MReport February 2018

TheMReport — News and strategies for the evolving mortgage marketplace.

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TH E M R EP O RT | 15 COVER STORY T here's no doubt the 30- year fixed-rate mortgage is the American housing market's most used—and most offered—product. But with more and more mil - lennials hitting the scene and buyer demographics constantly in flux, some lenders are left won- dering: Is it time to shake things up a little? The 30-year Looms Large I t's easy to understand the popularity of the 30-year mortgage. For lenders, it offers an easy way to get new buyers in the door, and for consumers, it provides a reliable, consistent monthly payment that keeps household finances in check over the course of the loan. As Todd Jones, President of Retail Mortgage at BBMC Mortgage, puts it, "In the big scheme of things, it's most ben- eficial to the borrower to have a lower, fixed payment they know will not change for a considerable period of time." According to Peter McCarthy, Head of Mortgage at PNC Bank, this stability is crucial—particu- larly for first-time buyers. "Historically, low rates have driven borrowers to the fixed-rate option," McCarthy said. "The fixed-rate mortgage removes pay- ment uncertainty, making it an effective product for the majority of borrowers—especially first-time homebuyers." Kristy Fercho, Head of Mortgage at Flagstar Bank, says that stability is especially impor- tant for borrowers who intend to stay in their home long-term. "I think you have to think about the house, for the major- ity of people, as being the largest financial investment they will ever make," Fercho said. "To re- ally have a product that can go with them through their growing income and different life phases, I think that is why it has been the product of choice." Despite its popularity though, not all agree that the 30-year is the best fit for today's buyers. According to Taylor Salditch, VP of Marketing at Better Mortgage, while the 30-year might feel safe, it's not always the best bet. "I think that the 30-year fixed- rate, 20-percent-down, traditional mortgage product feels the safest and feels like the thing they're supposed to do," Salditch said. "It has social-proofed itself to be the most predominant loan product in the market, even if that's not the best financial decision to make. People feel risk-averse when it comes to selecting a mortgage, particularly if it's their first time." Salditch says first-time buy - ers often choose 30-year prod- ucts because they're unfamiliar with other options that might be out there. More experienced and refinance buyers tend to go with adjustable-rate mortgages or shorter-term options. "I don't necessarily think that the 30-year mortgage is the best for everybody," Salditch said. "I think mortgages are not one size fits all, and if you are a millennial homeowner or a first-time home - buyer and you're looking to get a starter home, and you know that two bedrooms will work for you in the short-term, but in the next five or seven years, you could see yourself selling that property and moving into the suburbs, getting a larger home, then an ARM might be just as good, if not better. It could help you save over the life of that loan." For buyers choosing ARMs or more complicated products, Erik Schmitt, Product Executive at Chase Mortgage, has a few words of caution. "I think it's really critical the customer fully understands the risk they're assuming with those products," Schmitt said. "They need to understand the risk they're assuming when they get into a non-30-year product. Given what we learned from the crisis, very complex products have a place for certain segments of the population, but when we're driv - ing at first-time homebuyers, it's very important we do it in a pru- dent, responsible manner. Offering them reliable, fixed payments for the foreseeable life of the loan, for the foreseeable ownership of that home, is very critical." The Mortgage of Millennials T he millennial generation is quickly becoming the largest segment of homebuyers, but their entrance into the market has been slow going. A more transient group with disparate income sources, a penchant for high-cost, urban areas and sky-high student loan debts have made homeown - ership difficult for today's youth. According to many lenders though, thinking outside the 30- year product box—as well as how those products are underwritten— could help bring more millennials to the table. "I think millennials are different because the balance sheet looks different," Salditch said. "They have these burdensome student loan debt payments they need to make. They tend to move into very competitive, expensive cities where rent has continued to go up and up. Oftentimes, this group is paying more than half of their income on rent, and that makes it really dif - ficult to save for a down payment." Fercho, who previously worked at Fannie Mae, says adjustable- rate products are likely to grow in popularity as more millennials join the market. "I think the millennials are more transient and less loyal to companies or geography," Fercho said. "In some way, I think the advent of the internet has re - ally enabled this large world to become really small. I think prod- ucts that are going to be more in vogue for them would be shorter duration products. ARM products will be huge for the new mil- lennial buyers, and I think that's something that will definitely attract them more than a 30-year fixed-rate mortgage. But ARMs aren't the only op- tion for millennial buyers on the home hunt. According to Tony Ebers, EVP of Originations at Mr. Cooper, equity-sharing products are also a viable tool for today's younger generation. "The concept of equity-sharing mortgages—where an investor shares in the appreciation in home value in exchange for down payment assistance or lower monthly payments—could enable more low- to moderate-income borrowers to become homeown - ers," Ebers said. "Equity-sharing products could help millenni- als enter the housing market, By Aly J. Yale

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