Residential Pacific Mortgage Rate Snapshot: 8-23-07
Julian Hebron, mortgage banker and branch manager for the San Rafael office of Residential Pacific Mortgage, submits a copy of his most recent MarketWeek report (“Ride The Storm“) for review. Not too surprisingly Julian notes the Fed Discount Rate cut as well as the shuttering of Capital One’s GreenPoint mortgage (in Marin). What might be a bit more surprising (at least to some) are his following two points:

The Fed’s Discount Rate cut plus their infusion of about $80 billion into the banking system has prevented an all-out market meltdown, but results are muted so far because there’s still a lot of bad mortgage and investment debt in the financial system. It will take weeks or months for this to unwind – with more volatility and more company closures.
Meanwhile, new mortgage originations based on tighter approval standards will create a new wave of good quality Jumbo loans above $417k that investors will buy, securitize and trade. Rebuilding a robust mortgage securities market could take as long as 24 months because tighter guidelines will cut down the pool of eligible borrowers. However, when it comes to lending there are companies similar to more 2 life who are trying their best to give mortgage borrowers what they need in order to set up their homes. Whether it is to downsize their home or retirement, there are many homeowners who are looking for a mortgage that could support them in their new endeavors. There are a lot of resources potential investors can use when looking into mortgage securities if this something you are interested in you might want to check out this website for more information.

Home buyers, like any investors, often get nervous when markets are stormy. But this is the time to really pay attention. Higher mortgage rates mean lower property prices, and as I illustrated explicitly in my most recent client newsletter, the financial benefit of a lower purchase prices [sic] far outweighs the higher rate. Make the most of this change in the market to contact your Real Estate agent to see if this could be your chance to purchase your dream home.
The math on this theory overwhelmingly proves the case in short- and long-term scenarios. It will become more important to use this formula for evaluating decisions in the coming months. If you need a copy of this article or need to have me run an example for you, please let me know.

The mortgage market recovery won’t be quick and without more pain? Fewer eligible borrowers? Higher rates might lead to lower prices? Damn doom and gloom “bloggers!” Oh, wait a second…
[Editor’s Note: Interesting yield curve on those Jumbos. And no, we haven’t had an opportunity to check Julian’s math (but we will).]
? MarketWeek 8/21/07: Ride The Storm (pdf) [Residential Pacific Mortgage]
? JustQuotes: Acknowledging “Downside Risks” To The Economy [SocketSite]
? JustQuotes: Upping The Underwriting Ante (And Industry Layoffs) [SocketSite]
? Revisiting The “Real-World” Impact Of Rising Rates On Home Values [SocketSite]

15 thoughts on “A Few Points From A Local Mortgage Banker (No, Not “Blogger”)”
  1. Ouch – 7.625 on a 30 year jumbo – that’s a full percentage point higher than 1 year ago at this time (when I bought). Is this what those in the market are finding? If so, this will be very, very bad for prices.

  2. Socketsite didn’t publish my rates from my report, but rather pulled my bank’s rates from my site. We each have control over our pricing at the client level (and if a loan consultant ever tells you otherwise, they are lying to you), so rates I am sending to clients/realtors are about .375% lower than the cut-out from my website above.
    [Editor’s Note: Great point (and Julian’s rates are outlined in his MarketWeek report above).]

  3. Thanks Julian – for your honesty more than anything else – we all realize (I hope) that not all clients are created equal (financially and creditwothiness wise that is).
    One very quick question that I am curious about that maybe you could answer – and sorry for a very brief attempted threadjack here. Why would a lender, out of the blue, call a client who is paying a long term fixed rate loan (30yr) and offer a lower rate, for no fee (25bps lower) only 8 months after loan origination? Is it simply to prevent a refi elsewhere as a preemptive strike, or is it just to create customer loyalty. Thanks in advance for any answers to this curious (but financially very beneficial) event that I accepted with open arms not too long ago.

