I hope that you had a great Thanksgiving – now its time to talk about mortgages.
Rates Are Not That ‘Low’ For Most – Nowhere Near ‘Historic Lows’
Rates are not as low as the Wall Street analysts and media would have you believe. They are nowhere near ‘historic lows’ that’s for certain. They speak of mortgage rates as a static and generic thing that going forward will remain at levels that will fix all of the housing markets woes. However, in in reality mortgage rates swing wildly from day to day just like stocks, are ‘custom-outfitted’ for each and every borrower and only a select few are able to get the rates being irresponsibly thrown around lately.
Over the past few days the relentless pump over 5.5% is an absolute red herring. The media and Wall Street analysts should not be quoting mortgage rates because they are committing the greatest ‘bait and switch’ of all time. They are going to make thousands of loan officers around the nation look like crooks because 5.5% really does not exist for most.
The 5.5% rates that are making everyone so giddy are what’s known as ‘base-rates’ for perfect credit, vanilla borrowers. The ill-informed are assuming everyone gets that rate and is able to qualify. Perhaps two years ago when when house values were soaring and there was no negative-equity, credit was easy, the mortgage market was liquid and banks and the GSE’s had far more generic loan programs this was the case – but that is far from reality today.
Think of the 5.5% rates like that car shown for $9,999 in the paper – there is only one available, its last years model, this years’ is much more expensive and by the time you get yours, it costs twice as much. The fact is that most do NOT get the best rates available, rather get a shockingly higher rate.
The Borrowers Who Need Help Are Not Getting It
The fact is that the 5.5% rates are for the best AAA, high-FICO, low loan-to-value, owner-occupied purchase or rate & term refi. This loan scenario makes up the minority of all borrowers. Those in toxic loans, underwater or near-underwater in their homes, as 60% in CA are, with a credit score under 720 or a second mortgage / less cash down still can’t get a loan or will pay very high rates relative to the past several years even when rates were at their peak during those periods.
The rates for Jumbos are much worse and did not respond anywhere close to conforming.
The borrowers who fit the new ‘Prime’ mold are likely in fine financial health, have money to put down or equity in their property, no second mortgage and top credit score. This minority borrower class getting great rates will not have any noticeable effect on the housing market.
Two related Mr Mortgage Posts:
Please read my latest report entitled Mortgage Rates Tumble! It Does Not Mean What it Used to for additional information.
In addition, see Fed Buying Agency MBS – Still No Explicit Guaranty!
Now I am going to show you some of the best rates available in the nation available on 11/26. These are wholesale rates meaning they are only available to mortgage brokers. To get a retail (consumer) rates, just add one point roughly.
For example, if you see a 5.5% @ (1.000) this means that at a rate of 5.5%, the mortgage broker would receive in return 1% of the loan amount in a rebate that can be used as her commission, to pay borrowers fees etc. In a deal with this pricing and rebate depending on the loan amount it would likely be a ‘no point’ deal where the consumer had to pay all other closing costs such as appraisal, credit, escrow, title, lender processing, underwriting etc. Count on about $2500 for ‘other’.
Taking this into consideration you will see on the rate sheet that a 30-yr fixed $417k loan is about 5.5% at no points. A Jumbo $650k loan is approx 6.25% at no points.
BUT, NOW GET READY FOR THE TRUTH – In Recent Months Rate Adjusters Have Soared
A rate adjuster is a ‘hit’ to the interest rate if you do not fall inside the tight vanilla box. During the bubble years, the vanilla box was big. Over the past year, it has shrunk considerably to a point where to the majority do not fit inside of it. This is a perfect example of ‘credit tightening’.
All of those adjusters in the grid below the rates grid are what takes most borrowers interest rates well above 6% again. If you are not a perfect 720 score, <80% borrower you can’t have 5.5%. When reviewing the adjusters below note they are cumulative and 1.000 equals roughly .375% in rate. Therefore, if you are lucky enough to only be impacted by 1.000 of adjustments, your real interest rate is 5.875% at no points plus $2500 closing costs.
Actual Conforming Rates (11/26) Below – most borrowers will get rates at 6.25% to 6.75%
Conforming $417k Fannie Mae ‘base rates’ are shown below across the top row. Note the 30-yr fixed at 5.5% pays the loan officer 1.128% of the loan amount to be used as commission or towards closing costs. In most cases this would mean 5.5% is a NO POINT loan. To do a NO COST loan the rebate has to be around 3% which takes rates well above 6%.
Now, add up all of the adjusters for not being a perfect credit, low loan-to-value vanilla borrower. See below this grid.
ADJUSTMENTS GRID ABOVE – (Note: 1.000 adjustment = roughly .375 to rate)
The Conforming $417k base rate row above are not what most get. This is because all loans are unique. You have to build your loan using the adjusters – I highlighted the most popular in red boxes. Please see all that apply to you. Notice how that if you do not have a perfect 740 score, decent loan-to-value and no second mortgage, you are getting hit. 1.000 in hits = roughly .375% in rate.
