Ideas for spurring mortgage loan originations
Rising interest rates have caused residential real estate to come to a screeching halt. Mortgage refinances are nonexistent and new loan originations have plummeted. Demand is tampered by record low home affordability while existing homeowners face doubling or tripling their interest rate if they choose to move.
Loan originators have branched out offering borrowers mortgage buydowns and bridge loans to temporarily reduce costs with the promise of reduced interest rates in the future. For a more drastic impact however, more creativity is needed. While options are limited given most loans are securitized, the residential real estate market could benefit from incentivized payoffs, loan assumptions, and equity financings.
Common in commercial real estate, loan assumptions allow buyers to "assume" the existing mortgage on a property. This circumvents the borrower from having to go through the process of obtaining a new loan and allows the new borrower to carryover the existing interest rate.
Loan assumptions could be part of an overall strategy to increase real estate transactions.
Allowing loan assumptions would compensate the seller for their low interest rate and potentially increase housing inventory. While the industry would need to develop additional loan products for borrowers assuming a mortgage (e.g. second liens to account for loan amounts above the existing mortgage’s principal or financial instruments to adjust for differences in credit), loan assumptions could be part of an overall strategy to increase real estate transactions.
Another potential solution to increase home affordability is to allow borrowers to acquire less than 100% ownership of the property. Institutional investors could purchase a stake in the property while also offering the borrower a mortgage to cover the rest. Maintenance expenses could be escrowed, similar to how HOAs are managed today. Partial equity financings with a debt component would provide a consistent revenue stream for investors while also reducing monthly payments for the borrower.
Institutional investors could purchase a stake in the property while also offering the borrower a mortgage to cover the rest.
Startups have attempted offering partial equity financing options, however they have struggled to find capital sources to scale. In order to significantly influence the market, GSE investors would likely need to support and securitize both residential debt and equity.
Homeowners with a 2-3% interest rate have a strong incentive to retain their existing loan. However investors would love to see a waive of payoffs - freeing up their capital to be locked in at higher rates.
Investors could split the difference with existing borrowers - offering a lower interest rate or lump sum payment to existing borrowers. Hypothetically this would also be high value for the loan originator, as they would retain the relationship with the borrower and offer a product not available on the market elsewhere.
While incentivized payoffs would benefit existing investors and homeowners, it would put all first time homebuyers at a disadvantage - as they would have a higher cost of capital.
The impact of rising interest rates should arguably be solvable through financial engineering. With this said, solutions would require innovation and coordination among the entire value chain. There is a strong opportunity for institutions with large balance sheets and full stack operations to offer borrowers creative financing solutions specialized players cannot.
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