  4. If rates drop anytime after you’ve closed a client, yes, you need to keep the client in the market – and if it’s very soon after a transaction closes, yes, the goal is to do a refi for low or no cost. I guess it would be similar to a financial advisor trading securities for a client — if specific holdings start to underperform relative to other options, you touch up your holdings. Is this what you were asking?

  5. Enonymous, sounds like just a great windfall on your new, lower rate (especially since you didn’t have to pay fees to get it). One note is that with a refi, as opposed to a purchase loan, the bank can go after your personal assets in the event of a default and is not limited to the home value. So banks like it when you refi. But assuming you have some equity and plan to stay current, this is not a concern.

  6. why 15 year rates are higher then 30 year for jumbo loans? i.e. doesn’t it make getting 15 year loan completely pointless?

  7. yes, right now a 15yr jumbo doesn’t make a lot of sense. and frankly, the spreads on 30 relative to arms are not even that favorable right now. but with all the volatility now and in foreseeable future, these spreads can/will change.

  8. Angelo Mozilo was asked today point blank whether he believed that housing declines would lead us into recession. His answer: “I think so.”
    Bear in mind that this was AFTER his company got the $2 billion investment from Banc of America.
    Perhaps his predictive ability can be questioned because he suggested in the spring that things looked pretty contained, only to turn around months later in the summer and say that nobody could’ve seen how badly things could deteriorate so quickly.
    On the other hand, if an industry veteran who has always been pretty optimistic has suddenly turned pessimistic, either (a) he doesn’t get it and people who know better will take the contrarian bet and use this fear as a buying opportunity, or (b) he does get it because he’s spending every day working on this stuff up close and personal, and people who disagree with him are natural optimists who won’t believe a recession can happen unless it actually does.

  9. Trip – great point with regard to giving up the non-recourse protection of a purchase loan in California. If the extra security on that paper is worth more than 25bps in the secondary market is it possible that the lender is being motivated by increasing the credit quality of their paper more so than building customer loyalty? Something to consider for anyone who’s thinking they’ll simply walk away from their mortgage should they become underwater on their investment.

  10. So to give a few more specifics, it was decrease of 25bps- a loan modification – (is that what they are called when they refi without costs? I think so), 7 or 8 months after close, on a ‘super jumbo’ loan.
    Julian – thanks for responding, and yes Trip, it was a ‘windfall’ (about $150 a month, which according to some posters around here isn’t much for people with money, but I’ll take almost $2k x 30yrs for the rest of my life, thank you very much, and yes, this is how people build wealth).
    I am by nature a bit of a suspicious person, and I never really understood why they would offer me a lower rate out of the blue. It was an 80/20 full doc loan (as you might have figured out, I am very conservative, as everyone should be, on a million dollar purchase), and while I am aware of the refi non-recourse protection aspect of things, this just isn’t even part of my thinking given my debt/income is very low and I plan on holding for a very long time (and living for 5-10 in it).
    So being the suspicious person that I am, but never one to reject a ‘windfall,’ I took the freebie and didn’t ask my loan officer the question of why?
    Since my loan is an 80/20, and was of course on time in payment, and was backed by FICO >780, maybe it was a valuable loan on the market at the time? So maybe they wanted to originate a new loan to sell on the secondary market? But then they would have to pay off the stream from my old loan, correct? How is this a winning proposition for the lender?
    Did they want my safe loan on their books to balance other poor prime or subprime loans to get a better credit quality rating for their mortgage holdings?
    Or did they just do it because at the time, 10yr note yeilds were dropping, and with finagling (and a bunch of closing costs) I might have found a a new loan at 12.5bps or even 25bps even lower than what I refi’d into?
    Or was my lender just being nice, or ‘doing the right thing’?
    I don’t know the answer, I suspect I never will, but I have asked many friends and family, all of whom were stumped. And here is a thread, with a mortgage banker who (gasp!) is willing to tell the truth (yes they do exist, and there are many of them, despite what you might read on this site), and call a spade a spade. Lower prices are better for new purchasers (maybe not for me, but I’m a big boy, I can take it), higher rates don’t mean higher prices (as a certain realtor on various threads likes to claim), and creditworthiness should and does matter. So, with this chance to get an answer to my question (mortgages are straightforward – their pricing and placment into the secondary market are not), I’m going for it. Any thoughts from Julian or the rest of the crowd?