Conforming Borrower & Current Rate Example
675 credit score, 80% cash-out refi used to pay off a second mortgage, fully documented. This used to be considered super prime with very few pricing adjustments. Now they get smoked. 1) LTV & FICO hit = 1.75% to fee 2) Cash-Out Hit = 1.00 to fee.
The cumulative adjustment for this loan scenario of 2.75% of the loan amount in fee or 75 to 87.5bps in rate pushing the 5.5% rates to a whopping 6.375% at no points.
If they had a second to 90% CLTV they wanted to keep open as many do, there would be another 1% hit making the rate as high as 6.75% or forcing the borrower to come in with 1% of the loan amount, as much as $4,170 PLUS all closing costs.
Actual Jumbo Rates (11/26) Below – most borrowers will get rates at 6.75% to 7.50%
Jumbo from $417,001 to $625k ‘base rates’ are show below in upper left boxes. Serious adjusters apply here as well unless you are a 740 credit score borrower doing an 80% rate/term refi or purchase with no second mortgage on a primary residence.
Note that a 30-yr fixed at 6.25% pays the loan officer 0.818% of the loan amount to be used as commission or towards closing costs. In most cases this would mean 6.25%-6.5% is a NO POINT loan.
Now, add up all the hits for not being a perfect credit, low loan-to-value vanilla borrower below the rate boxes. I have highlighted some of the most common in red. These are cumulative adjustments. Be aware that 1.00 in fee adjustments equal roughly .375% to .500% in rate.
ADJUSTMENTS GRID ABOVE – (Note: 1.000 adjustment = roughly .375 to .500 to rate)
The Jumbo ‘base-rates’ quoted above are not what most get. This is because all loans are unique and you have to build your loan using the adjusters above – I highlighted the most common in red boxes. Please see all that apply to you.
Notice that if you are not a perfect borrower doing a vanilla loan with no second mortgage you can’t get these rates. As a matter of fact, a 680 score borrower can’t even do a loan over 75%. A 680 score 75.01% LTV borrower used to be AAA Prime and are still rated that way on the balance sheet of banks such as Wells Fargo, Citi and Chase. Note that 1.000 in hits = roughly .375% in rate to .500 in rate.
Jumbo Borrower & Current Rate Example
700 credit score, 80% no cash-out refi, fully documented. This used to be considered super prime with very few pricing adjustments. Now they get smoked. 1) LTV & FICO hit = 0.75% to fee 2) ‘Other’ hit >75% LTV or CLTV = 0.500 to fee. 3) If the borrower had a second mortgage above 80% which is common add another 1.00 to fee.
The cumulative adjustment of 1) and 2) it is a total of 1.25 to fee or roughly .625% to rate. This bring the base rate of 6.25% at no points to a whopping 6.875% at no points to the consumer.
If they had a second to 90% CLTV, which is common, there would be another 1% hit making the rate as high as 7.500% or forcing the borrower to come in with 1% of the loan amount, as much as $6,250 PLUS all closing costs.
Rates Rising Through Larger Rate Adjusters (Tighter Credit)
In the past the ‘base rate’ box was huge. For example at Fannie/Freddie the person with a 580 score would get the same rate as with a 700 score if their respective computer systems said the loan was eligible. Now that box has become very small with sizable rate adjustments for being outside the box. Below is an example of a couple of adjustments. There are dozens more similar to this enacted over the past year. We are seeing this type of thing come out all of the time now – remember that 1.000 = roughly .375% to the rate.
The ‘Refi-Boom’ Being Reported – MBA Applications Tick up
Not so fast – when rates drop suddenly and sharply as they did on the Fed announcement last week, very little new business is taken right off the bat. Rather, portfolios just tend to shift from one lender to another, as borrowers and brokers want to take advantage of the lower rates. Typically, the lender at which they are presently locked will not roll down the rate to the current market so the only way to get current market is to switch lenders. This skews the mortgage applications data by a) stuffing a previous month’s worth of loan applications into a few days b) showing a spike in all lenders originations as they take business previously with their competition. What the MBA survey never tells you is how many loans they lost to other during the few days of record originations. This is where the real losses lie.
For more on this see my recent report: Mortgage Rates Drop! It Does Not Mean What it Used to (67)
In closing DON’T BELIEVE THE HYPE folks. I maintain that this move was not necessarily to ‘help’ borrowers with lower rates, rather to talk Bond prices better so the likes of Bill Gross and foreign central banks can sell Agency securities. Agency securities had been coming under serious pressure for the past couple of months. See my most recent post on the subject below.
That being said there is nothing wrong about calling your mortgage broker or the bank and seeing what you can hammer out. Perhaps, there are things that can be done. At least now you have some ammunition.-Best, Mr Mortgage
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