Source: firsttuesday Journal —
Consumer mortgage originations plummet — so what now?
The rapid mortgage interest rate hikes of 2022 caught homebuyers and sellers completely off balance. With prices toppling traditional sales volume and mortgage rates essentially eliminating financial justification for refinancing, mortgage loan originators (MLOs) are now left to fight over what remains of the scraps of mortgage originations to be arranged and funded.
Mortgage industry institutions forecast consumer mortgage origination volume to nosedive from $4.44 trillion in 2021 to some $2.26 trillion in 2022 — a full half the origination volume in 2022. Mortgage originations are forecasted to fall further to $2.05 trillion in 2023. This includes a (rather optimistic) reduction of:
- 3% in purchase-assist mortgage originations; and
- 24% in refinances, according to the Mortgage Bankers Association (MBA).
The natural result is fewer origination fees to go around.
In turn, mortgage industry employment — MLOs as legislated licensees — is forecasted to fall by 25%-30% over the next two years. Already, lenders are reactively cutting staff and even exiting the consumer mortgage industry altogether, according to the MBA.
firsttuesday’s forecast is a more realistic minimum 50% decline in MLO employment — eliminating those MLOs who continue to maintain the same approach to earning fees developed in the recovery since 2010.
In other words, leaning on home refinancing and single family residence (SFR) purchase-assist mortgage originations, i.e., federally controlled consumer mortgages, will leave an MLO to exit the industry — fast.
To survive a decline in consumer mortgage originations, MLOs need to gain the attention of sellers and buyers by preparing themselves to negotiate sales transactions with alternative mortgage products arranged as seller financing. This practice of carryback sales was common throughout the decades in which interest rates last rose, peaking in 1980.
Arranging the sale of carryback notes
Heading into 2023, a spiraling housing market has forced sellers to increasingly turn to seller concessions to appeal to buyers who are turned off by the convergence of high prices and rising mortgage rates.
But instead of reducing the profit from the sale of the home by accepting price concessions, paying mortgage points, or kickbacks for down payment or renovations, etc., sellers who want to maximize marketability, uphold their price profit margin, and earn interest in an installment sale can offer seller financing at an acceptable interest rate.
Seller financing is also known and advertised as:
- an installment sale;
- a credit sale;
- carryback financing; or
- an owner-will-carry (OWC) sale.
Carryback financing generally offers the buyer:
- a moderate down payment;
- a competitive interest rate on the carryback trust deed note;
- less stringent terms for qualification, no appraisal and far less documentation than imposed by institutional lenders; and
- no mortgage origination costs or lender processing hassle.
For the seller, carryback financing makes their property more marketable, primarily enabling a higher sales price.
Taxwise, the carryback trust deed note allows the seller to defer any tax bite on their profits while earning interest on the amount of deferred tax.
On closing, the rights and obligations of real estate ownership held by the seller shift by grant deed to the buyer. In the carryback sale, the seller receives a trust deed note from the buyer as their primary net proceeds from the sale, taking on the rights and obligations of a secured creditor, called a mortgage holder.
Real estate agents and brokers who are MLO endorsed are perfectly poised to counsel and assist a seller by negotiating a carryback sale. They will find themselves taking a higher number and varied types of property listings and closing more transactions — simply, they will be more competitive in the paradigm of the new market.
Thus, different streams of fee-based earnings using MLO based knowledge will offset MLO income in the down years looming for consumer mortgages as the recession of 2023 takes hold and continues to strangle. [See RPI e-book Creating Carryback Financing]
Market your MLO-related expertise — FARM — for property owners who have not listed their property for sale or whose listings have expired. Emphasize your knowledge acquired negotiating consumer mortgages and, today, expanded by learning the basics for arranging carryback paper.
Further, market your knowledge to other real estate licensees who have any type of property listed for sale, specifically agents and broker-associates who lack an MLO endorsement. Partner with them — team up — to write up purchase agreements and counteroffers with carryback financing provisions for their buyers and sellers to consider. Share in the brokerage fees on carryback sales transactions you help arrange.