The reality of rates is that they don’t move.  The price on rates move.  So for this I looked at two rates 4.5% and 4.75% to show how the price on those rates has moved throughout the last week.

Since rates are priced upon a percentage of the loan amount I’ve normalized these to the price per $100,000 of loan amount.

What does that mean?  Today 4.5% was priced at .062% – discount.  On $100,000 the cost (discount) to get 4.5% would be $62.00.

Sometimes rates are priced so that there is a credit called a yield spread premium.  I’ve always credited that to the borrower hence the name of my site, yield spread credit.  Every mortgage broker has to do that now, so I guess I was ahead of my time.  Fat lotta good that does me.

So some days instead of a “cost” the rate actually paid a premium as was the case for 4.75% every day of the week, and on five occasions for 4.5%.

• Today:
  • 4.5% costs $62./ 4.75% pays $1316
• Thursday:
  • 4.5% cost $466/ 4.75% paid $862
  • 4.5% cost $300/ 4.75% paid $993
  • 4.5% paid $10/ 4.75% paid $1,229
• Wednesday:
  • 4.5% paid $262/ 4.75% paid $1,415
  • 4.5% paid $53/ 4.75% paid $1,257
• Tuesday:
  • 4.5% paid $52/ 4.75% paid $1,324
• Monday:
  • 4.5% paid $25/ 4.75% paid $1,314

What I find interesting about these is that while the market moves on a regular basis we, as brokers, only really see a few market changes.  Those changes are typically day-to-day as was the case Monday, Tuesday, and Friday.  Occasionally, there’s inter-day changes, as was the case on Wednesday and Thursday.

There  just isn’t a lot of volatility at the street level.  At the market level massive negative movement will typically translate into one big negative inter-day  at the consumer level.  Often that move purposely overshoots the mark, as as the mortgage banks avoid taking any but the most profitable locks.

Big movements to the plus side seem to come at a slower pace than negative movements.

This week there really hasn’t been a lot of movement.  The price for 4.75% has been between $862 to $1,415.  That’s a range of .625%, which seems like a lot, but when we start seeing 1% changes that’s usually a sign that the market has moved enough that people in the news will start talking about rates “moving”.  It may look like they are, but all the movement amounts to is that the most attractive price gets attached to a different rate-point (Since mortgage rates are priced in .125% increments, each increment can be called a rate-point) .

The news is out that Erin Toll will be making a career switch, from regulatory affairs to the real estate industry.

That is a shame.  Erin made lots of enemies by enforcing laws as she should have.   There’s been several reports of increased fines during her reign.  The new cop enforced the rules that the old cop ignored.

She also made some enemies for pursing some fishing expeditions that I reckon overstepped the bounds.  I do wonder how wide spread those investigations were.  Like the mortgage/real estate/insurance people she investigated it seems like she succumbed to the temptation to push the envelope to get results.

Ultimately, it appears that she was ran out as a result of investigating a politically connected person, who’s practices were, if the accusations are true, an embarrassment to the industry.  The accusation was that his company was sending out mailers that was made to look like they were sent from the government.  The kind of basic sleaze that turn caveat emptor on it’s head.

Ethically, caveat emptor is advice you give to help provide consumers with a shield.  Too many people have taken it as an excuse to defraud the public, turning the advice into a weapon.

Legally, caveat emptor is part of contract law under Laidlaw v. Organ.  The buyer does have a duty, but that doesn’t get the seller off the hook.  In the ruling Chief Justice Marshall stated, “each party must take care not to say or do any thing tending to impose upon the other.”  Misleading advertising is surely and imposition.

If the accusations of false advertising are true, it’s a shame that Erin was run out for going after somebody who was using these practices.

It might not make any difference in any case.  Last night Governor Ritter signed into law HB 1141, which among other worthless achievements places MLO’s under the authority of a five member board of Mortgage Loan Originators.  That doesn’t achieve anything other than put MLO’s in the hands of politically connected corporate interests  - that won’t protect the public.

What really gripes me about the legislation was that date for registering with the National Mortgage Licensing System has been pushed back to December 31 from September 30, which is nothing more than a reward to the lazy originators who haven’t taken the time to register, get tested, and have the background check done.

Is that a triumph for the industry?  CMLA thinks so.  But, my impression of the CMLA is that it’s nothing more than a union devoted to protecting the worst parts of the industry rather than protecting and rewarding those who have historically played by the rules.

The amendment, among other things, bans what are called Yield Spread Premiums, and it has the mortgage industry, at least a certain faction of it, in a tizzy.

Rules and regulations have come fast and furious recently.  One rule that has obviated my business model is that every broker has to credit yield spread premiums to the buyer.  I’ve done this for years, hence the name of my site, Yield Spread Credit.

