It's time for the mortgage industry to create meaningful options for homebuyers

If you’ve been following Inman’s coverage of layoffs in the real estate industry, you’ll know that much of it has been centered around the mortgage industry. Indeed, the story among these companies has been the same, by and large — citing market conditions and rising interest rates, these companies are no longer able to compete and are in a contraction mode.

And of course, we know that it’s true. People aren’t refinancing, which is where a lot of revenue comes from for loan providers. Why would they, since they undoubtedly already did so during the heyday of historically low, near-zero interest rates during the pandemic era?

But demand is also down for new loans, and the mortgage companies themselves bear some of the responsibility for that. That’s because they have thrown up their hands and absolved themselves of any responsibility for helping homebuyers to navigate the current market. 

Presumably, they understand the rationale behind the interest rate hikes. They saw them coming a mile away, yet they have done little or nothing to respond to them in a proactive or creative way.

That’s why I’m asking the mortgage industry to get creative and get inventive. Let’s get people moving again. Let’s dig down into your bag of tricks and dust off a tried-and-true, already available strategy: The assumable mortgage.

An assumable mortgage history lesson

Back in the day, a couple of decades ago, assumable mortgages were fairly common. They allow you to take on an existing home loan’s terms without applying for a new mortgage.

Even now, most government-backed mortgages, including VA, FHA and USDA loans, are assumable for buyers who qualify. This creates a great opportunity for agents with the MRP designation to serve their clients and puts sellers with assumable loans in the driver’s seat with a value-added proposition over the competition.

One of the drawbacks of assumable mortgages is that the down payment is often much higher because there is a need to offset the equity in the home. Because of the rise in home values over the past couple of years, this amounts to a huge amount of equity to offset for many borrowers.

However, in the case of homeowners who purchased only recently or who refinanced and pulled a lot of that new equity out of their home, an assumable mortgage might make a lot of sense. This might also be a good option for those who relocated with the expectation that they’d be able to work from home permanently, only to be recalled to in-office work environments post-pandemic.

How MLSs can support assumable mortgages

Most MLSs have a box that you can check to indicate the opportunity for an assumable loan through “cash to existing loan.” Maybe the MLSs should consider making a reminder or pop-up as agents input the MLS data to double-check with the seller and see if the loan is assumable. 

They could include the details for the interest rate and time left on the mortgage balance for buyers who might be interested in exploring assumable mortgages as an option.

The broader question is: Whose responsibility is it to teach agents about this option? The brokers? The MLSs? Or the Association of Realtors? At least let’s get the conversation started here.

How you can create marketing messaging around assumable mortgages

From the agent’s perspective, start pulling data for your geographic farm and prospecting for loans that might be assumable:

• Look for those that were put in place over the past couple of years. Market to those sellers or potential sellers, and let them know what they’re sitting on as far as a sellable home and a potentially assumable mortgage. 
• Create a poll on social media to see who bought within the past two years using an FHA, VA or USDA loan. 
• Create a postcard or letter, and send it to your geographic farm with this messaging, as well.

A broader call to action

Over the past couple of years, FHA, VA and USDA buyers were at something of a disadvantage. Many of the non-cash buyers who won in multiple-offer situations were winning with conventional financing. Because those mortgages aren’t assumable, it would take intervention by the mortgage industry to retroactively allow them to become so.

Alternatively, the lending institutions could explore other options, like a one-time, no closing cost, no loan doc refinance option at any point within the next X-number of years for those who are buying now and who’ve made their loan payments on time in the interim. It would give substance to that old “date-the-rate” saying by making it really possible for buyers to feel that if rates improve, they’d have the ability to refi at minimal cost, muss and fuss.

Government-backed loans have options in place already. VA loans have the IRRRL option (interest rate reduction refinance loan), which requires no appraisal. You only need to show that payments have been made on time for the previous 12 months, there are no income qualifications, and the funding fee is only 0.5 percent instead of the normal 3.6 percent. 

Similarly, there’s the FHA Streamline Refi, which offers many of the same perks and must reduce the interest rate by at least 0.5 percent.

Some countries are considering longer loan terms, especially because most people never pay off their loans anyway. Making the loans 40, 50, or even a 100-year loan, which is only slightly higher than interest-only, allows people to pay more if they wish or refinance when interest rates get better.

In addition, most lenders are slow to offer 7- or 10-year ARMs at any meaningful savings when this is exactly the time for these products to be rolled out.

There are also plenty of hedge funds that have been focused on single-family rentals. Why not put together a multibillion dollar fund and go into the mortgage industry for a couple of years, then sell the portfolio?

The government bears some responsibility here, too, of course, because its policies, justified or not, are causing the issue in the first place. What can it do to encourage the big banks to create more options and move things forward? What can it do to provide reassurance to buyers that they’ll have some decent options when they’re ready to buy?

I’m not a big-time banker, but as a real estate broker, I know that when the market changes, we change with it. We change the way we do business, and we change the way we advise our clients. We don’t give up, and we don’t give in. 

The mortgage industry could learn a thing or two from real estate agents and brokers. It’s time to get focused on an approach that’s built on solutions, not surrender.