Category Archives: The Mortgage Industry
Having worked in the mortgage industry for approximately 27 years now, I am often asked how mortgage rates are determined. I would love to tell you that I have all of the answers, however some days it is clear that I am still not as familiar with all of the nuances of changing mortgage interest rates as I often think I am.
The unpredictability of our economy coupled with the rise and fall of consumer confidence has left me, many times, bewildered. I still recall in my early years, how many times while getting ready to go to work in the morning, I would hear on the radio that the Federal government lowered rates but when I got to the office I was surprised to find out that many of my fellow loan officers were frantically trying to lock in their client’s interest rates.
Back then it didn’t make any sense to me or to many of my clients who were calling and asking to see if they could get a lower rate. We had to tell them that the rates had actually gone up. Many times I could hear in their voice a little twinge of disbelieve, but it was true!
When the Federal Reserve meets and decides to raise the rates it affects short-term interest rate maturities, the Fed funds rate, and the overnight lending rate which have a direct impact on the Prime rate. Anyone taking only these factors into consideration would mistakenly conclude that rate increases made by the Fed government will cause a similar movement in mortgage interest rates.
However, mortgage interest rates are dictated by the daily trading (purchase/sale) of mortgage-backed securities or mortgage bonds. That is why mortgage interest rates fluctuate every day. Factors that dictate interest rate movement include the trade of stocks and bonds.
Every single day of trading stocks and bonds includes competing for the same investment dollar and literally there is only so much of that capital to be invested. Daily released economic data is carefully watched by traders for signs of economic health. If there are signs of a slow-down in our economy, investors will tend to quickly liquidate their stock.
A good example of this would be if the unemployment report is up, we will typically have a rally of mortgage-backed securities and rates will go down. If unemployment is down and shows strength in the economy, mortgage-backed securities will tend to sell off causing mortgage rates to go up.
In even simpler terms, mortgage rates change primarily based on: 1) the perception of inflation, 2) times of uncertainty and 3) the movement of money in and out of the stock market–that’s it. When a piece of news shows weakness or uncertainty in the economy, that helps rates fall. The opposite is also true. A drop in the unemployment rate, a rise in durable goods orders, a rise in the consumer confidence index–rates go up. These influencing factors can present themselves all the time, many without warning, affecting mortgage rates instantly.
General rule: Good Economic News = High Interest Rates | Bad Economic News = Lower Interest Rates
Remember it is never about the best rate. It is about the best MATH, period. So why isn’t the lowest rate the best deal? Lower rates often come with more points and fees. That is not the real issue, however. There is a break even point to contend with when paying points and fees, as well as tax deductions to figure out.
In the case of a purchase loan, points are tax deductible in the year that you pay them as is the interest you are paying. With a refinance, points are usually only deductible over the full term of the loan. That could be 30 years, making the benefits and the break even point years down the road.
So why do lenders advertise really low rates with all of those points and fees? Because they know most consumers look at the rate, not the math. Unfortunately, that advertising strategy works really well. A good Loan Officer can analyze each rate and fee option to find out what the best math is for you. It only takes a few seconds for a professional to do it. As long as you qualify for various options, the final decision is yours.
Reading the paper for quotes doesn’t really work because the information is old by the time you read it. Radio, TV and billboards are not the answer because details are often missing. Their objective is to get you on the phone. Competitive and professional lenders can deliver nearly identical rates to each other. Most borrowers don’t ask the right questions and focus only on the interest rate.
The Bottom Line is that there is no one source that is the cheapest. If one lender always had the best combination of rate and fees, everyone would know about it eventually, right? The only other way most lenders can compete with one another is to somehow convince the public that they have some “secret way” of providing lower than market rates.
The market is the market and generally, you will pay for it one way or another. Only work with a professional mortgage company where the loan officers are skilled at the mathematics and can explain it in plain English. Feel free to ask for meaningful references such as CPA’s or Realtors, not just past customers. In times like these, don’t gamble with something as important as your mortgage.
Recently a national business syndication which publishes numerous individual state versions of its newsletter sent me an e-mail. They asked me to provide them with as many stories I had about current homeowners and how their mortgages caused them undue hardship leading to a forced short sale or pending foreclosure. As you might imagine, I sent them back an e-mail stipulating that I would do no such thing. While I had and continue to have concerns about my industry and its perception, I would be no source for media propaganda taking shots at our industry as a whole. I would not allow them to lump all of my peers into money grubbing thieves tearing at the flesh of ignorant consumers.
