Riddell describes clients picking shorter-term products because of a hope
With refinances largely off the table due to the current rate environment, most of the non-purchase business being done by originators right now falls into home equity lines of credit (HELOC) and home equity loans.
While HELOCs are allowing borrowers to tap into record amounts of home equity, they often come with a variable rate. The hope from borrowers is that they’ll put up with a higher variable rate for now, hoping that a rate decline in the future will allow them to refinance both first and second lien products.
But with rates continuing to climb, and the risk of more Federal Reserve rate hikes on the horizon, one executive says some borrowers may be expecting an eventual return to extremely low rates, no matter how much their broker tells them it isn’t happening.
Craig Riddell (pictured top), executive vice president at LoanLogics, said those borrowers could be setting themselves up for bigger problems in the future.
"Some of it is a consumer taking a short-term, 'temporary' product, anticipating a rate return to maybe historic levels that we may never see again," Riddell told Mortgage Professional America. "Now you've taken a short-term product because of a hope.”
Waiting on lower rates
Freddie Mac's 30-year average reached 7.28% as of Oct. 1, the highest since November 2023 and up from 6.34% a year earlier. Variable-rate lines typically reprice when the Federal Reserve moves its benchmark rate, which it raised on Sept. 16.
While the odds of an October hold seem to be increasing, CME FedWatch, which projects Fed moves based on the 30-day Fed Funds futures prices, is still betting on three more rate increases by the middle of 2027.
Riddell said that picture makes for a challenging scenario for borrowers who took a short-term product on the hope of lower rates.
"And that's just really risky even though nobody wants to necessarily take a first mortgage at (the current) rate,” he said. “You're going to take (a variable rate) thinking, ‘Well, (fixed rates) will be here in 18 months.’ And then all of a sudden in 18 months, (fixed rates) are now higher. And now you don't have the liquidity to knock the balance down. And now you're spinning a bit."
Choosing now over later
Riddell said borrowers use home equity for a mix of things, from covering deposits to renovations ahead of a sale to projects done for enjoyment.
"How much of it is ‘The roof is leaking, and I need a new roof?’" he said. "And how much of it is ‘I've maxed out my credit cards, but I would really like to go on a trip. Now I'm going to take a trip, but it's going to take me ten years to pay it off.’ Is that good financial decision-making? Every consumer can make their own mind."
Lenders that make qualified mortgage (QM) loans and those that make non-qualified mortgage (non-QM) loans draw the line in different places, he said, which matters for a broker choosing where to send a file.
"QM might say to you, look, we're going to stop you at this loan-to-value because they're looking at it going, this is really overspending," Riddell said. “The non-QM market might say, ‘Both of us, consumer and lender, we both understand that you're stretching. However, there is a market for this product, so I will help you.’
“But you do know that you're pushing yourself because if rates don't come down now, you're at 90% equity exposed. Your first is here, your second is up here. You may have to refi the whole thing, and now you're hoping that your real estate keeps going up. And it could take a big hit."
Home equity borrowing also affects the purchase side of the business, according to Riddell, because it changes what homeowners do with the homes they already own.
"I think those are the yet-to-be-determined pieces of all of this," he said. "Is the home equity improving the property so that it sells quicker at a better price? And does that break open a marketplace, can my kids get to their first home at a reasonable structure?"
If borrowers keep taking home equity, Riddell sees a scenario where homes never hit the market and are passed down through families.
"If I keep taking home equity to improve my house so that I stay there and add a new room or fix this, then this house is not going anywhere,” he said. “It's not going to be on the market. We solved one consumer's need, but we didn't open a business channel that ultimately does have to open at some point."
Stay updated with the freshest mortgage news. Get exclusive interviews, breaking news, and industry events in your inbox, and always be the first to know by subscribing to our FREE daily newsletter.
