Both Home Depot® and Lowe’s® have shown consistent growth in stock price over the course of the past several years. Home Depot shares have risen from a low of $47 a share in 2012 to $154 a share currently. While Lowe’s has been on a similar path moving from $25 a share, up to $84 a share over the same period.
The increase in stock prices means these companies are making money, and investors feel they are going to continue to perform. So, what do these stock prices have to do with mortgages? Everything.
The success of these two large U.S. home improvement retailers tells us that many people are spending money, a lot of money, to fix up their existing homes. Again, what does this have to do with mortgages? If people are spending large amounts of money to fix up their homes, they really only have three ways to get it: cash on hand, credit cards or loans. This creates an opportunity for you to provide borrowers the cash to make these improvements and create their dream home. Do people look to buy their dream home rather than remodel their current one? Not in today’s market.
The reason people are not buying their dream home is because of the low supply of houses available for purchase. The graph below shows housing starts in the United States over the past 10 years. After the 2008 financial crisis, new home construction hit a very low point. Though construction is slowly on the rise, the shortfall of new housing from 2009 to 2012 impacts today’s market: the inventory of new homes does not meet the demand.
U.S. HOUSING STARTS
In the past, you might have looked to upgrade your outdated kitchen by purchasing a new home, but today you remodel it instead. The lack of inventory is causing consumers to stay in their existing homes and make improvements to them creating the need for cash-out refinances.
This trend can be seen in the Mortgage Partnership Finance® (MPF®) Program’s rate/term and cash-out loan activity below. Rate/term activity rose slightly in mid-2016, but for the most part this activity has started to decline as interest rates have risen over the past 18 months. However, cash-out loans have steadily increased and even with a rise in interest rates are trending in the opposite direction of rate/term activity. Cash-out refinances are fairly interest-rate proof.
MPF Refinance Activity
The biggest challenge for most investors who offer these loans is providing an enticing rate and handling the loan level price adjustments (LLPAs) associated with them. Even the strongest borrower will have at least 3/8 of a point LLPA, making it hard for most institutions to earn the type of upfront income they would like on cash-out refinances. With FHLBank Topeka’s MPF Program, LLPAs are eliminated. You do not have to adjust your interest rates to accommodate the LLPAs upfront, allowing you to provide a more attractive rate to your borrowers and generating more income for your institution.
The scenario below shows an 80% cash-out refinance transaction. The total LLPAs on this loan exceed 130 bps even with the borrower having an 800 FICO score. This creates an immense opportunity for those using the MPF Traditional products. By not having to account for these LLPAs, the income potential is significantly improved. This loan gets 226 bps better execution through the MPF Program versus other investors.
Additionally, the recent realignment of the MPF Program’s risk model has dramatically reduced the risk-based capital impact on your balance sheet when this type of loan is sold to FHLBank Topeka. Risk on cash-out refinances has
decreased by over 50%
due to the model realignment,
plus you maintain the same income benefits as before
We think the MPF Program offers the perfect product at the perfect time. Now it is time for you to take full advantage.
Please contact me with any MPF Program questions or to discuss cash-out refinances.
“MPF” is a registered trademark of the Federal Home Loan Bank of Chicago.