Of course we have and continue to have issues, some of which we are indeed personally responsible for. Yes, for that, we must accept culpability. The good news is that we have corrected many and must continue to work hard to correct those that remain.
I have been disappointed for a while now that many continue to blame our industry specifically, as the cause of our country’s economic hardship. I understand the rational, and clearly numbers and statistics don’t lie. I just fail to comprehend why many in the media still can’t move forward and begin to demonstrate the same passion about what we are doing to address these issues and the pro-active positions brokers, lenders and secondary giants like Fannie Mae and Freddie Mac are doing to aid in our country’s recovery.
No offense intended, but consumers believe what they hear on the radio, watch on television, or read in the newspaper. Generally most of you don’t read national statistical publication and interpret facts. That is what you tend to rely on the media for. It means that if we are in deed on the road to recovery, the media must help to champion the cause. It is time to forget the old misconceptions that “bad news sells”, or that the “media is just a reporting service and not itself a newsmaker” and become a positive beacon to the general public.
So therefore, I call on each of you. I call on my peers and you the American consumer to take a giant step forward and speak up for a positive direction and a positive outcome. If we don’t become uniform in our actions, new purchasers will continue to hold off making decisions on housing. There will be no move up transactions, losses will continue and values will continue to decline and people will continue to blame the mortgage industry thus continuing our downward spiral. It’s just that simple.
My head is not in the sand. Yes, I understand that thousands of jobs have been lost over the past two years. I do know that foreclosure losses at an all time high. And yes, tighter regulations on lending remain. However, is it the entire nightmare that it appears to be?
Or maybe, just maybe is it the cleansing the industry needed? We have added licensing, new regulations and better disclosures that have been sorely lacking in our industry for far too long. We in the industry are finally establishing some accountability and culpability that will better inform and protect consumers.
People ask me daily “are things really that bad?” and I tell them yes and no. Statistics don’t lie. Job losses and foreclosures published are real. The state of the economy in most states is not good and a quick turn-a-round does not appear on the immediate horizon. With many state’s heavy reliance on the automotive industry and its suppliers, the market will continue to struggle along. Consolidation and concessions will need to continue until the economy of scale, when it relates to compensation, becomes more realistic. The value in education and encouraging our kids to secure college degrees must once again be rewarded in how they are compensated.
The good news, I believe, is that good things are starting to happen. I think economic recovery is just around the corner. As we continue down this road, wages will, as a necessary evil, begin to better reflect job status. I pass no individual judgment on the salaries we pay our workers, however once this happens, the mass exodus of our young college educated students entering the work force will begin to reconsider staying home in light of better compensation elsewhere. Our costs of living will also better reflect individual state’s economic situations and their population will be able to continue to maintain their current lifestyle despite modification to their wages.
Many states current economies and the current exodus from those states have obviously created an influx of available properties. This in turn has caused a stagnation of market values in most communities and caused an actual depreciation of value in others. While this for many is a challenge, values across the country today remain higher than property values of five to seven years ago when they purchased the property.
While most read of the horror of the current market, practical thinking and realistic expectation dictates that there is still profit taking available and many great bargains for new homes.
As I stated earlier, it is very easy to place blame. It is also very easy to blame the loss of jobs and careless consumer spending as the reason for so many homes lost however there are many components that need to be analyzed.
We can talk about our industry short comings, we can discuss the media’s choice of reporting, and we can challenge the government’s tactics in aiding this recovery. However, we must also remember that ignorance on behalf of the consumer is not bliss. Many consumers made poor uniformed decisions. Just because a lender can do something for them, doesn’t mean that it is the best and wisest decision. I know it is an overused cliché however I recall something about “just because someone jumped off a bridge”. Honestly, given the common sense we are supposed to posses, since when did taking out a second mortgage to 100% or 125% of the value of a home becomes a good idea?
In my home state of Michigan, only about 10% of our loan officers remain gainfully employed that were writing loans in 2007. It is time to find a trusted mortgage professional.
