Rate Sheets Gone Wild!

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.

What Lenders Learned During Prior Refi Booms

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 hard cold 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 Adjustmtents 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 agents...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 to be aware that the financial and lending climate has changed dramatically...but it's up to me as your trusted advisor to explain these dynamics, simply and clearly. What might make sense to me doesn't necessarily make sense to my clients and referral partners. 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. Any originator who would just quote a rate - without asking a number of questions - is really not a professional at all.