We saw it coming, watching mortgage interest rates rise with each passing meeting of the Federal Reserve Board, but did we think that we’d be running at 7.50%? The Fed has raised interest rates a total of 5 percentage points since March of 2022. We did tap 7.00% last Fall but really only for a moment. Just to quickly recap… Freddie Mac reported an average 30-year fixed rate of 3.22% in January of 2022, leaping to 7.08% at the end of October 2022. By January of 2023 we were back around 6.48%, steadily increasing to the current 7.49% recorded early this month, marking the highest interest rate since 2000! Beyond simple volatility, this aggressive rise in mortgage rates is wreaking havoc on your origination staff, adding multiple areas of risk that if left unchecked can become increasingly problematic.
A Domino Game of Risk
The current impact of escalating interest rates actually mirrors tumbling dominos more than you’d suspect, beginning with falling refinance business. The Consumer Financial Protection Bureau just announced that refinance loans decreased by roughly 73.2% from 2021 to 2022, and overall mortgage originations dropped by around 44.1%. This puts a lot of pressure on loan originators to hunt business, creating an absence of exactness when it comes to structuring loan transactions, and beginning what can be a domino effect.
The New Homebuyer
Next, the quality of homebuyers is eroding as many qualified purchasers fall by the wayside due to rising payment pressure. As buyer scrutiny intensifies, the average homebuyer starts to look less credit worthy, with diminishing down payment funds and squeezed debt-to-income ratios, as both feel the impact of economic pressures. Also notable is the increasing population of homebuyers who have “thin” credit files or no credit at all. The latter falling into the category of “credit invisible”, representing 45 million Americans in January of this year. The lack of meaningful credit obviously influences origination risk as the industry adds new credit scoring models and new low down payment products, amidst an evolving credit landscape.
Making Loans Work
Probably the riskiest aspect of any upsurge in interest rates is how originators can feel more compelled to make a loan work. In a purchase driven market, loan applicants start the home purchase process based on a prequalification or preapproval. This is not usually a problem but as originators and processors work to get the loan ready for underwriting, if interest rates rise, things can unravel quickly. What happens next is where the real risk arises – additional documentation is requested, can the borrower come up with more money? This hustle can create layered risk. If the lender is a broker or correspondent, then shopping for alternative products becomes the game. If the applicant is denied then they are hurriedly seeking an alternative lender. All of this is transpiring while the loan processing timeline becomes abbreviated.
Don’t Stand on the Sidelines
If you’re an originator then you’re familiar with this landscape but are you watching it or checking it? There’s no more important time than now to increase your quality control and audit practices. Traditional QC and audit practices can miss the nuances that are currently in play and may also overlook your unique approach to business. That’s why QC Verify delivers a distinctive methodology to QC and audit. We’ve learned that an emphasis on client-centric service, supported by proven expertise and sophisticated technology, allows us to deliver an unparalleled QC experience for originators. We don’t want you to stand on the sidelines and we won’t stand on the sidelines checking boxes and offering mediocre reporting when our clients need so much more in today’s market.
QC Verify has seen the defects that are arising in the current origination market and we know where to look for risk. With a careful strategic coupling of industry expertise and technology employed in those areas of your business where resources are deficient or impaired, QC Verify can ensure agency regulatory requirements are met while protecting your organization from distraction and origination risk.
Find out how you can prevent defects, protect your proprietary stronghold, and stay in check during interest rate fluctuation and acceleration. It’s time to experience individualized loan quality audit, reporting, and innovation for today’s market at QCVerify.com, sophisticated technology with a human touch.