Inside Story: False Illusions and What You Need to Know About Mortgage Rates

Inside Story: False Illusions and What You Need to Know About Mortgage Rates

(Distributed with the express permission of Sue Woodard and Barry Habib from Mortgage Market Guide)

The Fed's been at it again, offering words that sound encouraging at first blush, confirming that their buying program of Mortgage Backed Securities is in full swing and will continue as needed. Of course, the media will pick this up and offer their own interpretation, saying "Good news, the Fed's words on continuing their purchasing program mean that rates will continue to drop lower, and remain low into the summer..." But is this really what that means? Not so.

Here's the truth.

Yes, the Fed has been buying Mortgage Bonds, but if you look at what they are purchasing, they are buying a lot of FNMA 30-yr 5.5% and 5.0% Bonds...which won't have much of an impact on present interest rates. Why? First, see the Fed's purchases for yourself by hitting this link: Direct Link to View Fed Mortgage Bond Buying - http://www.newyorkfed.org/markets/mbs/index.html.

So why is the Fed buying these Bonds? Well if you think about it, it's very smart of the Fed...and maybe even a little sneaky...because 5.5% Bonds actually represent outstanding mortgages with rates of 6 - 6.50%, which are precisely the loans being refinanced at today's great interest rates.

Stay with me here...

With rates at present low levels, many of the mortgages in these FNMA 5.5% pools being bought up by the Fed will be refinanced and paid, thus giving the Fed a quick recoup on some of their investment. And this is likely a big reason why the Fed said they could continue this purchasing program beyond June, if necessary. Bottom line, the Fed buying these higher rate coupons will not necessarily help rates to move lower, as their actions do not impact the loans being originated at today's low rates.

Here's the most important part.

Sometimes I talk to clients who are in a situation where it makes sense to refinance right now, and save $250 per month for example. But when they hear the media throwing around teases of lower rates ahead, they decide to hold off on making the decision to save the $250 per month right now, in the hopes of gaining another $30 per month in additional savings with a lower rate than where we stand presently. Now clearly, rates could turn higher, and this window of opportunity could pass them by entirely.

The clincher is this:

Even if those clients ultimately are correct in timing the market, and eventually grab that lower rate and save another $30 per month - think of what they have lost by waiting. While they delayed, they lost the savings they could have gained by taking action sooner - or in the example used, $250 - for every single month they waited. So even if they got lucky and obtained the rate they were looking for, it could take years to make up what they lost by waiting.
I don't want anyone to miss an opportunity by either waiting, or not understanding what is at stake. Let's talk further on this - call or email me and let's discuss what this might mean for you.

If It Sounds Too Good To Be True...

Many of our clients are getting mail from different mortgage companies offering "special deals" for loans. What happens is as soon as a mortgage lender pulls your credit, the credit bureaus sell your inquiry to mailing lists that are distributed to direct solicitation companies who then call or write you about refinancing with them. Coincidence, huh?

100% of the time I have looked at the direct mail solicitation, it has been deceptive advertising a bait and switch scam, or simply not as advertised when the client called to take advantage.

For instance:
A client and friend of mine dropped off a piece of mail he received from a lender in Ohio, I advertised an "effective" rate of 3.35%. Now, since the rates at the time were in the low to mid 5's, I knew this had to be a scam. Sure enough, the "effective rate" was nothing more than a creative calculation. Basically, they were advertising a loan at an above market rate that was set up on a bi-weekly loan program. Well, the bi-weekly loan program is nothing more than a way to make one extra payment per year, thus reducing the interest expense over the life of the loan. They took the actual interest and acted like it was paid over 30 years to come up with the "effective" rate. Sounded good, but come on, nobody can offer rates in the low 3's for a 30 year fixed mortgage. If it sounds too good to be true, it probably is.

Another client that I was already doing a refinance for called about a month ago and read me a letter he received from his current loan servicer. Well, it advertised a "low cost" refinance. It advertised a flat fee of $1,500 or so. The rate was the same rate I was offering my friend, so I recommended he call to research it further and told him if his current lender could offer the same rate for less cost than me then go ahead and go with them. About an hour later he called back very upset saying that they told him the flat fee was simply just the origination fee and there were other fees involved that made the deal not so special. Once again, if it's too good to be true, it probably is.

