenders are experiencing double-digit losses.
Rising interest rates
The Federal Reserve lowered interest rates to boost economic activity in response to COVID-19. This led to mortgage interest rates falling below 3% in 2020. The low rates nudged many potential homebuyers who were on the fence into taking the plunge to homeownership. Plus, with rates being so low, people who already had a mortgage didn’t hesitate to refinance.
All this activity was proving to be overwhelming to mortgage lenders, and it was taking some lenders months to process loans. Partly to stem the tide and partly because business was booming, mortgage lenders started to raise the rates they charged customers and, by doing so, were making good money.
For 2021, although mortgage activity is declining, there will still be plenty of mortgage activity, reports the Wall Street Journal. But the activity is on a downward trajectory, and that could mean lenders again lowering the rates they charge.
Alternatives to mortgages
In our current seller’s market, bidding wars are common. It’s not unusual for Realtors to see 10 buyers vying to get one home. This is particularly true in the first-time homebuyer market. People who can pay cash typically have an advantage over buyers who need to add a financing contingency to the offer. That leads to more primary homebuyers buying a home the way many real estate investors do: using cash.
A new business model of companies that buy homes on behalf of future homeowners is gaining traction. Some examples of this are Ribbon, Knock, Accept.inc, and HomeLight. They all have slightly different business models, but they all buy homes using cash on behalf of the homeowner. Sometimes the homeowner still needs to get a traditional mortgage, but the homebuyer can sometimes get a mortgage directly from the company that buys the home (if it’s also a lender).
Rising home prices
Home prices have been rising ever since COVID-19 hit the scene, leading many people to wonder whether we’re in a housing bubble. That prevents people from buying a home and, subsequently, needing a mortgage. Low supply is also keeping people from buying. Even people who are willing and able to pay higher prices for homes are often losing out if there are multiple offers, and that also means more potential mortgagors not applying for a mortgage.
The Millionacres bottom line
Mortgage activity is down from its COVID-19 peak in 2020, but the mortgage industry is still doing quite well. Even though mortgage lenders might need to lower the rates they charge to customers, meaning each loan is less profitable, mortgage lenders should stay busy for at least the rest of the year.