We’re currently facing a strange kind of housing crisis where current homeowners are in a great place, but potential buyers are often priced out.
The problem is one of affordability and the problem of lack of available inventory. It’s the type of inventory that first-time home buyers look for.
So, you have a market of haves and have-nots, and a very wide gap between the two.
Meanwhile, you have millions upon millions of homeowners tied up, with mortgages so cheap that they will never be able to refinance or sell.
This exacerbates the inventory problem, but also makes it difficult for mortgage lenders to survive due to low order volume.
the solution? Offer your existing clients a second mortgage that doesn’t upset their first.
Loan servicers want to do more than just service your loan
Over the past several years, mortgage loan servicers have been embracing technology and making significant investments to step up their recovery game.
They are no longer satisfied with just collecting the monthly principal and interest payments, or managing your escrow account.
Realizing they have a goldmine of data at their fingertips, including contact information, they are taking big steps to get more business from their existing clients.
Why go out and look for more leads when you have millions in your database? Especially when you know everything about your current customers?
Everyone knows that mortgage rate stabilization has effectively crushed demand for term refinancing and refinancing rates.
Cash-out refinances are also a non-starter for many homeowners unless they have other debts that are already high in rate and that are straining enough to give up their low-interest mortgage.
Therefore, lenders are left with a very small pool of borrowers with money to work with. However, thanks to their investments, they are getting better and better at maintaining this business.
Instead of their clients going to an outside lender, they can sell it through a streamlined refinance or other option and keep it in-house.
But they know the volume of first mortgages isn’t there, so what’s the move? Well, offer them a second mortgage of course.
Your loan servicer wants you to get a second mortgage
I’ve talked about loan servicing before, where new loans like Refis stay with the company that serviced the loan.
So, if you have a home loan offered by Chase, a Chase loan officer may contact you and try to upsell you on cash or another option.
I’ve warned people to be wary of bad refinancing offers from the original lender. And to communicate with other lenders when they contact you.
But that was only the tip of the iceberg. There will be a big push by providers to get their existing customers to take out second mortgages.
This is especially true for conventional loans backed by Fannie Mae and Freddie Mac, in which borrowers are often restricted and there are no streamlined options.
They know you won’t touch your first mortgage, but they still want to increase production.
So you will be offered a new HELOC or home equity loan to accompany your lower-rate first mortgage.
As a result, you will have a higher outstanding balance and a blended rate between your two loans and become a more profitable customer.
That’s the approach of Pennymac, as seen above, which launched its Closed-end Secondary Mortgage (CES) product in 2022. They’re one of the largest mortgage servicers in the country.
It allows their existing clients to access their home equity while keeping their lower rate first mortgage. Most importantly, it keeps the customer with Pennymac.
Notice how high the payback percentage is once you deal with CES.
Other services do the same. Just last month, UWM launched the KEEP program, which brings back former clients of its mortgage broker partners.
A second mortgage payment may allow you to continue spending
One of the key differences between this housing cycle and the early 2000s is how little capital has been tapped.
In the early 2000s, it was all about 100% of the cash and extra seconds going to 100% of CLTV.
Lenders essentially threw any semblance of high-quality underwriting out the door and approved anyone and everyone for a mortgage.
It allowed homeowners to borrow every last dollar, often at false appraisals that overstated the value of homes.
We all know how that turned out. Fortunately, things are actually much different today. for now.
If this second round of mortgages materializes, as I believe it will, consumer spending will continue, even if economic conditions take a turn for the worse.
Many Americans have Already burned through excess savings It was discarded during the easy days of the pandemic.
And you hear about people who became so exhausted, they couldn’t even survive three months without income. But if they can access a new lifeline, spending can continue.
Then you start to envision a situation similar to what happened in the early 2000s where homeowners are using their properties as ATMs again.
Eventually, we may start to see CLTV creeping higher and higher, especially if home prices stabilize or even decline in some very hot metro areas.
The good news is that we still have the highest levels of home equity ever, and home equity lending is still very weak compared to that time period.
But it’s worth noting that it reached its highest levels since 2008 in the first half of 2024. If it increases significantly from there, we could face a situation where homeowners overspend again.
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My work experience in the early 2000s inspired me to start writing about mortgages 18 years ago to help potential (and current) homebuyers better navigate the home loan process. Follow me on Twitter for hot takes.
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