It’s been a tough year for the mortgage industry, with origination volume down substantially from the boom years of 2020 and 2021.
Even 2022 was a pretty good year relative to what we’ve seen so far in 2023, with the harsh reality of near-7% mortgage rates firmly setting in.
Aside from the more than doubling of mortgage rates virtually eliminating refinance demand, it’s also making it more expensive to purchase a home.
After all, a $500,000 loan amount at 7% vs. 3% is a difference of roughly $1,200 per month.
Because of this eroding affordability, mortgage lenders are getting increasingly creative with financing, the latest being Carrington Mortgage Services.
Carrington Mortgage Services Add 40-Year Home Loans to Its Lineup
This week, Carrington Mortgage Services’ launched a new home loan product aimed at affordability: the 40-year mortgage.
The Anaheim-based lender, which operates in the retail, wholesale, and correspondent channels, believes it will provide several advantages.
The main one being a lower monthly payment due to the longer amortization period.
The other being the ability to qualify borrowers at the lower payment, thereby reducing their DTI ratio and potentially allowing them to afford more home.
Because loan terms beyond 30 years were banned under the far-reaching Qualified Mortgage (QM) rule, this type of loan will be considered non-QM.
But it’s available across the company’s four non-QM suites, including Flexible Advantage, Flexible Advantage Plus, Prime Advantage, and Investor Advantage.
Additionally, it is an option for both home purchase transactions and refinances, including Full Doc, 12/24-Month Bank Statements, and Texas Home Equity loans.
However, it is limited to fixed-rate loans at the moment, with an option for adjustable-rate products potentially coming in the future.
In that case, the loan would amortize as a 40-year loan, despite being adjustable, thereby keeping monthly payments lower.
It’s not an option for interest only loans, or certain alternative documentation types such as 1-year Alt Doc, 1099, and P&L programs.
Temporary Buydowns Also Unveiled
In addition to their new 40-year loan term option, Carrington has introduced temporary buydowns for home buyers using government or conforming, conventional loans.
This means borrowers can take advantage of a 2-1 buydown on a loan backed by Fannie Mae or Freddie Mac, or the FHA/VA.
For example, if the note rate were 6.5%, the borrower could enjoy a rate of 4.5% in year one and 5.5% in year two.
The hope is that it bridges the gap to lower mortgage rates in the future, though no one knows for certain if and when mortgage rates will actually fall.
Unlike the 40-year loan option, the borrower is still qualified via the actual note rate to ensure they can afford the eventual higher monthly payments.
While reserved for QM loans at the moment, the company plans to offer temporary buydowns for its non-QM loan products as well.
Look Out for More Creative Solutions If Mortgage Rates Stay Elevated
As noted, these new products are designed to tackle affordability woes. Ultimately, it has gotten a lot more expensive to become a homeowner these days.
The combination of much higher mortgage rates coupled with home prices hitting fresh all-time highs has been devastating for prospective buyers.
And with no relief in sight, we’ll probably see more of these types of products make their way to market.
The good news, despite some additional risk, is these programs pale in comparison to what was available more than a decade ago prior to the mortgage crisis of the early 2000s.
Back then, there was a bevy of toxic mortgage options, whether it has the no doc loan, the option ARM, 100% financing, or a combination of all the above.
The abundance of those products, along with loose underwriting and a deluge of inventory, led to one of the worst housing crises of all time.
Today, most mortgages are locked-in at 2-3% rates and backed by 30-year fixed mortgages. Housing supply is also near all-time lows, painting a very different market.
The one commonality at the moment is a lack of affordability. But due to a severe shortage of available homes for sale, prices continue to defy expectations.