Schmitt says building a loan around a future refinance is a mistake the industry keeps making
The Federal Reserve held rates steady last week, and the mortgage industry spent another news cycle debating where rates are headed next.
One of the growing concerns in the mortgage industry is borrowers struggling to afford their current payments.
A recent report from Truework said 85% of homeowners said refinancing within the next three years is important to their financial health, up from 56% last year. If that refi isn’t available, 40% say they will need a second job and 21% will dip into retirement savings.
For one senior executive in the lending space, the more important question is not where rates will be in 12 months but whether the payment a buyer signs up for today is sustainable regardless of what happens next.
Erik Schmitt (pictured top), head of consumer direct sales at Chase Home Lending, said the industry has a habit of reassuring customers that a refinance will be available when rates drop. However, when rates remain elevated, that refi keeps getting pushed back.
"The most important thing I think we do as an industry is to make sure housing is sustainable," Schmitt told Mortgage Professional America. "It's all what happened during the financial crisis. Mortgages were not necessarily affordable for some consumers, and really bad outcomes can have a prolonged impact on your credit, cost of credit, and your access to future housing."
Payments must be sustainable
Schmitt said the pattern he worries about is not unique to any one lender or loan type. It is a mindset that a rate reduction coming down the road justifies stretching into a payment that is uncomfortable today.
"The most critical thing to make sure, regardless of the rate environment, is that the current payments you sign up for are sustainable," he said. "You're not counting on a future refinance to make it affordable. You've got to make sure because it's very hard to predict that."
He said the ability to refinance is a benefit of the mortgage market, and one buyers should understand, but it is a bonus rather than a plan to build around.
"If you find the home you want and it's affordable, you can act now, and then if interest rates do fall, you can generally lower your rate into market rates relatively easily," he said. "But I would never make a decision based on the ability to refinance in the future because you've got to make sure your mortgage is long-term sustainable for you and your family."
Schmitt said borrowers also need to account for costs that are easy to underestimate at closing, with taxes and insurance rising in many markets and the full cost of homeownership extending well beyond the principal and interest payment.
"Make sure you understand all the variables of the cost of homeownership," he said. "And that's why we have experts to help you with that, as does the industry, to make sure you really understand all the inputs into that calculation."
Where the opportunities are
Schmitt said the consumer sentiment he is seeing reflects what brokers across the country have been describing, a gradual acceptance that the post-COVID rate environment was the anomaly, not the norm.
"There is always recency bias in all perceptions," he said. "Because rates were low during the financial crisis, that came up a little, then came down again during COVID, you're in a pretty prolonged cycle of historically low interest rates. Now we're in a more normalized rate."
That normalized rate environment could still provide refinance opportunities for some customers, Schmitt said. Some borrowers who originated before or during COVID may still have refinance incentives even at current rate levels, particularly those whose credit has improved or who have accumulated enough equity to eliminate mortgage insurance.
"Your conditions could have improved," he said. "You could have a loan with mortgage insurance that now, that your property has appreciated, you could either cancel the mortgage insurance or refinance into an option without it."
When refis don’t make sense, home equity loans can help homeowners in the current market. With the lock-in effect keeping many homeowners in place, Schmitt said lines of credit and closed second liens are seeing demand from borrowers who want to improve their homes or consolidate higher-rate debt without touching a first mortgage they locked in years ago.
"With a line of credit or a closed second lien, you have the ability to extract equity, leave your existing mortgage rate payment intact, and incorporate capital you need for either debt consolidation or home improvement," he said. "That's one way you potentially could take higher interest rate debt, move it to a lower interest rate debt, and take that advantage to increase customer cash flow."
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