About an hour ago I spoke with a title agent who recommended a relative to refinance with us. I offered a very fair rate and low costs to the client, but he chose to go with a loan broker out of Texas. I have nothing against Texas loan brokers, I am friends with several. However, this particular one totally messed up the application and my title agent friend is very upset with the broker. As I said, if it's too good to be true, it probably is.

Finally, a few minutes ago I received a call from a repeat client that received a piece of mail from a lender about refinancing. They advertised 4.75%. This is simply another case of a "quoted rate" and a "real rate." Lenders can LEGALLY quote ANY rate they wish on any given day. All they have to do is put a disclaimer at the end of the ad saying that "rates are subject to change." Guess what? do you really believe that lender who receive their business through direct solicitations are going to quote market rates or give advice that matters to customers? No way! There is no way today at 5:00 a lender can quote 4.75% without any discount points. Just isn't happening. Finally, if it's too good to be true, it probably is.

There are 26 variables that go into setting an actual mortgage rate. Some of these items include credit score, LTV, debt ratio, # of days locked, purchase, refinance, cash out refinance, loan type, discount fees, origination fees, property type, PMI, and others. Oh yea, rates have been changing on average twice per day over the past 6 months. If ANYONE quotes a rate, that is all it is. Don't expect to get that rate. Ask for a RATE LOCK GUARANTEE in WRITING along with a good faith estimate of closing costs to make sure the rate you are being quoted is not offset by higher than normal closing costs. (Why do you think they call it "discount fees?"

The key is only deal with a mortgage professional that you know well, or one whom comes HIGHLY recommended by someone you trust.

What I Learned This Month...It's Simple

To say this month was an exciting start to the year would be an understatement!

During the 20 or so business days in January, I bet we had 50+ rate changes.

Underwriting guidelines continued to tighten.

Lenders have come, lenders have gone.

MI companies are much more strict, and pricey.

Risk-based pricing reared its ugly head in the conventional market.

Appraisal values...well never mind.

The government continues to stimulate, dominate, and exasperate.

We have a new president and a renewed sense of optimism by most in this country (and beyond) that is sorely needed.

The stock market continues to tank.

If the government is REALLY buying MBS, why are rates going up?

Only in the mortgage industry do you have massive lay-offs followed by record-level refinance application volumes.

Who's in charge: Bernanke, Paulson, Obama, Bush, Shelia Blair, Kramer (Jim, not Dylan)?

Who's really stimulated with the stimulus package?

Why didn't more clients who wanted 4.25% jump on 4.75% and now are faced with 5.5%?

etc., etc., etc.

What's in store for the rest of 2009? .....I'm not sure, but personally, I'm already tired from information overload. I'm opting for simplicity. I'm going to focus on quality loan applications, and fair, but not crazy pricing of loans. I'm going to reach out and develop some strategic partnerships with a few Realtors and we are going to grow our businesses TOGETHER. I'm going to get to know each and every one of my new clients and make them my friends. I'm going to reach out to my existing clients and let them know I am here for them, as well as their friends and family. I'm going to get rid of all of the "tools" I have except Mortgage Coach and MMG. Simple, I say.

On Monday, my team and I are going to simplify our "system." In fact, we may not have a "system" after Monday, but rather, a "method." Our method will be to just enjoy our clients and make sure their loans close smoothly and on time. Then, we'll ask for referrals.

My point is that we should get back to enjoying our businesses. Stop worrying about the news, the rates, the lending climate, etc. There really is NOTHING any of us can do about those external factors. Focus on making your clients your friends, give them the same advice you would give your mother or best friend, take bullet-proof loan applications, and have fun again.

The key to growing your business in this market (I'm not considering refis growing your business) is to focus on quality and not just quantity. Quality relationships, quality applications, quality advice, and so on.

We have an unbelievable opportunity in front of us. Give thanks, enjoy the moment, and make some friends. It's that SIMPLE.

