On top of that, most 2-1 rate buydowns have expired, leaving borrowers to either face financial strain head on, or consider other options like taking out an adjustable-rate mortgage (ARM) or purchasing discount points.
Rate predictions went awry
Mark Worthington, a Bend, Oregon-based branch manager for Churchill Mortgage, says that clients were misled by loan officers who thought they could “predict” rates, leading them to push their budgets.
“I equate buying a house with a lot of analogies. But if you have to convince yourself that the person you’re dating is great, and then you think to yourself, ‘Yeah, but … ,’ that’s not somebody you should date long term, right?” Worthington said, offering a different perspective on the phrase. “And yet, we wouldn’t go into a relationship with the ‘Yeah, but’ scenario. But people bought houses, maybe some because of that slogan and the mindset that rates are going to get better.”
“I don’t think we should ever count on rates at any certain time being at a certain number, because it’s too hard to predict,” he added. “I mean, two years ago, Fannie Mae predicted that by the end of 2022 or 2023, rates would be in the high 5s. We’re not — we’re still in the mid to high 6s.”
Originators, he says, didn’t do enough education on debt-to-income ratios with their borrowers, leaving many to become house poor.
“Most loans have a typical debt-to-income ratio of approximately 45%. … And if someone’s buying a house and the only payment they have is a house, and they push to the 45% number, well, they’re not giving themselves any allowance if they have to buy a new car,” he said. “They’re not giving themselves an allowance to necessarily do something with their life other than pay for their house.”
That has resulted in unsustainable payments, Worthington added.
“It’s definitely hurting people. It’s definitely eating into people’s savings,” says Melissa Cohn, regional vice president at William Raveis Mortgage. “That’s not where any of us wanted to be right now, but unfortunately, through various circumstances, we are where we are.”
Cohn says the solutions are limited and far from perfect.
“You can ask, if people refinance, can you take an adjustable rate and do any better? Can you do an interest-only ARM and do any better on a monthly payment?” she said. “But no one can magically change rates, and there’s no bank out there that’s offering a rate that’s so significantly below anyone else for refinancing.”
Cohn admits that way back when, she did throw the “marry the house, date the rate” phrase around when talking to clients.
“There were times when it really seemed imminent that rates were going to drop. But you look back at COVID, that’s a good learning lesson where you never say never, and that you always have to prepare your buyer,” she said.
“‘I’ve only had one client who’s calling me that’s been struggling with a monthly payment. And that’s someone who used one of these [low documentation] loan options to get approved, where they were not relying on their taxable income, or they were probably stretching a little further than they should have.”
Worthington and Cohn agreed that a massive geopolitical event or another pandemic would have to happen for rates to reach their previous low points.
“We thought rates were going to come down a few months ago, until President Trump announced his new tariffs and announced his new spending bill,” Cohn explained. “The Fed would have cut rates if neither had happened the way it did. But I think that anytime you go into a mortgage, you have to go in knowing that there is a risk that the rate may not come down.”
Borrowers in jeopardy
Worthington worries that the inability to refinance will cause two regretful circumstances: buyers who are forced to sell their homes or being unable to make payments.
“They’re going to get themselves into some financial and credit jeopardy. Because, regretfully, when you look at the affordability of housing, now is one of the lowest levels it’s been in history,” he said.
“And when we look at our expenses, you go back 25 years and we didn’t have cell phones that we replace every year. We didn’t have the internet and all these streaming services we paid for. We didn’t have apps. Those are habits we’ve created due to, frankly, the influence of our economy. I think it’s going to get rough,” Worthington added.
Emily Gardner, chief lending officer at Atlantic Bay Mortgage Group, says that some of her clients have gotten creative with their financial positions.
“Some people may not have been able to see the interest rate reduction, but a lot of people have taken advantage of the increase in equity and put themselves in a better financial position by consolidating debt,” she said.
Buydowns, for one, became popular, leading Gardner and her team to offer them as options to clients.
“We have done a ton of 2/1 buydowns,” she said. “But one of the things that we really coach on is that final payment. What is that final payment going to be? Are you comfortable with that? And then, during that two-year period, is there a financial plan that can be in place to even set some of those savings aside as reserves?”
Gardner says that she’s directed her team to steer clear of the “date the rate” mantra.
“That’s not verbiage that we wanted to use, because you can’t guarantee what interest rates are going to do,” she said. “I think if you like the house and you can afford the payment — and it’s comfortable in the client’s financial picture — that needs to be the conversation, and not a guarantee of a rate reduction in the future.”