  11. enonymous,
    Is it possible that your lender sold off the loan, for a large fee, but retained the servicing of that loan, so you never saw any change. Then, when rates dropped, they saw an opportunity to get you to refinance so that they could generate another fee when the second loan was sold off. The fees may have been large enough that they were willing to pay any fees you would have been on the hook for. And it may have been the end of a reporting period for the loan originator, who might have been a little desperate to hit a certain target.
    Is it also possible that at the last minute, they realized they needed a higher average fico score in the pool they were about to sell, so they ate the rate difference themselves to sell off a pool of loans that wouldn’t have been as marketable without your fico score (and maybe some others). They may have gone to get the pool rated, found out they couldn’t get the rating they needed, and so they just took any high fico score person they could find (and an existing customer was easier to locate than a high fico new one, since the pipeline of high quality borrowers had been sucked dry months ago) to add them back into the pool so they could sell it off. Again, it may have been a timing issue: they just didn’t want to have to wait to sell it off into a different reporting period.
    Either way, you made out. And with 20% down, you aren’t likely to walk, so giving up the no recourse right to turn in the keys and walk away had little value to you anyways. Sounds like a windfall to me: you were probably in the right place (a high fico score) at the right time (a period in which high fico scoring borrowers were harder to find, at a time when the loan originatro needed to upgrade the pool).

  12. tipster – thanks for the response. this was along the lines of what I was assuming, but I am not in the mortgage biz, so I don’t know exactly how things work – your scenarios make a lot of sense, at least on paper.
    as for your last point – ‘i made out.’ well, the story on that is still to be written. i probably fall into the neutral to bearish camp on this site (i think we know where your position falls), but my reasons for purchasing (as opposed to renting) are/were simple. ‘get busy living, or get busy dying.’
    i can’t predict the future, and the current flat to bear market in SF real estate may last 1 year or 20 years. If I wait for a bottom – well I might be wating forever. The better decision making metric is simpler – given my financial situation can I afford to buy now, and not have it eat up my income? This is the reason why I will never understand ARMs. My 30 year fixed will only get cheaper as my income rises and inflation devalues my payments. I can easily afford it now, so going forward it will continue to become cheaper and cheaper. ARMs are awful, because they give you no assurances as to the future affordability of your investment. Would you take a job where they told you that they would pay you a bit more for the first 5 years, then at year 6 they could drop your salary by 20-30%? And would you sign that dotted line?

  13. “Would you take a job where they told you that they would pay you a bit more for the first 5 years, then at year 6 they could drop your salary by 20-30%? And would you sign that dotted line?”
    Depends on what my alternatives were. If it was take that job under those circumstances or not have a job at all, I’d take the uncertain future over the bleak present.
    If I know my employer would be cutting my pay in 5 years then I would make certain that I am doing everything I can to be ready to get a better job in 5 years.
    How that applies back to r/e is that in five years when my ARM resets I plan to have my 2nd mortgage paid off, have perfect credit with no other debt, and have cash in bank so that I can be in a position to refi into a 20 year fixed and have my place paid off in time for retirement in 25 years.

  14. “Would you take a job where they told you that they would pay you a bit more for the first 5 years, then at year 6 they could drop your salary by 20-30%? And would you sign that dotted line?”
    Ummm…Errr…Yes! Not a difficult choice really. That’s a long time to be at a job. A significant chunk of people will be on to their next opportunity well before the 5 years comes around. I understand your point but in some ways your example reinforces why ARMs can be great products for the right consumers.

  15. BTW, I know lots of savy homeowners who saved thousands by taking out monthly CMT indexed adjustable rate mortages between 2002-2005 and refinanced to 30 year fixed or longer term ARMs as rates started to move in an upward direction. It’s not very difficult to time because in general rates change slowly and in relatively small increments.

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