What goes down, must come up.
That will apply to mortgage rates, which have begun to climb after hitting historic lows in 2021 and are expected to continue to rise through the end of the year amid upcoming interest rate hikes.
Will this put the red-hot housing market on ice?
Probably not, say local mortgage lenders, though many expect the blistering pace of loans that has marked the last two years to cool off at least a little.
Indeed, the unique combination of low interest rates, lack of housing stock and surging demand created an inferno that had many small mortgage companies struggling to keep up.
“The doors blew off,” said Mary E. Nunes, executive vice president of retail lending for The Washington Trust Co. “The whole industry was drinking from a fire hose and just couldn’t keep up with the demand.”
Some lenders resorted to setting their rates above the market to slow the seemingly insatiable hunger for mortgage loans and refinancing, according to Stephen Tetzner, founder and managing partner for Providence-based Homestar Mortgage Inc. His residential mortgage company did not, but the demand was still the highest he had experienced in his 46 years in the business.
“Just insane,” Tetzner said.
Washington Trust and Homestar Mortgage each saw record-highs in loan activity over the last two years, driven by new deals, as well as existing borrowers who wanted to refinance at better rates.
At least one of those sources of demand, refinancing, has all but run dry at this point, Tetzner says.
There are still borrowers aplenty who likely won’t be dissuaded by rate hikes, which are still historically low. But whether these prospective homebuyers can find a house to take out a loan on is a bigger problem.
‘If inventory levels don’t pick up, loan volume is going to go down.’
STEPHEN TETZNER, Homestar Mortgage Inc. founder and managing partner
The number of houses for sale nationwide plunged to the lowest level in 40 years in 2021. In Rhode Island, inventory reached a critical shortage, with less than one month of supply up for grabs as of December 2021, according to the Rhode Island Association of Realtors. At the same time, median prices in the Ocean State were up 15% year over year, as bidders duked it out for the few properties on the market.
Without new construction to ease the supply side shortages, Tetzner fears inventory woes would put the cap on new mortgages, and company profits, in the year ahead.
“I would be five times busier right now if there were more houses,” he said. “If inventory levels don’t pick up, loan volume is going to go down.”
Already, Tetzner has started cutting costs, laying off two of his 11 workers in anticipation of decreased activity.
Other lenders were also strategizing for new sources of income amid rising interest rates and diminishing supply of homes up for sale.
While Tetzner had written off refinancing, Rick Pannone, capital markets director for Province Mortgage Associates Inc. in East Providence, still sees some hope on that horizon.
Traditional refinancing of loans for lower rates was “all but gone,” Pannone said. However, appreciation in home values could spur interest in cash-out refinance deals, in which borrowers replace their existing mortgage with a larger loan based on home equity, cashing out the difference to spend on home improvement projects or something else.
Jumbo loans – in which the mortgage exceeds federal limits set by Fannie Mae and Freddie Mac – were another avenue Province Mortgage was giving new attention amid rising property values, Pannone says.
And if you can’t change the market, why not just buy more of it?
That is part of the strategy at Citizens Bank, which is set to close two acquisitions of more than 200 branches across two banks – European-based HSBC Bank Holdings and New Jersey-based Investors Bancorp Inc. – in the coming months.
“Volume is going down, but we have these inorganic things coming that will boost the customer base we serve,” said Sonu Mittal, executive vice president and head of home mortgage for Citizens.
One option lenders won’t be considering despite stiff competition for a shrinking pool of borrowers are the infamous no-document-required, subprime loans that led to the 2008 housing market collapse.
Strict regulations on mortgage lenders imposed in the aftermath of 2008 means those types of loans are not even allowed today.
And while the rapid rise in housing prices over the last two years has triggered flashbacks that have some warning of another bubble on the brink of bursting, the circumstances now are a lot different, says Peter J. Nigro, Sarkisian chair of financial services at Bryant University.
While the 2008 housing market collapse occurred in part because of “lax” mortgage underwriting practices that allowed borrowers to take out loans they couldn’t afford to pay back, today’s housing market is your classic economic tale of too-little supply and too-much demand, Nigro says.
Nigro is not expecting any kind of major market correction, instead predicting prices will continue to rise – though perhaps not quite as fast – through the end of the year.
“This is the new market,” he said. “Rate hikes may slow the price increases but they are certainly not going to stop or reverse them.”
Nancy Lavin is a PBN staff writer. Contact her at Lavin@PBN.com.
