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CEO Roundtable: Mortgage Banking

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Springfield Business Journal Editor Eric Olson discusses trends in mortgage banking with deAnna Downs, director of mortgage lending with BluCurrent Credit Union; Aaron Jernigan, president of mortgage banking at OakStar Bank; Steve King, managing director of residential lending at Great Southern Bank; and Jason Lister, vice president of mortgage lending at Assemblies of God Credit Union.

Eric Olson: In one word, how would you describe the temperature of the mortgage industry right now?
DeAnna Downs: Evolving.
Steve King: Fluid.
Aaron Jernigan: Opportunistic.
Jason Lister: Uncertain. So many mixed messages with what’s going to happen with rate cuts.
Olson: We’ll stay there with the rate cuts. There’s been two Federal Reserve interest rate cuts this year. How is that affecting loan volumes? Have you noticed an uptick?
King: We all probably have. Rate cuts always fuel the refinance business and we’re in long enough that we’ve had … some 5% rates over the last couple of years and now when you drop back, we’re not at historic lows. We’re not at 3.25%, 3.125%, but at 3.5%, 3.625%. As far as the purchase market goes, I think you’ve still got the same housing shortage problem.

Rate game
Olson: What is that average interest rate?
Downs: Today, we’re running about 3.75% for a 30 [year loan]. We do a lot of home equity lines of credit, so our portfolio is just growing with that. When people come in for that, we try and suggest refinancing their first mortgage to try and get with that lower rate.
Jernigan: The real downturn in mortgage rates happened really back in the stock market sell off of the first quarter. The recent cuts, the Fed funds cut, I almost think that kind of brought rates back up just a little bit. The long-term rates – because that money is flowing out of the stock market back into the bond market when there’s a sell off. But then vice versa, when they’re cutting short-term rates, there’s more incentive to put money back in the stock market.
King: I think they already priced in the 30-year fixed rate six months ago when the Fed was talking about cutting rates. We’re already into it. The more that that happens and the greater the recession issue might come up, honestly, there’s a reverse trend on the mortgage side. We see them go back up because there’s more confidence when the Fed is reducing rates.
Jernigan: Not that we prey on bad news.
King: When my 401(k) drops, typically mortgage rates also drop.

Book of business
Olson: What percentage of your portfolios is in refinancing loans, mortgages and first-time homebuyers?
Downs: Year-to-date we’re about 64% purchase and then the 36% refi. That’s just really over the last few months when rates dropped. July and August we had a large refinance boom.
Olson: Typically, is it more like 80/20 purchase to refinance?
Downs: It just varies. I think that’s pretty average.
King: Earlier in the year, it was 75%-80% purchase. Now, it’s switched. And you know, the percentage thing is kind of a misnomer because we have more loans that are refinances. I don’t think our purchase volume has backed off at all; it’s just we’ve got a lot more refinances. The volume just increased. We’re 52% purchase, 48% refinance this month.
Jernigan: We’re 55% year-to-date. Last year, we were 70% purchase. Volume, year-to-date we’re at $64 million more in refinances this year than we were last year.
Olson: What percentage increase is that from last year?
Jernigan: Twelve percent. Purchase volume is up 6%.
Downs: Year-to-date, we’re up about $10.7 million from overall 2018. We’re projected to close probably $5 million more for the rest of the year. It’s been a good year.
Lister: It’s a record year for us, but small changes make a bigger difference for our group. We’ll close right around $82 million for the year. That’s with three and a half loan officers. We’re probably 55%-57% (refinance) versus purchase for the year. But we also have a little bit of that newer staff. The refinance piece has been big and honestly a good chunk of our refinances are just coming from loans that were done in September, October, November and December. There are a lot of people at 4.99% and we’re trying to target individuals who maybe at the time they bought their home, their home had appraised higher than purchase price. It’s not so much just the rate drop that’s helping them; they’re now able to gain some of that equity. It’s amazing from the last 10 months how much homes have appreciated value. The real savings is coming from getting into a lower mortgage insurance category for a lot of them.