Don't Be Late on Your Record Rate!

Don't Wait Until It's Too Late to Lock Your Record Rate! (edit/delete)

Let's face it, everyone wants to get the best deal out there. We want to get that house at the bargain basement price, we want to buy the car after making the car dealer say "mercy", and we all want the VERY lowest possible rates on our mortgage. For the past 5 years, with the exception of a few brief moments, mortgage rates have generally been in the high 5's to high 6's. When rates went down into the 4's a couple of weeks ago, many people jumped on the opportunity to get an unprecendented rate on their home loan. However, there were probably just as many people who waited and decided not to lock in hopes of scoring an even lower than record rate on their loan.

More than one person asked me if rates were going below 4.5%.
A few weeks ago, in his annual market review and prediction article, Barry Habib of Mortgage Market Guide mentioned that rates for 2009 would range from 4.5% to 5.5%. As I write this post, rates are generally 5%-5.25%, up from 4.5%-4.75% two weeks ago. I've got a whole list of clients waiting for rates to hit 4.5% again before they lock. My feeling is that they may not get the 4.5% they are looking for, but they very possibly will be able to get an opportunity to lock in the upper 4's in the coming weeks.

For a number of reasons, these rates will not stay at these ultra-low levels for an extended period of time. Some of the reasons include:

1) Inflation Inflation is the arch-enemy of bonds, including mortgage-backed securities. While there is no apparent inflation in today's economy, the busy driving season and the influx of cash by the government will likely cause inflationary pressures heading into the summer months. Even the hint of inflation will be enough to eat away at the price of bonds, sending home loan rates upward.

2) Lender Volume Levels Virtually every lender in the country cut staffing levels this past fall. Couple that with mortgage applications that are up nearly 400% and you have a situation where it is nearly impossible to keep up with the demand. In order to slow down the demand on their systems, lenders are artificially charging mortgage rates higher than the market would normally permit. If mortgage rates are generally 4.75%, and a lender can charge 5% and be at full capacity, they are going to charge the higher rate.

3) Less Competition The mortgage industry is definitely in a transitional period. In 2009 you will see less and less mortgage brokers and indirect lenders in favor of direct retail mortgage banks. The government regulators are encouraging more and more lenders to eliminate wholesale mortgage operations in lieu of direct lending. This in and of itself will cause rates to be slightly higher as mortgage lenders try to keep up with demand and strains on the system as mentioned in #2 by charging slightly higher rates.

4) Risk-Based Pricing Fannie Mae and Freddie Mac are now very much involved with pricing that is tied to borrower's credit scores. A client with a 650 credit score is now looking at a rate 1/2% higher now than they would have gotten a year ago. In fact, any borrower with less than a 720 credit score is penalized with higher rates on conventional loans. Also, PMI companies are MUCH more restrictive with the loans they are insuring and charging premiums that are higher than ever. If this trend continues, it will become more and more expensive for borrowers to obtain financing at good rates.

5) Federal Government Buying Bonds - The federal government is the main reason we are seeing rates as low as 4.5% in the recent cycle because they are buying up to $500 Billion in mortgage bonds. When the federal government STOPS buying mortgage-backed securities, we will see mortgage rates automatically increase. How much of an increase, we don't know.

6) The Market The mortgage rates are at record levels. NOTHING stays at record levels forever. When housing and the economy regain momentum (and they will), you will see rates much higher than they are currently. This is simply a market principle.

In an earlier blog post, I showed the savings of refinancing a loan to from 6.5% to 5%. The payment savings and interest saved over time is mind boggling. The bottom line is this:

If you are likely going to stay in your home for another 5 year or more, it will make sense for you to refinance if you can lower your interest rate by at least 1%.

If you are going to stay in your home 3-5 years, it MIGHT make sense to refinance if you can lower your rate by at least 1.5%.

If you are going to be in your home less than 3 years, you will likely not have time to recover the closing costs it takes to refinance.

