Featuring the perspectives of local lending executives:
Jeremy Collette
Executive Director of Capital Markets, Guaranteed Rate
Brian Driscoll
CEO, Senior Vice President Residential Lending, Draper & Kramer Mortgage Corp.
What will happen with interest rates in 2024? When do you expect to see any changes?
Jeremy Collette: Right now, I don’t see much relief in sight from this high-interest-rate environment. Inflation is still much higher than the Fed’s 2% target, so, unfortunately, the “higher-for-longer” theme being telegraphed by Fed officials is likely here to stay. The Fed recently moved its Fed funds rate forecast to 5.1% from 4.6% by the end of 2024, so with mortgage rates currently near 8%, maybe they get to the mid-sevens. It’s just amazing how strong the employment market and the consumer is — both major headwinds for Fed rate cuts.
Brian Driscoll: I expect to see some long-awaited relief with rates in 2024, but this will be data dependent. Now that Fed rate hikes have had time to marinate, we’re beginning to see a slight dent in inflation figures. Lower inflation tends to favor the bond market, which in turn will improve rates. However, the struggle we’re facing is a sustained strength in consumer spending and a tight labor market. This tug-of-war will result in more rate volatility, but I’m forecasting a tilt towards 6% by the latter half of 2024.
What will be the biggest challenges and opportunities for lenders in 2024?
Driscoll: The biggest challenge will be the size of the pie. With a significant percentage of homeowners currently in loans below 3.5%, refinances will be limited to “need-based” transactions, like divorce and debt consolidation. Further, the scarcity of available properties for purchase will only intensify competition among lenders.
Amidst these challenges, there are related opportunities. The exodus of over 100,000 loan originators has left many real estate agents without the support of their regular referral partners. This presents a prime opportunity for originators to forge new relationships, particularly those who carve out a niche (Non-QM, Down Payment Assistance products, etc.).
As rates drop, the lenders who stay tight with their database will be the ones who can take advantage of the next refi environment.
Colette: Generally, the biggest challenge will be continuing to operate in an extended high-rate environment. I do think there are some very interesting opportunities for nonbank lenders that can fill some of the niches left by banks exiting the lending industry due to balance sheet issues or because of the new bank capital rules.
Aside from the traditional 30-year fixed-rate mortgage, which kinds of loans do you expect to be most popular for homebuyers in 2024?
Colette: Short-term rates being higher than long-term interest rates, the so-called “inverted yield curve,” make it very challenging to originate ARMs or other short-term fixed-rate loans. I do believe there are some opportunities in the equity extraction space for products like HELOCs and reverse mortgages. Down-payment assistance, non-QM, business-purpose loans and affordable product sectors should continue to grow.
Driscoll: DSCR programs (Debt Service Coverage Ratio) will grow in popularity. These business purpose loans are designed to buy residential properties for investment-rental income. It’s basically “commercial-lite” and is a great solution for real estate investors looking to expand their portfolio. The streamlined documentation, relying on rental income from the property instead of traditional income verification methods like tax returns or W2s, makes it particularly attractive.
Recent updates to the FNMA loan level price adjustment matrix have pushed conventional rates higher for many well qualified buyers, especially non-first-time buyers earning more than area median income. FHA is a great alternative for borrowers adversely impacted by this change. On average, FHA offers lower interest rates, and HUD recently reduced the mortgage insurance premiums making the program even more competitive. My hope is that real estate agents can look beyond their bias against FHA because it is a more affordable option for many homebuyers. I expect the FHA program will continue to grind market share away from its conventional counterpart.
State housing agencies have really stepped up their game offering shelter from LLPA’s, lower mortgage insurance premiums and enhanced down payment assistance. Locally, Massachusetts housing, New Hampshire housing and Rhode Island housing will continue to play a big role in combating the affordability crisis in 2024.