The squeeze is on!
Monday, April 27, 2009
Today in the mortgage space, everything is getting squeezed. Values are getting squeezed. Consumers are getting squeezed by credit bureaus, Fannie Mae and the lack of transparency of the Obama plan. Lenders are getting squeezed as they are overwhelmed with demand and try to get loans closed as they are near the top of their warehouse lines with increased costs of providing each loan. Employees throughout the industry are squeezed by everything in this challenging landscape and customer service is suffering horribly.
With that all said, thank you to everyone who reached out to us after our message of urgency last week. For anyone who missed it, we are in a situation where effective with all applications dated after May 1, 2009 the appraisal will have to be ordered blindly through an independent repository. This will have several effects. First, appraisal times will be delayed. Second, there will be no more "gut checks" of value for the consumer to see if it is worth spending the fee on an appraisal. Finally, there will be higher costs. Appraisal costs are expected to rise by $100 to $150 to the consumer. By the way, the repositories are owned by, you guessed it, the big banks. So much for independence in valuation.
So again, if you are considering refinancing to get a better rate or perhaps, shorten your term, move on it this week. You will maintain maximum control of the process.
Labels: mortgage truths
posted by Dylan Kramer @ 8:44 AM,
Crazy Things Happening in the Mortgage Business!
Monday, April 6, 2009
Word is the mortgage business is busy. And to a degree, it's true. We are in a situation where rates are down and the phones are ringing off the hook. If you are one of the lucky ones who can secure a mortgage at today's rates, get it done though. The landscape continues to change and there is no reason to think that the pendulum will swing back toward "easy lending" any time soon. Combine that with a short staffed industry working at full, albeit reduced capacity you have a recipe for challenges.
Sure we are swamped, the phones keep ringing and everyone wants to get take advantage of today's lower rates. However, it's not that simple for us and more importantly the customers. We have told dozens of people who would love to refinance, "Sorry, we can't get you approved". Any one of several factors can prevent you from getting a loan. First, changing guidelines are an issue. Last week on one day notice several lenders reduced the amount of cash you could take out of your home to consolidate debt or raise cash by ten percent of the property value. This was done by email and effective immediately. Also, if you live in a condo, you have a "risk adjuster" that makes it impossible to get the lowest rate in the market unless you have 30% equity in your property. Finally, speaking of equity, most people we are talking with have a drop in property value making it challenging if not impossible to secure these rates.
Add to this the customer service challenges. Brokers, lenders and others that support the mortgage process were all struggling to survive in 2008. With that they all have lost money and are often not willing to "staff up" to meet current demand. This has caused the standard 2-3 days in underwriting to balloon to 2-3 weeks and longer. In fact, as of this writing on March 28th one of our lenders is working on loans submitted to them on February 16th. This is causing customer service problems through out the industry, especially related to rate lock periods, and purchase closing deadlines.
Finally, getting the lowest rate is the final hurdle. Every week there is a great interest rate survey published. The most recent one's results can be found here. Read it carefully though, it gives not only the average rate from last week and mortgage rates change every day (rising and falling). Additionally, the survey always mentions the average amount of points being paid (yes, points). Points can now financially make sense and we are seeing many people run the numbers. A further discussion of points will come to this blog soon.
The bottom line is this. If you have not tried to secure a mortgage since early 2007 or before but are thinking of it, the rules have changed. The interest rate market is in your favor but the lending environment is not. Get your loan up and running sooner rather than later, even if you don't lock the interest rate in right away. This way, you can manage all the other headaches that exist in getting a new loan approved and get the low rate you want.
Labels: current market, mortgage truths
posted by Dylan Kramer @ 8:03 AM,
The Death of the No Closing Cost Loan
Monday, February 2, 2009
If you have financed more than one mortgage in your lifetime you are likely aware that one of the marketing "tools" that those of us who sell mortgages have had is the no closing cost refinance. It has been a tried and true method of managing your mortgage if you are a consumer and managing your database of closed clients if you sell mortgages.
