Saturday, January 24, 2009

Loan Update from Tony Guaraldi of Intero Mortgage

Rates are up quite a bit this week as Fannie/Freddie mortgage securities traded lower six days in a row, which lead to higher rates each day. Things are abnormal these days with mortgage rates. Typically rates are influenced most heavily by inflation and demand for bonds. Lately it’s been different. Here’s why.

The lenders spent most of 2008 either going out of business, merging with other banks, or laying off employees to cut costs as business came to a grinding halt. All of a sudden the US Treasury starts buying mortgage securities from Fannie & Freddie at a low 4% coupon, and this action dropped interest rates in the beginning of December. The lenders were instantly slammed with new refinance business, and now are at the point where they can not keep up with work load. So when you have too many loans in your pipeline the best way to slow down the flow of new loans coming in the door is to raise your interest rates! But people are still applying! Raise them again! Let’s take some profits while we’re at it, we can use it!

The second phenomenon in this environment is the lenders are changing the way they price zero point loans. They are strongly encouraging borrowers to pay points to get lower rates by increasing the spread between zero point rates and 1.0 point rates. You will see this on the rate sheet for conforming loans. The reason for this is a buyer/borrower is more likely to keep the loan for a longer period of time if they pay the points to get the loan and have a lower rate. The bank loses money if the borrower keeps the loan for only a few months. To encourage the behavior they desire, they are pricing the 1.0 point rates much better than zero point rates. This is of course the opposite of what the client thinks they need, so it’s our job to educate them on the benefit of paying points and show them the large amount money they will save by investing in lower monthly payments. This is a generalization on the market right now, but there are exceptions to this rule.

The third thing holding back the jumbo/conforming rates from dropping further is the rule created with the 2009 Jumbo/Conforming loans. A given bank is not allowed to have more than 10% of all of its conforming loans be jumbo/conforming. That means that 90% of all their loans must be below 417k and only 10% and go up to 625k. Well there is such a huge demand for jumbo/conforming loans that the lenders maxed out of it in a couple weeks. So most of them have greatly increased the rates on jumbo/conforming to stop the new submissions from coming in. This will hopefully normalize soon as the bundling and selling cycle starts over, and jumbo/conforming will come back down again.

In order to minimize this risk for rate volatility, with Intero Mortgage we are signing up new lenders constantly. This is a big advantage of being a broker, and not just any broker. A broker with some good volume and professional loan officers who submit clean files and act with integrity. The lenders are starting to really realize that not all brokers are good to partner with, and they are being very picky about who they will do business with. This way we have a better chance of having a lender that is not “full” already and can be competitive for rates and turn times.

That’s all for today. Give us a call this weekend if you need anything. We’ll be around! Have a good one!

Tony Guaraldi
Mortgage Consultant

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