We are currently in a strange kind of housing crisis where existing homeowners are in a great location, but prospective buyers are often oversold.
The problem is the affordability problem and the lack of available inventory problem. That is, the kind of innovation that first-time home buyers want.
So you have a market of haves and have-nots, with a very wide gap between the two.
At the same time, you have millions and millions of homeowners locked in, with mortgages so cheap they will never refinance or sell them.
This exacerbates the inventory problem, but also makes it difficult for mortgage lenders to stay in business due to the drop in applications.
The solution? Offer your existing customers a second loan that does not interfere with the first.
Loan Officers Want to Do More than Service Your Loan
Over the past few years, mortgage servicers have been embracing technology and making big investments to step up their repossession game.
They are no longer satisfied with simply collecting monthly principal and interest payments, or managing your escrow account.
Realizing that they have a goldmine of data at their fingertips, including contact information, they are making big moves to capture more business from their existing customers.
Why go out and look for other opportunities when you have millions on your website? Especially if you know everything about your existing customers?
Everyone knows that a mortgage rate lock effectively reduces the rate and the need to refinance.
And a cash out refinance is also a no-brainer for most homeowners unless they have other really high debts that are pressing enough to get rid of their low-end mortgage.
Lenders are therefore left with a very small pool of financially sound borrowers to approach. However, because of their investment, they are getting better and better at maintaining this business.
Instead of their customers going to an outside lender, they are able to sell them through a refinance or other option and keep them in-house.
But they know that the initial loan volume is not there, so what is going on? Yes, they offer a second mortgage, of course.
Your Loan Officer Wants You to Take Out a Second Loan
I’ve talked about loan servicing before, where a new loan like refis stays with the loan servicer.
So if you have a Chase loan, a Chase loan officer may call you and try to sell you a cash out refi or other option.
I warned people to be aware of low refinance offers from real lenders. And access to other lenders if they reach out to you.
But that was just the tip of the iceberg. You will see a big push from operators to get their existing customers to take out second mortgages.
This is especially true for conventional mortgages backed by Fannie Mae and Freddie Mac, where borrowers are often locked in and default options are not available.
They know you’re not touching your first mortgage, but they still want to increase productivity.
So you will be offered a new HELOC or home equity loan to go along with your original lower rate credit.
As a result, you will have a higher outstanding balance and a combined rate between your two loans and be a more profitable customer.
This is Pennymac’s approach, as seen above, which is launching a second mortgage product (CES) in 2022.
It allows their existing customers to access their home equity while maintaining their low-cost, original loan. And most importantly, it keeps the customer with Pennymac.
Notice how high the retake percentages are once they enter CES.
Other workers do the same thing. Just last month, UWM launched KEEP, which recaptures past customers from its mortgage broker partners.
A Second Mortgage Push may allow spending to continue
One of the biggest differences between this housing cycle and the one in the early 2000s is how the equity was acquired.
In the early 2000s, it was all 100% reissue seconds piggybacking to 100% CLTV.
Lenders basically throw any semblance of writing quality out the door and approve anyone and everyone for a loan.
And they allow homeowners to borrow every last dollar, often at inflated rates that exceed home values.
We all know how that goes. Fortunately, things are very different today, at the moment.
If this second mortgage squeeze occurs, as I believe it will, consumer spending will continue, even if economic conditions worsen.
Most Americans are already burned by the excess savings that were wiped out during the easy money days of the pandemic.
And you hear from people that they stretch so much, they can’t even face three months without money. But if they have access to a new lifeline, spending can continue.
Then start envisioning a scenario similar to the early 2000s where homeowners are using their buildings as ATMs again.
Eventually, we may start to see CLTVs go higher and higher, especially if home prices drop or fall in certain overheated metros.
The good news is that we still have record high home equity levels, and mortgage lending remains relatively low.
But it should be noted that it reached its highest point since 2008 in the first half of 2024. And if it grows too much from there, we could have a situation where homeowners are overextended again.
Before creating this site, I worked as an account manager for a real estate broker in Los Angeles. My experiences in the early 2000s inspired me to start writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the mortgage process. Follow me on Twitter for the latest.
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