Erin Palmer and Chris Bennett
Erin Palmer is Founder and CEO of Blue Phoenix. He has held a number of executive leadership roles over the past 25 years. He has served as an Executive Advisor through the Teraverde Alliance to banks and mortgage bankers in these specialties. He currently serves as a board member for the Michigan Mortgage Lenders Association.
Chris Bennett is principal of mortgage industry hedge advisory firm Vice Capital Markets, now in its third decade of service to mortgage lenders of all types and sizes across the country. Chris has given numerous talks on current U.S. and global economic conditions as well as Federal Reserve and other central bank monetary policies and implications for the future direction of interest rates.
In December 2022, The Federal Reserve raised its benchmark interest rate to the highest level it’s been in 15 years – a reflection of its efforts to get inflation in check.
When mortgage interest rates rippled up to around 7%, some homebuyers put their searches on hold … but not all. According to Freddie Mac, there are still 12 million “mortgage ready” homebuyers out there. The trick is landing them before the competition does.
One tried-and-true approach is for lenders to engage their referral networks, specifically real estate professionals. And while that’s a good idea, these days it takes more than a box of doughnuts to make an impression.
One idea that could help lenders stand out in this market is a rate-lock program to give qualified borrowers more time to shop for their home. And, by design, incentivize them not to also shop elsewhere for a different rate and so that they will close with the original lender.
Some lenders’ first response is probably somewhere in the ballpark of, “We’ve tried lock-and-shop programs before, and they didn’t work.” That was then; this is now. NextGen homebuyers, those aged 21-41, accounted for 58% of all home purchase applications and 81% of first-time homebuyer applications in 2022 and likely don’t remember a time when rates were over 5%. In fact, from January 2000 to December 2022, the 30-year mortgage interest rate was an average of 5.01% and were as low as 2.65% in January 2021.
But they are smart and tech-savvy. So, lenders can show them that historically (going back to 1971), the average interest rate has been 7.76%. Knowing that, and if they’re ready financially, it’s still a good time to buy and a lock-and-shop program may help convince them to move forward. Lenders who have tried a similar program don’t have to start from scratch and may be able to dust it off for a fresh start.
The ideal lock-and-shop program is for serious borrowers, meaning those a lender has pre-approved and wants to retain as customers. These buyers are pre-approved and actively shopping for a house but haven’t found the right one yet.
One of the program structures that best balances buyer attractiveness and risk mitigation for the lender is a 90-day program and would use 90-day pricing. These programs should also be structured to be sure customers have skin in the game. They would be required to put money down upfront, say .5%, to lock both the rate and pricing. This lets lenders weed out the “looky-loos” who aren’t actually ready to buy. This aspect is mission-critical to managing risk and making a lock-and-shop program work.
Customers would also be given a defined shopping timeframe of 45 days. This lets them take more time to shop for a home and not worry about potential increases in interest rates. After all, the longer a transaction takes to close, the more risk lenders have that interest rates go down instead, and the borrower goes somewhere else. When that happens, the lender is left holding the bag.
If the buyer has a purchase agreement within 45 days, they would go through the formal application process for that property and the deal moves forward.
The specifics of a lock-and-shop program will vary depending on a lender’s size and typical loan amount. Of course, there are some suggested common elements to protect all parties:
- Having .5% of the buyer’s money upfront gives the lender some leverage. Customers who have made this payment should want to stay with that lender and have their .5% applied to their closing costs. If they now choose to close with someone else, they lose that credit.
- A 45-day non-extendable window protects the lender since interest rates are not as likely to go drastically higher or lower in that timeframe. Of course, never say never, as the recent market has demonstrated, but with a longer timeframe, say six months, this is far more likely to occur. If there isn’t a purchase agreement by day 46, the lender can no longer guarantee the interest rate or fee, but a relock policy can still get the deal done and credit the .5% back as a closing cost credit to the borrower.
- Capital markets teams should carefully monitor lock-and-shop transactions to see how they are performing with customers and make adjustments to the program that make sense for the financial institution and customers or, if necessary, limit the program to only those loan officers that are using the program responsibly and as intended.
Making the best of this market
Industry veterans will know that programs like this were popular when interest rates were 16% – 18%. During that time, a well-known Michigan bank built a brand around its version of lock-and-shop decades ago. While the current rate environment is not quite the same situation, many borrowers seem hesitant to enter the market. Having this option available may convince them that they’ll benefit by locking in their rate today and continuing to look for a home.
Having a modern lock and shop program can help soothe the nerves of jittery buyers, knowing that rate will be held for them, for a limited time, so they can focus on finding the home of their dreams. Currently, home buyers spend an average of 10 weeks searching for a home, which might lead some lenders to consider offering a short-term rate-lock extension for an additional deposit to closing costs. After all, some buyers may find their dream house on day 46 or 47 and still have considerable incentive to close with their original lender. Furthermore, if the buyer has cash up front, the seller is also more confident in ability of the buyer and the lender to complete the transaction.
Bottom line: Having an option like this is good to have in any market, and, if structured properly, can help a lender land buyers it might not have otherwise. It’s a great tool for buyer’s agents – especially those who are looking for a competitive edge. And, finally, it’s better for everyone than another box of doughnuts.