Don't let a perfect rate get in the way of great rate. I assure you, there will be consumers around the country who will be stuck paying a rate over 6% who could have gotten 5%, but wanted 4.25%. Take your profits when you can get them; lock in within a 1/4% of the all time low rates; and count the thousands of dollars you will save over the life of your loan.

Financial Planning Steps for 2009

Do you want to secure and sound financial future and reach all of your future goals? Here are the four steps:

1) Cash Reserves - The MOST IMPORTANT step is to accumulate some savings. The over 2 million Americans who lost their jobs in the past year that will be able to make it without perhaps filing bankruptcy are the ones who have the safety net of a cash reserve account. You never know when something might happen and your income will disappear, whether it is a job loss or disability. Also, you never know when you may have an unexpected purchase or expense such as auto repairs, unexpected medical bills not covered by insurance, or when you may need to help an elderly parent. Ideally, you want six months salary socked away somewhere safe and accessible. However, any amount is better than nothing.

2) Pay off Non-Preferred Debt - Non-preferred debt is any debt that is not tax-deductible or carries a high interest rate. Credit cards sap the life out of a financial plan. Pay your cards off each month and use them in the event of an emergency and to help your credit scores. When you pay your cards off, be sure to keep them open with as high of a credit limit as possible, and use them sparingly (one small purchase per month) for maximum points on your credit report.

3) Save and Pay Cash For Purchases - Try to get to the point where you are paying cash for Christmas, birthdays, vacations, and if possible, automobiles. Also, put away as much as possible for retirement, especially if your company matches your 401k contributions. This, of course, requires you to live within your means.

4) Pay off Your Mortgage - Once you have accomplished the above goals, focus on reaching your mortgage freedom point. This is the point in time where your mortgage is paid in full OR you have enough liquid savings set aside to pay it off if you choose. I personally prefer the second alternative since it allows consumers to keep control of their funds through liquidity, preserves tax benefits, and allows you to earn a rate of return.

Note: Imagine the thousands of Americans who have focused on pre-paying their mortgage or getting a 15 year mortgage over the past few years. Many of these consumers believed they were doing the right thing by sending in extra funds to their lender. Well, when some of these Americans lost their job, the bank still wanted their monthly payments. Since some of these well-meaning, proactive, and responsible consumers skipped steps 1, 2, and 3 and went straight to step 4, they lost their homes or are facing foreclosure in the very near future.
Remember these four steps: cash savings/no credit cards/live within your means by paying cash/reach your mortgage freedom point and you will have peace of mind and a very bright financial future.

6.5% vs. 5%...Wow!

Have you ever wondered the difference in payment and interest savings between a rate of 6.5% and 5%?

The savings is significant: $152 per month payment difference, $23,782 interest savings over 10 years, and over 8 years off your mortgage if you continue to pay the 6.5% payment with the 5% rate.
Many consumers will miss out on a tremendous amount of savings trying to time the bottom of the rates and get the "perfect rate". If you are over 6%, don't hold out for 4.5% if you can get 5% currently. It's just not worth the risk.

Mastery Business Plan

This past November, Lenders Who Care made great strides in furthering our cause as advocates of ethical lending practices by having a significant presence at Mastery Business Plan in Las Vegas.

Julie Miller, as always, worked hard along with Tim Harrison (and team), Patti Shaner, Brent Sute, and Chris Tilley in the Lenders Who Care booth in the exhibition hall. We spoke with literally hundreds of mortgage professionals about Lenders Who Care.

Brent Sute was featured in a panel with 4 other lenders in Barry Habib's session entitled "Rising Stars in the Mortgage Industry: Tomorrow's Leaders Today." Brent talked most about how Lenders Who Care has enabled him to be the educational resource in his market through home buyer education classes, Realtor lunch and learns, and other opportunities to promote affordable and sustainable mortgage financing.

Finally, our Lenders Who Care members who attended had the pleasure of networking with many other mortgage professionals and industry leaders. Our group had the opportunity of getting to know many of our leaders on a more personal level. Some of the people we had the honor of breaking bread with included Todd Duncan, Dave Savage, Jeremy Forcier, and Ron Quintero.