"You have to be nimble, and you need to have good products," official says
Historically low, pandemic-era mortgage rates have given rise to a mass lock-in of sorts among homeowners – people so tied to their low rates they’re unwilling to buy another property at prevailing costs. As they dig in their heels, what’s a lender to do?
At Pennymac, the apparent solution to the standoff is a home equity loan colloquially known at the company internally as a “closed-end second” launched a year ago. It’s another sign of the times as lenders become more creative in their product offerings to lure business amid a downshifted market.
Mortgage Professional America spoke to Scott Bridges (pictured), senior managing director, consumer direct lending, to learn more about the growing appeal of the product a little over a year since its rollout.
“We have certainly seen a very profound shift,” Bridges told MPA during a telephone interview. “Obviously, there’s really no rate and term refinancing going on whatsoever. That’s effectively gone. Borrowers have 3% mortgages or low 4s or high 2s, and often it doesn’t make sense for them to refinance their first mortgages to get cash out because their new rate is probably going to be 6.5% to 7.5% in this market.”
Closed-end second to the rescue
Enter the closed-end second. “It’s not a HELOC,” Bridges insisted. "It’s a home equity loan second mortgage. You get a lump sum. So if you want $75,000, you get $75,000. We see most of our borrowers use their funds for bill consolidation, home improvements or other needs.”
The product appears to be a hit for those guarding their low rates – rates so low they’re unlikely to be seen again. “You know it’s been a very popular product for us,” Bridges said. “It has performed well; the consumer demand is strong.”
Since its launch in August 2022, consumers appear to be using the closed-end second offering judiciously: “We have a max LTV of 85%, but we see a lot of our consumers not going that high and borrowing 65% or 70% and still leaving some equity room, which is great.”
The product has been good for LOs as well, Bridges noted: “It’s allowed our loan officers to stay at capacity and keep busy,” he said. “If we didn’t have a second mortgage product, it would be a much harder market for us.”
Products emerge as America’s debt load tops $1 trillion
In another sign of the times, the product has emerged at a time of record-setting consumer debt. According to the New York Federal Reserve Bank, balances surpassed $1 trillion for the first time with credit card balances rising by $45 billion to $1.03 trillion during the second quarter.
“It’s the first time in history Americans’ debt load has been that high, and that’s non-mortgage. So yeah, we’re in an inflationary market and customers of equity can improve their cash flow, certainly if they’re consolidating debt.”
Asked for a baseline attesting to the closed-end second product’s success, Bridges offered: “We have locked since inception north of $750 million.”
Another advantage to the product is that the time element for repayment is at the discretion of the consumer, he noted. “It’s not a HELOC, like I said, it’s a lump sum distribution. HELOCs work for some people. We don’t offer HELOCs. We do like the home equity loan versus the HELOC because it’s a fully amortized debt. HELOC is sort of an open-ended piece of credit – it doesn’t fully amortize. We have terms for 10, 15, 20 and 30 years, so the consumer can choose their payback timeframe – if they want a lower payment, they can have a longer period; if they want a higher payment and want to pay it off more quickly, they can choose a minimum term of 10 years.”
Most consumers appear to be splitting the difference: “We see most of our customers navigate to the 20-year term,” Bridges said.
About six months ago, Pennymac launched another product emblematic of the times – a temporary buydown product designed for purchase loans only.
“Let’s say rates today are 6.5%,” Bridges posited. “The buydown is a 1-0 buydown, so the first year of repayment your rate would be 5.5% – 1% lower than the market. You pay a small fee in order to get that, but the benefit of the buydown exceeds the fee obviously, otherwise you wouldn’t do it. We find that to be really popular. Since we rolled that out, we’ve locked north of a quarter-billion in buydown for purchase transactions.”
He explained the appeal further: “In a market like this which is very volatile, it has widespread appeal because if you do a buydown loan for a year, the rate may be better in a year and you could certainly refi at that time. You would have the lower rate for the first year and then it would go back to the standard rate of that time.”
Another plus is the product lacks the fees associated with a HELOC, Bridges added: “A HELOC usually has a minimum payment structure and other fees associated with utilizing it,” Bridges said. “There’s no annual fees for our home equity loan. It’s just standard loan fees at closing, title, etc.”
In another response to the volatile market, Pennymac last year launched its Lock & Shop product that enables buyers to freeze mortgage rates while they continue to shop – another product inspired by the current volatile market.
Using Lock & Shop, buyers can choose among three lock terms: a 60-, 75- or 90-day lock, giving customers 30, 45 and 60 days to shop, respectively. In a previous interview, Bridges said the company “took note of the market” in unveiling the product as they witnessed rates continuing to rise as the Fed looks to fight off inflation. “We developed a Lock & Shop product where you can lock in your rates today for up to 90 days while you shop for a home, and that will lock at today’s price,” Bridges said.
Pennymac is going with the flow in today’s uncharted waters, but with an array of products to keep it afloat. “Look, it’s not an easy market,” Bridges acknowledged. “So you have to be nimble and you need to have good products, diversification for consumers, and especially products that can provide savings in a higher market.”
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