To my peers, we must assume more responsibility in working with our clients. We need to educate them that establishing an important business relationship is tantamount to any successful endeavor. Consumers need to understand that without knowing the background of a particular lender, making a choice by asking “what are your rates and costs?” is often a recipe for disaster.
Despite all the doom and gloom, I don’t believe that things are all that bad. I am a glass half full kind of guy. I feel deeply for those who have had unmentionable misfortune; however they will recover as will our industry and our economy. We can continue to wallow in our misery, if we choose to, or we can help to champion a recovery.
I hope my media friends as well jump on the proverbial “band-wagon” and also find the wherewithal to champion our cause.
And to you my friends, the message is “remain consistent yet prudent and realistic in your financial decisions. Understand your goals and objectives. Take the time to build a relationship with a lender who demonstrates a commitment to your short and long term goals and the experience to back it up”. That very posture, in addition to this industry cleansing, will help to alleviate many of the ‘bad actors” that have contributed to this mess.
Come jump aboard, this train is leaving the station.
Wow, has mortgage banking been a challenge this year. Mortgage Brokers continue to take the heat for our nations collapse as new and ongoing legislation, while attempting to protect consumer’s interests, continues to in one way or another punish consumers, more than it does reprimand bad actors in the mortgage industry.
The good news is that all of us, that is you too, have an opportunity to correct one of those very challenges.
The Home Valuation Code of Conduct (HVCC) was established earlier this year after the backing and promotion of New York Attorney General Mario Cuomo’s investigation into mortgage fraud in his state. While there is no debating the issue at hand, nor his intent to address it, the solution was poorly thought out. In turn, it has done nothing to alleviate the problem and in many ways has increased mortgage costs to consumers
Recently the House of Representatives constructed H.R.3044 which calls for an 18 month moratorium of the Home Valuation Code of Conduct (HVCC). Now that the members of Congress are back in session, it is imperative that you help to support this action. Whether you are in our industry or a concerned consumer, call your Congressman today and ask them to cosponsor H.R. 3044 and attach the bill as an amendment to any legislation currently moving through the House of Representatives.
I know you may be thinking I can stop reading now, and this really doesn’t concern me, however, you should concern yourself because:
The National Association of Mortgage Brokers conservatively estimates that the HVCC will cost you, the consumer, over 2.8 BILLION dollars a year in extra fees, created by long delays (extended lock-in fees) and higher appraisal costs.
Appraisal Management Companies (AMCs) are driving honest appraisers and mortgage brokers from business, eliminating competition, increasing costs to consumers and reducing revenue. The HVCC is causing significant delays in real estate transactions, hurting real estate agents, title companies and other third parties reliant on turnaround time.
Additionally and arguably, HVCC does nothing to reduce fraud, as it legitimizes the same failed model, which was the subject of Attorney General Cuomo’s investigation.
As a consumer you are also now “trapped” with a specific lender. If a better deal becomes available with a different lender, the consumer is forced to pay for another appraisal as the original appraisal is no longer transferable.
This lack of portability, regardless of the reason will force borrowers to pay for another appraisal and wait for a new appraiser to be assigned and complete it. This will increase the total cost and time needed for obtaining a home. Delays in turnaround times could also cause you the borrower to miss rate lock deadlines and possibly face penalties charged by the lender or home seller.
Additionally, the quality of appraisals can now be challenged. In some circumstances, AMC’s are assigning appraisers from a different municipality, county, or even state to appraise your home, therefore unfamiliar with the neighborhood and unable to produce an accurate appraisal.
Many also argue that Appraisal Management Companies are looking to be profit centers as well paying many appraisers lower fees, thus resulting in the assigned appraisers, willing to do the work, often being inexperienced and failing to adequately appraise your home.
Additionally, administrative costs for the AMC’s are also passed on to you the consumer resulting in increased fees, in many cases ranging from $50-$150 more per appraisal.
Studies by The National Association of Mortgage Brokers have indicated that these issues, coupled with the drastically increased appraisal turnaround times that impose extended lock periods, are now costing consumers an estimated additional $711.95 per transaction.
Are there problems in the mortgage banking industry? Without a doubt. Do changes need to be made? Yes, of course. Let’s just make sure that we address these issues by doing the proper due diligence so that our solutions benefit, not punish you the consumer. If you want change, you need to speak up along with those of us in the industry fighting diligently for our rights to deliver to you fair, honest and competitive products and services.