In a galaxy far, far away ... (camping in the Utah high country desert.)
A band of brothers set off for our annual camping, motorcycle-riding, fly-fishing extravaganza. These are my ‘brothers-in-arms’ ... a few close, life-long friends and a couple of amazing siblings.
The destination, the San Rafael Swell.
This is what summer is made of ... camping with your peeps, and exploring the backcountry.
I’m speeding along a desert ridge with the sun setting on my back, the wind in my face and bugs in my teeth ... surely as a result of grinning from ear-to-ear thinking about the shenanigans and great conversations from the night before.
In between playing in the wilderness, and cooking over a real fire, we all get to catch up with each other.
The night before, my friend Josh was telling us the story of the home they bought. He and his lovely wife Danielle, are self-employed. Josh and his amazing wife Danielle design and build pools with the most amazing water features you have ever seen. Rock-wall waterfalls, rock water slides, grottos, etc.
To call them ‘pool contractors’ would be a gross understatement. This couple can create a tropical paradise in your backyard. They are modern day artisans. Their projects come together in the open air. They require decent weather to be the most productive at their craft. We were lucky he could break-away for some fun.
As the story goes, Josh and Danielle happened upon an amazing piece of real estate they wanted to purchase, they had limited bandwidth to deal with the reality of buying a home during their busy season. Their company does great, and they have plenty of money in the bank. The trouble is, wet concrete won’t wait while you do your taxes, an extension is generally an option for self-employed contractors that are slammed in the spring.
So they opted for an ‘Alternative doc’ loan. They printed up a few months worth of bank statements to prove their income and wrote a check for 20% down.
I’m a nerd. I’m always filtering bits and pieces of these stories through the ‘consumer data filter’ in my head. I’m pretty good at turning it off and enjoying the present, but I’ll always recount the conversations that have relevance to the current market conditions.
He goes on to tell us he’s paying 7.75% on a $520k loan.
This is the world we live in. Josh explained it like this, “Guys, we found our dream house. We had to have it, and we secured a contract for an amazing deal and then the appraisal came in for $100k higher than the offer. We figured we’d get the deal done, and refinance the loan a few months later.” (Nearly a year has passed since.)
Josh and Danielle’s home buying adventure is not a unique case. We see this every day in our data. Tens of thousands of self-employed borrowers are accepting high-interest rate loans, just to ‘get the deal done.’ Some of them could definitely have better terms. Sorting those out is what we like to do.
Deals like these are of particular interest to me because it’s a matter of creating a sustainable mortgage marketing campaigns for our clients.
These are fully qualified loans to self-employed borrowers. They’re not exactly ‘slam dunk deals,’ and for that very reason, they’re getting done for much better margins. These loans can be done at margins that match the typical purchase shop.
If you’re going to invest in any part of your precious operational resources to processing refinance transactions, wouldn’t it make sense to also target a segment of the refi market that won’t evaporate after a 30 basis point swing in the bond market? In Josh’s case as well as tens of thousands just like him, he’s going to be able to get better terms even if bond yields are much higher than they are now.
The other segments are within the Non-QM space. There are tens of thousands of homeowners that did a cash-out refinance. The risk premium for Non-QM cash-out refinance transaction is as high as 75 basis points to the note rate, (compared to a rate/term with the same lender.) In this case, the bond market could worsen, and you could still refinance the Non-QM cash-out transactions a year later.
These are a few examples of refinancing trends that we are seeing that are structural in nature, rather than rate sensitive. Needling these opportunities out can feed a mortgage shop with perpetual refinance business at higher margins than streamlines. Join the discussion with us to dive deeper into these and other trends that we are seeing in the market today.