If you are not familiar with the no-cost refi, or need a refresher, let me explain it briefly.
Your mortgage is a liability to you but is an asset to the bank or broker that is creating it. The asset is the right to collect your payments, which is sold at the closing. If on any given day, a mortgage rate is 5.5% with zero points and $2000 in closing costs, there used to be a rate of 5.75% or 5.875% available with no closing costs as illustrated in the chart below.
So what happens to the costs in a "no cost" loan? The short answer is nothing. The costs remain but the broker pays them. The title company, appraiser and other third parties do not waive their fees. The bank also collects an underwriting or funding fee on every loan. None of the service providers waive their fees for the consumer.
The way that the broker pays the costs is to increase in the fee paid to the broker for the right to collect the payment called the Yield Spread Premium (YSP). Simply put, using the sample we gave before, the broker sells the loan at the higher rate to the bank. The bank pays roughly $2000 more for the loan at the higher rate. The broker uses the $2000 to pay everyone the closing costs and the mortgage now is "no cost" to the consumer. The broker nets the same amount for their work in securing the mortgage so they are happy to make this deal.
The choice for you as the consumer was do I take the lower rate and pay the fees or do I take the higher rate and payment but pay nothing up front. In the example above, do you take the $40 per month higher payment and save $200 in cash, which would take 50 months or over four years to break even? Usually it made sense for most folks to take the no cost option as rates were falling and the option of refinancing multiple times over the course of a year or so was made prohibitively expensive because the closing costs had to be paid in cash each time. This is also known as financing the costs into the rate.
This brings us to the death of this loan and the trouble it is causing in todays' busy mortgage market. Banks have stopped paying any significant amount of YSP to the broker for the right to collect the payments. Here is a sample comparing a rate sheet from last spring when we had a very brief drop in rates to one since from last week with similar rates using the same $250,000 loan example.
This drop in what banks are paying for mortgages can be attributed to several factors.
First is that more loans than expected are going to foreclosure. With the uncertainty in today's economy, you may feel comfortable about your income prospects but lenders don't. It's not personal; they feel that way about everyone. Second, if rates drop more later, (a big "if" that I address here) banks will get crushed because all of the loans that they are spending money to purchase today will pay off long before the collect many payments. Third is that after two years of falling profits and rising losses on mortgage portfolios banks are overwhelmed by refinance demand. Just like any business, if you can sell all you have at today's prices, why would you cut your prices (or pay more for them).
As you can see by the chart, it is now difficult if not impossible for brokers to do what they did before: pay the closing costs from the extra YSP if you wanted a 5.75% rate instead of 5.5%, the YSP would only provide an additional $250 toward your closing costs. To get anywhere close to the YSP needed to pay all the closing costs on a loan, the rate needs to rise to 6.375% where it would not likely make sense to refinance.
In today's market, the reality is that the best deal is likely to include the customer paying their closing costs. It is a shift in mentality but one that each consumer must understand is critical to getting the best deal to secure their financial future.
Labels: current market, mortgage truths
posted by Dylan Kramer @ 9:16 AM,
Interest Rates Are Up?!?
Friday, January 30, 2009
There is an old saying that the market (in this case the bond market) makes a fool of the largest number of people. That came true again yesterday in mortgage bond trading. Thursday morning, rates on a 30 year fixed rate loan were at 5.25%. Today they are for the most part around 5.75%. This made fools of everyone who "knew" interest rates on mortgages were going to fall to 4.5%.
