One San Diego broker explains what the market looks like when rate-and-term refis disappear
Despite the recent headwinds, the mortgage market has not stopped moving. Buyers are still jumping into the market, and brokers are still finding deals. The borrowers walking through the door today, though, are there for very different reasons than they were a year ago.
Voluntary refinances have largely dried up for borrowers who bought in the last two years. With rates at or above where many of them purchased, there are few refi deals available.
Today’s announcement that existing home sales surged 3.2% in May to their highest level since December provided some positive news. But for one veteran broker, those who aren’t looking to buy are motivated not by rates, but by necessity.
Amir Nurani (pictured top), broker-owner at Left Coast Leaders in San Diego, California, has been originating mortgages for over two decades. He said elevated rates have made a voluntary refinance a lot trickier.
"What comes off the table is people who are going to rate and term their mortgage," Nurani told Mortgage Professional America. "Now that we get to this part of the year and rates are essentially where they're at, where they purchased, in some cases even higher than where they purchased, that market for rate and term refinance with that demographic of individuals completely disappears."
A refinance market of ‘absolute necessity’
Some borrowers have too much consumer debt and need to consolidate. Others are sitting on equity they need to access, even if it means giving up a rate they worked hard to get. Nurani said those are the people driving his pipeline right now.
"You go into a refinance market of absolute necessity," he said. "If people have too much debt, they need to consolidate it. They're dealing with the economic pressures of that. And at that point in time, yes, people are exploring everything. They are exploring the second liens. They are exploring temporary rate buy-downs. Those things are coming to the surface now with people who have an absolute need."
With inflation keeping consumer costs elevated, more borrowers are running credit card balances they cannot sustain. A second lien at today's mortgage rates still beats carrying revolving debt at typical credit card rates.
"You are going to see the pain that comes along with rising interest rates all over again," he said. "And we know what that story looks like because we've been through it in 2022 and 2023."
Don’t expect a delinquency spike
Nurani expects delinquencies to tick up, but said record home equity levels give him confidence the increase will not be severe.
"Do I think we're going to see an uptick in delinquencies? The short answer to that is yes," he said. "Do I think that they're going to come up to an alarming level? That I don't. You still have a record number of homes across the nation that are sitting on astronomical amounts of equity. Those properties are less likely to default and feel turbulent."
He is already seeing that equity drives some of the necessary transactions on his desk. Borrowers with sub-3% first mortgages are willingly resetting to rates in the 5s when their debt load leaves them no other option.
"They were in such a pickle that they had to actually do something, and it was just no longer an option for them to maintain that low rate," he said. "Before they experience delinquencies, they're going to pull the lever to pull the equity out, even if that means resetting their first mortgage."
Inflation is where Nurani sees the longer-term pressure building. According to Moody’s Analytics, the average US household has spent approximately $450 more on gas and energy since the Iran conflict began. The New York Federal Reserve has also found that the ability of US households to cover an unexpected expense is at its lowest level in a decade.
"About half of the United States is a $2,000 medical emergency away from bankruptcy," he said. "When you have these types of rising costs, eventually people will take on debt to maintain themselves through the situation, and then they can't pay the debt."
Nurani said there is still a case to make for buyers to jump into the market if they can afford the payment.
"When you buy a home, in five years, are you going to be in a better position than you are now?” Nurani said. “What about in 10 years? When you look at housing, it is not a roulette wheel. It's a long-term play. Homes appreciate 8% a year. That is exactly what they do historically, and they're going to continue to do that."
Rising prices, he said, work in a homeowner’s favor over time. When inflation pushes costs higher across the board, assets go with them.
"Even if rates are going up, what you know is if they're going up, the asset prices are going to go up as well," Nurani said. "For those that have an accurate perspective and perception of what's happening right now, it becomes a compelling reason to get into a house if you don't already have one."
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