Wednesday, May 06, 2009

Rate Drops Keep Falling on My Head

Where the heck has Nate been?

Gosh wouldya believe that it has been about a month since our last visit here at NWOW. Wow,… life seems to have taken a turn in the busy direction… and it seems that my late night computer hours have been taken up with catching up on my fantasy baseball team and missed episodes of Heroes and Desperate Housewives. My team is already deep in last place and I may have been mathematically eliminated on Cinco De Mayo! Amazingly, I still have not caught up with my shows, since I’m still 2 episodes behind on Heroes! It's a good thing those 2 along with Lost and 24 are my only can’t miss shows on my schedule…otherwise I might not be back here till July!

Speaking of Lost…as always. I remain totally confused. I see that the story has evolved into a tale of traveling to the past to change the present. The first episode in 2004 started out with people on a plane, crashing into the island due to the release of some electromagnetic energy caused by a human/computer malfunction. Will traveling back and changing history mean that the end of the show will show the plane flying on its merry way with NO release of that energy. Will the unhappy passengers on that flight get a mulligan and never even realize what transpired when the plane "crashed"? I guess they will just show Ben and Juliet hanging out at a book club meeting while up above the plane passengers sit watching a lame-o 2003 movie as Sawyer, Kate and Jack are oblivious to the craziness that has entertained us the last 5 yrs, and we would all know Michael Emerson as a buggy eyed actor who did a fantastic job on "The Practice". Of course by next week I will change that theory too.

Nonetheless… it was raining this past Sunday.. and Trophy Wife was at a Hadassah shindig… so I grabbed my laptop, popped on my earbuds to listen to American Top 40 with Casey Kasem.(from the 80s on satellite radio via my cellphone), and went off to Panera to catch up on some out of town baseball and begin my revisit to NWOW.

Today’s column is one of those synergy (not the energy that Desmond has to press codes to prevent) cross promotional columns in connection with my Mortgage podcast. If you have noticed I also have been a bad boy and not updated my podcast in quite awhile. I started the Podcast a few years ago as a vehicle to discuss different mortgage products. A guy I used to work with taught me how to maneuver my podcast to be listed first when googling the term "mortgage podcast". Interestingly enough I discovered another mortgage podcast that lists first when you google "mortage" podcast, because his references to his expertise are the "mortage" field!

The idea behind the original concept was that the episodes would not be timely so that stuff that I recorded in 2006 would still be relevant in 2009. However, once we had the infamous mortgage meltdown, the entire lending process changed. Banks took away all of their "creative" programs leaving us with basically Fannie Mae or Freddie Mac loans and FHA government loans. It’s very difficult to do podcasts about different products when they really aren't there anymore.

However I have branched out and podcasted about other not timely mortgage related issues which brings us to today’s column and future podcast topic that I would like to call... … “Rate Drops Keep Falling on My Head”.

Rates are usually dictated by the movements of the Treasury Bond. Rule of thumb is that if the stock market has a rough day, the rates will tend to improve. However nowadays there are really only 2 loan categories – Fannie Mae/Freddie Mac (also known as conventional) and FHA. All FHA loans involve a monthly mortgage insurance premium, even if you have more than a 20% equity position in your house. On top of that, those loans include an upfront insurance premium payment that is financed into the loan. That is why, a lot of people would prefer to take a conventional Fannie/Freddie loan so they can avoid paying the extra insurance.

However, as we hear breathless news announcers bellow with glee that rates are dropping there is of course a catch. Fannie Mae decided last year to institute “pricing penalties” on borrowers… so when you hear about these great low rates in the high 4’s. you better have a 740+ credit score and own approximately 40% of the value of your house to qualify for that wonderful low rate.

And just like the saying that 40 is the new 30… credit scores have a similar 120 point swing. In the old days, a 500 score could secure you a mortgage loan; now the minimum score is 620. And on top of that, in the old days where 620 could basically get you virtually any type of loan – now you need a 740 to get the best of what is available.

Interestingly enough, one byproduct of this latest downward trend in interest rates has been a rise in fees. Before this recent rate drop, I rarely thought it was a good idea to pay points on a mortgage loan… because usually paying a fee of 1% of the mortgage loan usually got the rate down by about 1/8 to ¼. But the conventional rate sheets are quite clever… they have changed the spread on how mortgage loans are designed.. now people have a chance to pay a point to knock the rate down approximately 1%. Nowadays, qualified borrowers actually benefit from paying the point – since it can now bring you a substantial discount in your final monthly payment. Fannie and Freddie cleverly set it up this way, because not paying the point gets you a higher undesirable rate.. and if you are not a “desirable borrower”, they don't want your business and want those people to be tempted to go towards an FHA loan which has a much lower rate, but usually a similar payment once you add in the mortgage insurance.

Now that May has arrived the latest curveball is coming our way. One conventional pricing penalty involves loan to value – how much your loan is divided by the value. In the old days, loan originators had a roster of qualified local appraisers who knew the area well and could do the proper detailed research needed to find the correct value… many times those values have flown in right under the wire.. reaching the amount needed to avoid one of those pesky penalties. And once a loan officer builds up relationships with his appraisers – those appraisers will do a search of comparable properties in advance.. just to make sure that the value is going to be there. It’s a terrific courtesy to save your customers the expense of an appraisal if the appraiser knows in advance that the value of the home is too low to make the loan work.

Well that luxury is now … gone! Starting May 1, banks are now in charge of hiring the appraisers for conventional loans… (FHA is not a part of this). And, the days of comp searches in advance are how history, which kind of sucks if you are the kind of mortgage guy who doesn't like surprises and prefers to know the value in advance. Unfortunately, I also have encountered a few lousy appraisers in my day… and it makes me nervous that some of these shlubs are going to now be appraising houses for my customers. Luckily there is an appeals process, for appraisals that come in way off...but nonetheless this should be an interesting next few months.

Now if you'll excuse me I am going to see if turning that wheel will push me back in time before all this mortgage craziness started!


Here is the original song that inspired the title of today's column.

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