What Rising Rates Mean for Originators

A combination of historically low interest rate along with pandemic-related financial uncertainty has created a scenario ripe for refinances, which are dominating market activity, especially when it comes to jumbo loans, representing about 60% of jumbo lock volume in February, according to a non-agency secondary market data and insights report from MAXEX, a digital mortgage exchange. But, as rates slowly increase, experts say originators will have a refi void to fill with alternate products.

"As rates start to rise and we move to a more normalized rate environment, we expect that purchase business will represent more than 50% of total jumbo originations. We expect to see the current trend effectively flip as we move throughout the rest of this year as rates continue to rise," note the report's authors MAXEX's CEO Tom Pearce, President Bill Decker, and Chief Commercial Officer Greg Richardson. "Originators will need to take note of the trend away from refinances and into the purchase market. With home prices surging due to many factors, like limited inventory, lenders will need to look to the jumbo market and drive more revenue with non-agency products."

The execs also highlighted the following in a report summary:

• As originators increasingly turn toward the non-agency market for new revenue opportunities, an increasing number are benefiting from using the agencies’ Automated Underwriting System (AUS) results to simplify jumbo underwriting.
• Weighted Average Coupon (WAC) on jumbos saw a gradual decline through
  Jan. 2020 with a slight increase beginning in Feb. 2021.
• Credit trends: FICOs remain higher than historical averages as credit rules. With lower rates we continue to see loan-to-value (LTV)s diverge on refinances versus purchases.
• Loan values remain elevated compared to pre-pandemic levels, averaging close to $1 million since Aug. 2020.
• ON inflation and the Fed—Federal Reserve Chair Jerome Powell has sidestepped discussion on bond yields and says inflation is still "soft" and we are far from achieving employment goals.

In its final market/economic summary, MAXEX reports that what the industry is going through now is "the beginning of climbing out of the extremely low-rate environment and the start of some reflation of the economy."

"Rates should moderate here for a while but margins on mortgages originated will get tighter. Originators looking to fill existing capacity and support revenue will need to expand their product breadth."