My thinking had been that the borrower is paying for the yield spread via accepting a higher rate, and should get the benefit of the payment.  That benefit would be the means to reduce closing costs, achieve transparency in my fees, and take me out of the equation with regards to having any interest in market timing.  Here’s how that works:

• Accepting a higher rate will end up creating a premium in mortgage pricing.  Just as it does in any bond pricing scenario.  The premium is payed by the market to the bank,  who pays the broker, and in my case it went to the borrower.  The rationale is simple.  If it costs $4,500 to get a loan, and the borrower can get a yield spread of $4,500 in exchange for accepting a higher rate and a higher payment the borrower can reduce the current burden on their pocket book.  If the difference in payment between a lower rate and the premium rate is $45.00 then the borrower only starts losing if they are in the property or still have “that” loan after 100 months have passed.  Understanding this is fundamental to financial planning.  Call a mutual fund and they will ask you what your investment horizon is.  Call me and I’ll want to know how long you intend to own this property.  The yield spread in this case is nothing more than a tool for planning.
• The tool achieves transparency in pricing since I make only what I charge as an origination fee.  No other fees apply and the yield spread is not part of my income.
• Taking me out of the market equation is a benefit to me as well as the client.  Some lenders/brokers (most lenders really are brokers hiding behind a line of credit), will promise a rate to the client and play the market for their own benefit.  I find this to be very risky to me and my customer, stressful, and just foolish.  There very little to be gained and too much to lose.  Since I work for a single fee that’s fixed, I let the borrower decide if they want to wait on the market, if things get better that’s great for the borrower if it gets worse it’s bad for the borrower (and me since it tends to kill deals).  The parenthetical part leads me to encourage locking and achieving the long term goal rather than messing with the market and missing the boat.

New laws pretty much force my brethren to work as I do.  Some cheat, and they always will even inside a federally chartered institution.  If the recent experience with Wall Street is any indication, it seems to me that cheaters will be tolerated until a loss is incurred.

The new amendment, not law yet, wants to outlaw the premiums that I credit to the borrowers under the rationale that people are being steered into higher rates when they could get lower rates, ignoring that they may not actually have the funds to pay the other costs.  This is non-sense on the face of it, but there’s a much more sinister side to it.  What will become of the premium?

The fact is that premiums are paid to brokers because the banks receive them as well.  There’s no secret fund of money that produces the premium, and the bank is still passing the mortgage through to the public via fannie mae/freddie mac.

If I’m no longer allowed to receive this, or utilize it, what becomes of it?

My guess is the bank keeps it.  If brokers exist at all they’ll be able to offer only the rate the banks offer the broker.  That rate will not be priced at par it will be priced above par with the bank keeping the premium as profit.  That might eliminate brokers, which is a situation the banks won’t really mind.  This is an opportunity to grab market share at a time when  public opinion is against the industry, though the banks fully participated in all the worst aspects of the melt down.

And, the public will never have any idea that the banks are making this income at the public expense.  This appears to be a wonderful way of driving up the cost of financing and giving more power to big banking interests.  Is that a good thing?

via Rates and price levels | The Economist.

Whenever I read a “blame the borrower” story in regards to the housing bubble I want to scream.  Yes, there are losers, but the lesson of home-ownership both implicit and explicit was that you stretch when you buy, you get comfortable, you reap the gains….

Everyone who owned real estate and benefited from the bubble, either by taking equity or moving up, needs to keep in mind that timing is an accident.  Many people have lost their homes for no other reason than that they had the bad luck to buy at the top of the market prior to a widespread contraction.   Bad timing doesn’t a loser any more than good timing makes a genius.  What timing defines is how randomness rules.

The winners should have the grace to recognize where their hard work and diligent attention to making payments got a big boost from an inflating bubble.

What follows is a sample of today’s rates for a 30 year fixed rate conventional mortgage. The APR is effected by loan size, and so will be higher for a smaller loan and lower for a larger loan. This is not an offer to lend. Rates are also effected by loan to value, FICO scores, property usage, second mortgages, and whether or not cash is being withdrawn.

So what fictional borrower can rely on these rates? Someone with all of these: a 780 credit score, borrowing exactly $250,000, 20% minimum equivty in a single family home that they occupy, and who can prove that they have income to support qualifications. Total closing costs are: $4,138, representing a fixed fee of $2,000 plus 2,138 in closing costs.

***Negative numbers indicate that this is a no-cost loan. Since D. White’s revenue is limited to $1,750 there is some excess Yield Spread that can be applied towards interest, principal, insurance, taxes, hats, or towards any other use that the borrower wishes.Net closing costs are calculated as Gross costs less Yield Spread Credit equals Net Closing Costs.  Or, Gross closing costs plus loan discount equals Net Closing Costs.”