The past few years have been a roller coaster ride for the mortgage industry as interest rates have fluctuated up and down.
Mortgage rates hit an all-time low this week in the United States, with the average 30-year fixed rate mortgage rate dropping to an astounding 3.29% according to Freddie Mac, eclipsing the previous past low in 2012. Just a year ago, however, mortgage rates hovered around 4% after hitting nearly 5% at the end of 2018.
Refinancing activity booms with the ups and downs of mortgage rates. This week, Quicken Loans reported the largest volume of mortgage applications in a single day in the company’s history.
Quicken Loans is in an enviable position to profit from the latest boom in refinancing activity, this time caused by the outbreak of the coronavirus. Since launching its Rocket Mortgage technology in 2015, the company has focused much of its energy on digitizing the lending process, triggering a trend across the industry. Today, 98% of all Quicken-originated home loans use Rocket Mortgage technology at some point in the process, helping the company become the largest mortgage lender in the country in 2018.
Read more:Mortgage rates drop to all-time lows amid coronavirus concerns – that’s why Americans may not take advantage of them
MarketWatch spoke to Quicken Loans CEO Jay Farner to get an idea of where interest rates are headed now that they have hit new lows and what the future holds for the mortgage industry. The following interview was edited for clarity and length.
MarketWatch: What is your opinion on the situation with mortgage rates right now? Where do you see them going?
Jay Farner: As you probably know, the 10 year old Treasury
, at least the last time I checked this morning, it has remained below 1%, which is an all-time low. This had the same effect on mortgage-backed securities. So 30-year mortgage rates have dropped somewhat to the lower-middle range of 3% on a 30-year fixed rate, and we are now below 3% on a 15-year fixed rate. So, I would say for the vast majority of Americans, they are now in a position where they can save money by refinancing. So they should do something.
Interestingly, one of the things we are talking about a lot is that people go from a period of 30 years to a shorter period, at 20 or 15 years, since rates are so low that they can get paid today at 15-year which is similar to a payment they would have made four or five years ago in thirty years when rates were five, but they could pay their home in 15 years for much less interest.
MW: How much do you think mortgage rates will drop?
Farner: There is a supply and demand problem here. We have been very lucky for years that we spend a lot of money investing in technology. We have hired over 1,000 people in the past 12 months due to the normal growth pattern we had set up, so we are taking on this volume. But the capacity of the sector is running out very, very quickly. So you will see a reduction in [interest] rates, but probably not at the same rate because lenders are taking on additional costs to be able to handle this additional demand. So they won’t be able to keep up with the 10-year Treasury.
“Bad or good news, certainty of what will happen, I believe will cause interest rates to rise.”
I don’t see a 30-year fixed rate mortgage of less than 3%. I think we were witnessing many uncertainties, which creates volatility in the market, which is causing Treasury rates and 10-year mortgages to drop. Bad or good news, certainty of what will happen, I think it will raise interest rates. Right now, we have a complete lack of certainty, which is why we are seeing this. Even if they come out and say that maybe the coronavirus will be a little worse than we thought it could bring certainty. If it makes sense, you can save money, you have to block interest rates. Take advantage of savings. And if I were a betting man, I would say there will be higher odds rates that will increase in the coming weeks.
Read more:What does the Fed’s surprise interest rate decrease mean for mortgage rates
MW: How do you compare the situation today with low mortgage rates compared to 2012 when rates hit an all-time low?
Farner: You have a particular accident that is creating uncertainty, but the basic fundamentals are very, very strong. And so when there is a certain level of certainty about the health of our country, all the other fundamentals will go back. And so you will see things go back to anything normal, while in 2012 there were many questions about the fundamental components of our economy. And that created a longer track with lower interest rates than we could experience here.
MW: After Quicken Loans introduced Rocket Mortgage in 2015, with a promise to speed up the two-week closing process, it prompted other lenders to step up efforts to digitize and accelerate the origins of mortgages. What do you see as the next big trend on the horizon when it comes to improving the user experience for borrowers?
Farner: Mortgage is an aspect of a wider experience; is part of owning a house. Whether you’re buying one or if you already own one, integrating the other things that matter – in properly maintaining your resource and being aware of what you should or shouldn’t be doing from a financial perspective around that resource – that’s important.
It shouldn’t be just “Hey, I heard rates have gone down, I’m refinancing my house, I’m done.” No, you should be aware of what’s going on in your neighborhood. You should be aware of the equity that you are building on your property. You need to be aware of interest rate trends and take advantage of all this data. We should be able to present it to you where you can always be truly informed about the ownership of your home.
Your biggest investment is your home, so why not have more visibility on how that resource is formed and more tips for improving it? You will see that people will value consumers in this way. This is what we focus on.
Yesterday, we wrote nearly 7,000 mortgage applications in one day. It’s fantastic that we’re helping all those people. I bet that if we had to peel the onion, there would be thousands of people in there who could have saved money two years ago that they didn’t. And they lost thousands of dollars in savings because they didn’t run that business on a frequent basis. And I think it needs to change.
See also:Here are 5 questions to ask yourself before refinancing your mortgage
MW: The Office for Consumer Financial Protection has suggested that a specific mortgage debt / income ratio may no longer be required to be purchased by Fannie Mae.
and Freddie Mac
as part of a policy review set up in the wake of the 2008 financial crisis. Many lenders have said they will continue to use the report when taking out loans and Fitch Rating has raised concerns that the change could lead to riskier loans. What do you think about this?
Farner: I am not sure whether debt to income is the right thing to look at. I think it’s a good relationship, an important relationship, but what we need to start thinking is how we look at income.
‘I worry that there are fantastic people out there who should own houses that they won’t be able to do.’
Many of the guidelines still address revenue in the way it was generated 20, 30, 50 years ago. But the economy is changing. There are people who have real income, but they don’t exist in those forms. They can afford a house, but according to the guidelines, they are currently unable to do so.
We’ve partnered with Airbnb not too long. There are consumers who purchase a home with the full intention that a bedroom or cottage located on the property will be a full-time rental with Airbnb. Following standard guidelines will take years before you can possibly consider it, or in some cases you may never consider that income. So we worked with [Fannie Mae] create a program that would allow us to use that income because it was real income and we could say through historical data that the client would have had no problems renting that bedroom for years to come.
So I think that’s where we should focus. There are so many self-employed workers, there are so many people who are contractors. And if we’re not solving this, and allowing programs to use that income, I worry that there are fantastic people out there who should own houses that won’t be able to do it.