How lenders are talking with clients about the Fed cut

Lenders are using the Federal Reserve's recent rate cut announcement to draw customers intrigued by the economic headlines.

Industry players are well aware that the first cut in four years has in recent weeks been baked into mortgage interest rates, which today sit closer to 6% for a 30-year fixed rate home loan. Originators are explaining those market mechanisms to consumers, in an attempt to build off rising refinance activity and to capture more moderate interest in buying a home. 

"There's been massive awareness to clients about what this means for them, and it is now the time to refinance," said Terry Lockery, regional sales leader in New York with Prosperity Home Mortgage. "So we've had a ton of conversations."

Mortgage rates don't directly correlate with the Federal Funds rate, and yields on the 10-year Treasury actually went up a day after the Federal Open Market Committee's announcement. However, Fed governors, and the market, project further cuts through 2024. Lockery said he anticipates two more 25-basis-point cuts, one in November and another at the December meeting.

Some staff at Atlantic Bay Mortgage Group were anticipating just a 25 bps drop this past week, and were excited to see the larger cut, said Emily Gardner, chief lending officer. The company primed marketing materials for its team to share and avoided getting too detailed in explaining the Fed impact. 

"As we go into [the fourth quarter], we are making sure that we're equipping our mortgage bankers and our team with the right CRM tools, that we're educating borrowers, that we're going out on our social media, through our database in local communities," she said. 

Homeowners in the second half of this summer have caught on to lower rates, with refinance demand as of early September up 127% from the same time last year, according to the Mortgage Bankers Association. Some lenders in recent weeks have also reported their own shops' refi volume doubling in recent weeks. 

Purchase application activity, while up overall, has wavered. The FOMC cut came during a seasonal shift in purchase activity, said Lockery. While home purchases slowed in late August and early September as summer ends and school starts, the lull typically picks up this month. 

Homebuyers are still challenged by elevated home prices, originators said. While prices are rising at a slower pace, they remain up over 50% from pre-pandemic levels. 

"Part of the issue is home prices are at an all-time high level," said Lockery. "But consumer debt is also at an all-time high level, so the overall affordability definitely has an impact on qualifying clients." 

More originations from fading rates could also be counterintuitive for the market, lenders said. A sudden boon to affordability could heat up home prices.

"Potential homebuyers are reinvigorated, fearing that lower rates may lead to reduced inventory," said Christy Bunce, president of New American Funding, in an emailed statement. "They are eager to secure good deals now, before competition potentially intensifies."

The California-based lender said it will deliver new messaging based on homebuyer interest spurred by the Fed. NAF anticipates the central bank to shave off 75 basis points by the end of the year, Chief Investment Officer Jason Obradovich said in a statement, although moves remain dependent on inflation meeting the Fed's target. 

Mortgage competitors hungry for volume have angled for the moment, rolling out promotions including refi discounts and higher conforming loan limits ahead of the new year. Prosperity Home Mortgage is among those offering promotions, including Competitivedge, which gives borrowers a full underwritten loan commitment as they shop, and waiving refinance costs for such transactions within 3 years of a purchase. 

Fannie Mae has predicted rates will dip under 6% before the end of the year. While lenders are telling clients rates should continue to fall, they're hesitant to predict such lower mortgage rate thresholds as Fannie Mae's.

Plaza Home Mortgage CEO Kevin Parra said he expects lower rates to take time to sink in for consumers, suggesting a lag between the Fed's announcement and greater origination activity. Some consumers still don't understand they can close on a mortgage today and refinance in a year at a lower rate.

"Sometimes that's true from the standpoint of qualifying," he said. "So this will help more people qualify, which is important for us."