Fed forecast
Olson: Do you think the rate cuts were enough, and do you anticipate more?
Jernigan: I don’t think they’re forecasted to do another cut in December from everything I read. I don’t see us getting out of control, getting into the 5% range. I remember this January was the worst January that I can recall in a long time and we were forecasting the 30-year fixed to be well over 5% by this time. It was a nice surprise.
King: Haven’t we been saying that for like 15 years? I thought, oh, they went below 6% – that was like 1997 – and I was like, oh they’ll never go below 5%. And here we sit 20 years later and we’ve been below 5%.
Jernigan: Budgeting for a manager of a mortgage operation is kind of a joke.
King: A shot in the dark.
Lister: Most of us do budgeting around this time. In discussions last year, we were anticipating three rate increases in 2019, so the complete opposite. You hear the media talking about a recession, but there’s a lot of indicators that wouldn’t do that, so it’s really kind of interesting that the consumer confidence is not as high as maybe what it should be. In terms of the economic side, I’m not sure that we need additional rate cuts for that to be the case, but I feel like any piece of negative news and the markets are just crazy. If I hear that Kim Jong Un is going to fire a rocket over Japan, I know that’s a great day to lock rates.
King: With an election year next year, more news comes out like that, that can affect us. I think we’re pretty stable for the next 12 months.
Jernigan: I think the biggest, I guess misconception, is that whenever the Fed cuts a quarter and the consumer thinks that mortgage rates drop a quarter. It’s not a correlation.
Olson: Maybe there’s some room for education. The prime rate is 1.75%-2% range. How does that translate into what I’m going to pay for a mortgage loan today?
Lister: Mortgage rates are somewhat similar to how the stock market prices in their rates. For example, whatever Apple is trading at today is really a forecast of what people think the earnings are going to be the next quarter. When those earnings come out, if they kind of hit what everyone was expecting, you’re not going to see any change. But if they blow them out, you’re going to see an improvement. And even if they were good but below what expectations were, Apple stock price is going to drop. Mortgage rates are somewhat similar.
Jernigan: From a technical standpoint, mortgage rates are based off of mortgage-backed securities. There’s an inverse relationship there with supply/demand and the rates. When people are buying mortgage bonds, that drives the price up and the yield of the rate down. That’s what really drives mortgage rates down. What causes the bond to go up is just supply and demand.
Olson: So the prime rate is the base and then there are other factors?
Jernigan: Prime really is more for home equity lines of credit and commercial loans.
Downs: It’s really not directly correlated with fixed rate mortgages.

New normal
Olson: A little over a decade ago, we were coming out of a historic financial crisis that affected your business greatly. Lending standards were revised. Some say overcorrected. Do you agree?
Lister: There are some aspects that have been – at the time they were probably sick about – one of those being allowing that borrower to obtain that final settlement figure a minimum of three business days before closing. Title companies will tell horror stories of final numbers not really getting worked out until an hour before closing, or sometimes at closing. It created a lot of mess and in some cases distrust because they felt like you were trying to pull a fast one. It’s an adjustment period. It has eased stress in many ways if you’re a planner of any kind. Having those figures out to the borrower in advance so that you can kind of work through any issues that you weren’t 100% sure about. I think maybe the pendulum swung maybe a little bit too far in some areas. There are some penalties for things that are just completely ridiculous. I would say it’s probably more good than bad.
King: We used to say this isn’t rocket science, but now anymore I kind of feel from a compliance standpoint … when you’re selling off to investors or Fannie [Mae] and Freddie [Mac] or even putting it in your portfolio for what the examiners are looking at, it goes down to the details. We didn’t have that level of detail in the early 2000s. I think a lot of that stuff has affected the consumer in a positive way because now even the loan officers have a better idea of who qualifies and should this person be in a house or not.
Jernigan: We were just way too loose. Back when you had stated income, stated asset, no (documentation), I mean truly that’s one of the biggest reasons for the crisis. Once they took all that away, … it’s pretty simple now.
Lister: We purchased newer software in the last 12-24 months to kind of help with the compliance. It was sticker shock at first when you look at it. But it’s made a big difference.
Olson: What kind of investment is that?
Lister: Compared to the system we were using, it was about a 25-fold increase in terms of expense. But in terms of peace of mind and comfort, I think it’s probably been worth everything that we’ve spent.
Olson: What does it do?
Lister: Probably the biggest piece is a built-in compliance engine, just to make sure that your documents, your disclosure timelines and some of those pieces have been met so you don’t have a buyback issue. That’s the biggest concern for any lender. You think you’ve got this thing worked out and then all of a sudden you’re putting up a 30-year fixed loan for 3.5% on your books, which nobody wants. There’s a lot of safeguards in place as you manage loan officers. The best way to keep your people compliant is by having a system that they can’t work or cheat outside of.
Jernigan: There was definitely some savings there, too. We saved, just our group and our bank, over $35,000 in paper, toner and equipment.
King: We don’t print that much anymore. You actually have to stop people from printing cause they love to print.