So what happened and is it permanent? The answer is that mortgage bonds got caught in a vortex. First, they have been on a huge run since around Thanksgiving and since rates never go up or down in a straight line a little sell off is not surprising. Additionally, the stimulus package that the new administration was touting before the inauguration was short on details but long on commitments to infrastructure and direct stimulation of the economy. Now the package is more expensive and appears to have more pork (read: non stimulus spending) in it. This combination is inflationary and bonds hate inflation. The final straw is that mortgage lenders are overrun with business. I receive emails from underwriters with questions at all hours of the day, midnight, 5AM, 8PM. They are working around the clock and not hiring additional people to help since they laid them all off a few months ago. This is causing lenders to raise rates to catch up on workflow. The combination has turned the falling rate momentum into rising momentum.
So will it last? The short answer is I don't think so. Rising rates are associated with rising inflation, which in the big picture, is associated with an expanding economy. The 4th quarter 2008 GDP number was just reported at -3.8%. There does not seem to be an improving economy on the horizon. Thousands of layoffs were announced and executed this week. Do you know anyone, aside from bankruptcy attorneys, doing well today?
The best advice now is to find a target and stick to it. Your mortgage professional can run the numbers for you and show you where a really good rate makes sense for you. Then get your application in and wait for the market to return. Once, that rate hits LOCK IT IN. Don't let the greed to get a great rate get in the way of getting a good rate that can save you tens of thousands of dollars over the life of your mortgage.
Labels: mortgage truths
posted by Dylan Kramer @ 9:35 AM,
The Folly of Four and a Half Rates
Thursday, December 11, 2008
Over the last week, those of us in the mortgage business have been overwhelmed by questions from borrowers, potential borrowers and prior borrowers that all want to know the same thing, "how do I get the 4.5% interest rate for my mortgage that I am hearing about". It's a tough one to answer because, though there may be a day in the future, even perhaps, the near future, that a 30 year fixed mortgage at that rate is easily available to everyone, it's not likely anytime soon. In fact, this attempt to "fix" the market is likely to have the exact opposite effect.
2008 has been the year when everyone got caught up in the challenges existing in the economy. The mortgage business, however, started seeing problems in mid 2006 (effectively chronicled here). Everyone else just got welcomed to the misery party those of us in the mortgage industry have lived through for a couple of years now. We have thankfully seen bad companies and bad loan officers go out of business previously. But in 2008 good people got washed out of the industry because there just not enough loans for everyone. Since Thanksgiving week though, and thanks to a big drop in rates from 6.25% to about 5.5% we are overwhelmed with business and could write more business in November and December (if rates stay low) than the rest of the year combined.
Well if the business is overwhelmed by the number of people interested at 5.5%, what would happen at 4.5%. If that rate was gerrymandered into the market by the government, demand would be tenfold what it is today. Estimates are that capacity in the mortgage business has shrunk by 50-60 percent since 2005 when it seemed like everyone had a relative, college buddy or neighbor who "jumped in" to the mortgage industry. It would be impossible to get everyone in and closed.
Two things would happen as a result. First is that to slow demand, the big banks would RAISE rates. This would mean that again the American consumer/taxpayer would not see that savings flow to them. The banks would keep it. Second is that only the best customers would get the best rates. With the "declining market costs" Fannie Mae has put into the market over the last two years, the salespeople will focus on the need "get borrowers/customers through the system". This means that most salespeople will focus on borrowers with credit scores over 720, property values that ensure the loan is lower than 80% of the value, and standard W2 wages that eliminate the need to underwrite the self-employed or those who have a large portion of their income made of commissions or bonus. How this will help solve the problems that plague the housing market is beyond me, though I welcome being really busy again.
Ultimately it is impossible to guess where interest rates are going. The market will have a lot more to say about where they go than the government. Even if they do go lower, it will be challenging for anyone who does not have all three of the following to secure a mortgage at the lowest rates: Easy to understand W2 income in excess of that needed to make the payments, 720 credit scores and plenty of equity. The bottom line is that you just never know if there will be a better deal tomorrow. Even if there is, you may not be able to get it. If you can justify refinancing by recovering the cost to do so in a reasonable time, do so today.
Labels: current market, mortgage truths
posted by Dylan Kramer @ 9:19 AM,