How to Originate Mortgages in a High-Interest-Rate Environment

I was a high-numbers, top-producing loan originator back in the early 2000’s when the 30-year fixed interest rate was 9%.  So I am not paying any mind to the mortgage professionals currently complaining about and predicting how rising interest rates are going to destroy any chance for new loan originator success and decimate the mortgage industry.  

Rising interest rates are actually good for the mortgage industry.  Why? And no, I haven’t lost my mind!  For starters, when interest rates go up, mortgage lenders and brokerages immediately “thin the herd.”  Loan originators who are not pulling their weight or who are not serious about this business quickly disappear.  So how is this good?  It’s good because it results in far less competition for those who are serious about success as residential mortgage loan originators.

The refinance market may now be sleeping.  But people will always be buying homes.  And home buyers will always need to secure the financing to buy them.  The mortgage loan origination industry is not disappearing nor will it ever.  What will diminish, temporarily, are the unending droves of qualified borrowers.  With rising rates, less people will be able to demonstrate a qualified ability to repay and, as such, fewer people will be eligible for financing.  But that’s not entirely a bad thing and please don’t let it deter you.  There are still enormous droves of people who do qualify and for whom you can service.  And with less competition, you’ll have easier access to them.

To capitalize on the qualified borrower when rates rise, the successful mortgage loan originator needs to “up his or her game.”  This means that he or she must prove him or herself to be an asset of value to the qualified customer much sooner than later.  As an MLO, you must know your stuff.  You must have a thorough grasp on all mortgage products (even those that you do not offer), and you must be able to offer creative solutions.

Any time when a potential borrower engages you, there is a reason.  He or she is not trying to burn up time by talking with you.  A good loan originator quickly establishes trust, listens more than he or she speaks, strives to understand his or her customer’s needs and wants, and produces the appropriate solutions needed to satisfy those needs and wants.  The loan originator who’s thinking about what loan to put their customer into the moment that he or she hears, “I want to buy a house and I need a loan,” is a loan originator who is going to be floundering to generate new business.

Hear Don’t Listen

There’s an enormous difference between listening and hearing.  Hearing involves empathy, and empathy leads to the “yes.”  By truly understanding what your customer wants and needs and by furnishing the appropriate solution to achieving those wants and needs, the MLO has performed his or her job exceptionally well.  Customers who are heard get the right financing.  They’re extremely happy, they’re more likely to remember that loan originator’s name, and they’ll find genuine pleasure in referring new business.

Know Your Solutions

If you visited your doctor complaining of knee pain and she simply gave you aspirin without thoroughly examining you, the aspirin might help but, more likely, it would not solve your problem.  Similarly, putting someone into a 30-year, fixed rate loan when their need and want may be much better served by a different product certainly won’t lead to the kind of customer who’ll remember your name and refer new business.

What would you offer to a customer buying a home with 10% down and who wants to avoid a monthly private mortgage insurance (PMI) payment?  A VA loan?  Well, what if the customer was not eligible?  An 80/10/10 piggyback financing structure consisting of an 80% first, a 10% second, and the customer providing the 10% down payment?  That could certainly work.  But what about financed mortgage insurance?  Financed MI would probably prove more appealing and beneficial to this customer due to its many benefits.  And if, prior to reading this article, you had no idea that financed MI existed, that undoubtedly confirms that you have more to learn.

When the Pond Dries Up, Fish in Deeper Water!

It’s time to stop searching high-and-low for that coveted lender willing to finance the 540-credit-score borrower insisting on a cash-out refinance of his three-family investment property currently at a 75% loan-to-value.  If the borrower isn’t being realistic, explain why, tell them what they’ll have to do to achieve what they want, let them go, and move on to more productive activities.  The strategic management of your time is now more critical than ever.

Plainly and simply, it’s time to get creative.  If the majority of the clientele with whom you were working in a low-rate environment no longer qualify, find other customers who do.  Instead of desperately searching for more creative ways to jam that square peg into the round hole, go out and find a round peg.  Serve the community that is not affected by rising interest rates.

Become an expert in products that appeal to a more opulent clientele.  Those who are not as adversely affected by rising rates.  Set your focus on niche products or become the vacation home expert in your community.  Think about it.  Someone reaching out to you to finance a vacation home is probably not going to be considering doing so if they’re cash-strapped.

Rising Rates Actually Help

When rates are historically low, just about anyone can afford a mortgage payment.  The increase in qualification increases the demand for housing, consequently driving housing prices up.  Eventually, the point is reached where people can qualify but lack the down payment needed to secure an affordable loan for which they can qualify.  When home prices rise beyond the level of affordability, whether the 30-year rate is 1.5% or 20%, if the borrower can’t afford the house, they’re not applying for the loan.

When interest rates rise, fewer people can qualify.  With harder qualifications comes fewer buyers.  Decreasing demand eventually leads to lower housing prices and the cycle repeats.  That’s when all of those purchase customers become refinance customers as the refinance market wakes up.  So please don’t panic and lose site of the forest for the trees.  The cyclical nature of rising and falling mortgage interest rates is a perfectly normal and welcome component of the mortgage industry.

In Summary

The bottom line is that, even with rising interest rates, there is always a market needing mortgage loan origination services.  Through commitment,  creativity, flexibility, and patience, not only will you be able to survive until the rates eventually drop (as they always will), but you’ll also set yourself apart from your competition and manifest the success you desire.