Online competition
Olson: What about the rise of the digital lending platforms like Quicken Loans and Rocket Loans? Are those cutting into the margins for you?
Lister: I like competing against Quicken.
Jernigan: Our margins have gone up. In Springfield and southwest Missouri, we’re almost always below the national average. And we’re always below your online lenders on – from what I found – closing costs and interest rates.
Lister: It’s a very difficult space to compete in. One, ratewise, and two, there are just a lot of really highly ethical and good loan officers in this town. I could probably name 12 to 15 people I’d feel comfortable with my own parents going to. I love it when I get a sample loan estimate from Quicken. I can charge a higher rate if I needed to and still come underneath them versus what I would just have quoted anyways. The issue that most people run into is they become interest-rate obsessed without understanding what they’re paying in terms of closing costs or fees for points. And I just think it’s unrealistic that the average borrower is going to live in their home for 15-plus years to make up that one-time expense. You just look at the rise of HGTV and Chip and Joanna Gaines. All it does is just fuels the desire for people to change.
Jernigan: We offer the same thing and probably the same software as Rocket Mortgage. The difference is if they have a question or if there’s anything at closing, we’re going to be at the closing. We’re going to be there. We still have a percentage of people who, I just had one yesterday, and it’s like, I’m not doing it online. Well, then, come in. That’s another advantage of what we represent here as local lenders versus online.
King: You say that but then I think you also have to be in the space, because if you’re not out there at all, and the question is, are they going to look you up and just do a quick app – are you going to lose a certain percentage if you’re not there at all?
Olson: Do you have a mobile lending platform?
Lister: You can apply from your mobile phone. Most of the software now, the questions are like an interview style. A Realtor may hand out our link and ... I’ve had them fill it out when they’re in the driveway. Most people are ready to make the offer before they’ve even thought about financing.
Jernigan: It is a lot faster today because of expectations. They’ll fill it out and say, “OK, well, can you give me the letter now?”
Olson: It sounded like, from each of you, volumes are up this year. What about the number of homes on the market?
King: From the folks I’ve talked to, it’s easing a little bit. If you drive around and just look a little bit, you probably see a few more signs that are sticking in the yards just a little longer. We haven’t seen the 15 people waiting at your door to look and having a contract the same day kind of a thing.
Jernigan: It’s different on a $600,000 house than it is on the $135,000 house. In the $85,000 to $175,000, there was a time in the summer in Springfield, and especially in Kansas City, where I mean as soon as it hits the market, there might be four offers within an hour.
Lister: It’s kind of creating almost like a shadow inventory. A situation where you’ve got people that would like to buy, but they’re afraid to list their home because they can’t find something they like.
Jernigan: We’ve done more bridge loans this year than the last five years combined. Somebody is using the equity in their current house and buying before they’re selling their house.
Downs: They don’t want to accept a contingency offer.
King: They know their house is going to sell or reasonably confident it’s going to sell fairly quickly. We’ve done a ton of bridge loans.

Excerpts from Features Editor Christine Temple, ctemple@sbj.net.

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