RATE SHEETS GONE WILD



RATE SHEETS GONE WILD! by Barry Habib and Sue Woodard

Friday, January 23, 2009

What's going on? There's very little above par or "premium" pricing available…and the latest round of Fannie and Freddie pricing adjustments means more and more borrowers need to pay points. They don't understand why and they don't like it. Combine that with some investor rate sheets getting worse…at the very same time that mortgage-backed securities are getting better…and we've got the makings of a wildly confusing situation.

But here's the good news. There are very logical reasons for what is happening. And taking a few minutes to understand the current market dynamics and being able to explain them clearly will separate you from the competition, and increase your clients' and referral partners' confidence in you. Let's unpack what's going on and why…and how you can communicate this to clients and referral partners.

What Lenders Learned During Prior Refi Booms

First, let's revisit the topic of reduced yield spread premium, and look again at why there is little premium pricing available on our rate sheets currently. If you've been in the business for a number of years, you know that 15 years ago it wasn't uncommon to see nice buy-up schedules on many products, with an increased yield spread premium being offered in return for a higher interest rate. In fact, you could even get par plus 5 or 6, with the buy-up schedule giving about 50bp in return for a .125% mark-up on the interest rate.

But then along came the refinancing – and re-refinancing and re-refinancing once again – frenzies of 1993 and 1998, followed by the big daddy refi bonanza of 2002 to 2003. As home loan rates dropped ever lower over the years, you can imagine how the investors felt as they watched "par plus" loans get originated with the payout of juicy premiums...only to see those same loans turn around and be paid off in relatively short order, as increasingly lower rates made it attractive for the client to refinance, sometimes multiple times. These losses on loans were very costly to lenders.

Think about it – when a lender offers a premium in return for a higher-than-market interest rate, it takes some time for them to make up with future interest earnings what they paid out in cold, hard cash for the premium pricing when the loan closed. So after learning their lesson many times over many years and many refinancing booms...the lenders got smarter and started to reduce the amount of par premiums, followed by making those premiums more expensive by demanding even higher rates in return for a smaller premium and eventually have now nearly eliminated that premium pricing which cost them so much money in the past.

Fannie and Freddie Loan Level Price Adjustments Make Paying Points Almost a Given

Now, let's add the string of Fannie and Freddie loan level price adjustments to the picture, another set arriving on the scene just recently. Who would have ever thought that a credit score of 680 or an LTV of 90% would be considered such risky business? But it's been a tough year for everyone, including the agencies, and risk-based pricing is one measure they can take to protect themselves. In the past, pricing hits or adjustments could more easily be built into the rate, with a small bump up in rate offering enough premium pricing to cover the hit. But as we explained above…those days are gone, often leaving the borrower with no choice but to pay points for the adjustment. This can be frustrating to clients who don't understand why the recent pricing adjustments have to translate into potentially thousands of dollars in cash out-of-pocket.

Bottlenecks in the Pipeline Keep Rates Artificially Inflated

But wait, the fun isn't over yet…let's add some current events to the party. Investors have been slammed with the recent uptick in volume, at a time when they have both shrunk in number and depleted their head count, in an effort to slash costs. So while the increase in volume is certainly a good thing, it is apparently "too much too soon" for some investors to handle…and the only way to slow down the volume is by an increase in pricing. And if you're an investor...hey, why not bump up pricing, even though the mortgage backed security market might dictate otherwise? If your capacity is maxed out, raising rates helps increase profits while making the workload manageable by slowing down the flow of incoming files.

What's Temporary, What's Long-Term and What You Can Do

What's the result of all this? Frustrated originators, frustrated clients and frustrated referral partners…but there are answers and opportunities once you understand what is happening and why.

You'd have to be living in a cave to not be aware that the financial and lending climate has changed dramatically…but it's up to us as trusted advisors to explain these dynamics, simply and clearly. What might make sense to us doesn't necessarily make sense to our clients and referral partners. But herein lies your chance to stand out from the pack, as most of your competition just doesn't have the patience or understanding to communicate this well.

The lending climate where investors are bumping up rates in an effort to slow down volume is certainly temporary. Investors will eventually catch up, staff up, ramp up – as they will want to pull in some profits after the recent drought, like all of us as well. But be smart - during the interim, this is not a time to cut short your lock-in time frames. Make sure you have ample or even excess lock-in periods to get your loans closed during this bottleneck. Take 60-day locks, rather than trying to squeeze closings into a shorter time frame, and risk losing your lock.

To help explain this issue, we've even written an easy script for you to use verbally, or paste into an email or letter. Also, use David Kuiper's "What's My Rate?" flyer to help communicate with rate-shoppers.

On the other hand, the issue of reduced premium pricing, loan level pricing adjustments and point-paying may be here for awhile – and could perhaps get stricter still, as delinquency and default issues continue on. You have a great opportunity to explain why any originator who would just quote a rate – without asking a number of questions – is really not a professional at all. Fellow LTB member Linda Davidson was kind enough to share a script she and her team use. We've included an adapted version of it for your use as well – appropriate for both clients and referral partners, ready to use verbally, or pop into a simple email or letter.

And it's not just the clients…your referral partners need to understand too. LTB member Dustin Hughes says, "I think many REALTORS® are not aware of Fannie and Freddie's loan level pricing adjustments, and how they might impact a client's ability to purchase a home. I address the issue by proactively telling my clients and referrals partners that times have changed, and people generally can't just wake up one Saturday morning and decide today is the day to buy a home. Clients need to review and map out a strategy well in advance of making an offer on a home. Subtle changes to credit score and down payment can have a dramatic impact on how much a client might qualify for and what their monthly payments may be. I then show them payment estimates, showing the difference on interest rate and payments between a 640-ish credit score and a 740 credit score. I find that clients are more likely to apply in advance and appreciate the time and expertise I share."

Times are interesting, to be sure…and likely to stay interesting for awhile. But with more than 70% of your competition out of the picture, abandoned referral partners looking for smart lending professionals to work with, a very welcome refinance run in the works, homes and interest rates on sale – the glass could be considered quite full. Take a few steps right now to communicate current market dynamics, and you'll be taking a step to stand out from the pack.

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