Low Rates, Small Supply Mean Brisk Activity for Mortgage Lenders
By Mark Morris
When COVID-19 made its arrival in Western Mass., it was mid-March, just weeks before the start of the traditional home-selling season. Area mortgage professionals didn’t know what to expect when the pandemic hit, but they certainly weren’t projecting a solid year.
Soon, though, they had to adjust those expectations and projections.
Indeed, a combination of factors, from historically low interest rates to high demand and low inventories, have made this a much busier, much better year than most residential lenders and home sellers could have hoped for back in the dark days of March.
Indeed, instead of completely canceling the spring home-buying market, the pandemic merely postponed it, said James Sherbo, senior vice president of Consumer Lending with Holyoke-based PeoplesBank.
“We’ve been very busy because the activity we would have normally seen in April or May, we saw in June, July, and August,” he told BusinessWest.
Jeffrey Smith, vice president and chief Lending officer with Freedom Credit Union, concurred, noting that any debilitating effects on the housing market from the pandemic have been more than offset by lower interest rates. The rates were already fairly low — in the 3.25% to 3.5% range — before the pandemic, he said, but now consumers can now get a 30-year fixed-rate mortgage for well under 3%.
“We’ve been very busy because the activity we would have normally seen in April or May, we saw in June, July, and August.”
“This is probably the best real-estate market I’ve seen in years,” Smith said. “When the pandemic first hit, I thought it was going to be just the opposite.”
Meanwhile, many mortgage holders are taking advantage of these lower rates to refinance, and this high volume of refis, as they’re called, is keeping most all lending institutions busy.
“It’s crazy … we’ve seen an 80% volume increase in our overall business compared to last year,” Smith noted. “And we certainly did not expect that.”
Tami Gunsch, senior executive vice president and director of Relationship Banking at Berkshire Bank, agreed. She said the bank is pleased with the Mortgage Division’s performance, “especially during these unprecedented times of COVID-19.”
For this issue and its focus on banking and financial services, BusinessWest takes an in-depth look at the housing market and the various, and powerful, forces that are driving it.
Rooms for Improvement
Flashing back to mid-March, Sherbo said his department was mostly focused on where (and how) team members would work, and keeping employees and customers safe.
“We just tried to prepare as best as we could to keep our team safe and our customers safe,” Sherbo said. “When COVID-19 first hit, everybody wondered what would happen; nobody had a crystal ball.”
Indeed, no one could have foreseen how the drop in interest rates — one of many steps taken to stimulate the economy — and other factors would collaborate to stimulate virtually all aspects of the housing market and create a unique set of circumstances.
Home sales are strong, again, because of low interest rates even though fewer homes are for sale, said Sherbo, adding that he can’t recall a time when both conditions have happened at the same time.
“This is probably the best real-estate market I’ve seen in years. When the pandemic first hit, I thought it was going to be just the opposite.”
“I’ve seen rates this low before, but I’m not sure we’ve seen this lack of supply in quite a while,” he said, adding that it’s no surprise that many people do not want to move or sell during the pandemic, so the supply of homes for sale is limited. That creates an environment where many purchase offers are coming in higher than the asking price.
“New listings are selling very quickly,” noted Smith, adding that nearly all the houses offered for sale in early July were sold by early August.
In addition to people moving out of the city and into the suburbs to take advantage of low interest rates, Smith said the demand for second homes is exploding.
“In the last three to six months, prices have increased by 20% or more in areas like Cape Cod or Maine,” he noted. “Second homes are a hot market right now, and because there is a limited supply, properties are on the market for only a short time before they are sold.”
Then, there’s the refi market.
Gunsch said that, in addition to strong new-mortgage activity, Berkshire Bank is doing a high-volume business in refinances.
“Refis account for 52% of our closed-loan production through July,” she said, “while in the prior year, during the same period, they accounted for 35% of the closed loan volume.”
Smith added that, thanks to the robust business Freedom is doing with loan refinancing, he does not anticipate the lack of housing supply to limit the institution’s growth potential this year.
Strong housing-sales activity is even more impressive considering how the entire home-buying process had to quickly change when COVID-19 hit.
The notion of a real-estate agent walking potential buyers through a house for sale sounds almost quaint these days, as virtual tours have replaced showings, and drive-by looks at a house have become the norm.
“People are buying homes based on what they see online,” said Smith. “Many people are not even going out to the house to see it. In some cases, particularly for second homes, they are buying them sight unseen.”
Before COVID-19 struck, Smith said Freedom had limited online mortgage-application capabilities, but the virus forced the institution to quickly go all in.
“Luckily, we had the technology to be able to make a fast adjustment to online only, so we were kind of ready for it,” he told BusinessWest.
PeoplesBank launched its paperless mortgage-application system in October 2019 after two years of refining it. When COVID-19 arrived and disrupted so much of daily life, Sherbo said having a touchless system already up and running made it easier to maintain business levels.
“Our customers don’t have to meet or sign anything in person,” Sherbo explained. “The entire application process can be done online or over the phone. We were ready for this, which was great.”
Gunsch said Berkshire also uses an online application process. When an appraisal of the property is needed, only the exterior is appraised to reduce physical contact.
“Loan closings are still done in-person with everyone wearing masks and following social distancing guidelines,” she added.
A serious concern at the beginning of the pandemic was the potential for mortgage delinquencies to spike due to homeowners affected by financial and health issues. In April, Gov. Charlie Baker signed into law a moratorium on evictions and foreclosures on consumers through March 2021.
Meanwhile, those who are struggling with COVID-related issues are encouraged to contact their mortgage holder to defer payments. The law makes it clear that, by deferring, consumers merely extend the length of the mortgage without taking a hit on their credit rating.
All the mortgage professionals BusinessWest spoke with said the deferral program has worked to keep delinquencies down and allow people to stay in their homes.
“We have a strong team in place to assist our borrowers with loan deferrals and ensure they understand their options to defer payment during this time,” said Gunsch.
Smith said that roughly 5% of Freedom mortgage holders have taken advantage of the deferral program. “We’re actually seeing our delinquencies at very low levels, lower than they’ve been in years.”
Smith added that most of the deferral requests occurred in April and May. With each passing month, the number of new deferrals continues to decline.
“The deferral program is working the way it was intended,” Sherbo added. “It’s giving people the chance to maintain their own stability and credit.”
As for inventories, even that picture may improve soon. A recent report from the U.S. Census Bureau and Housing and Urban Development (HUD) showed new housing construction starts are up more than 23.4% in July 2020 compared to July 2019. The national figure closely mirrors the Northeast, which saw a similar increase of 23.3%.
Locally, Sherbo said new home starts are relatively flat, but if interest rates continue at record lows, that would encourage more new construction in Western Mass.
Just as no one had a crystal ball back in March, none of the mortgage professionals we spoke with can really say what will happen six months or a year from now. That’s the nature of this pandemic — a high level of unpredictability.
For now, the housing market is booming at a time when few thought it would. This is good news for banks and credit unions — and for the customers they serve.
And it’s certainly one of the more intriguing stories in a year with seemingly no end of them.