Rates up!!

After a quiet weekend in the markets, rates are headed up this a.m.. It appears a result of a continuing run-off of foreign capitol from the US markets.

As of noon (PDT) 30 year fixed conforming range from 6% for 2 points to 6.5% @ 0 points

Choosing a Loan Officer

I had a call the other morning from a person moving back east (why, I can’t imagine), and she was asking how she should shop for someone to handle her mortgage purchase loan back there. Normally the real estate agents involved would be the best starting point for recommendations of lenders; however in this case, no agents were involved. Although Mountain Coast is able to, and has, originated and closed mortgages in many other states, in this case a local lender would best serve her. So now the challenge was to provide her with the questions she should be asking in order to find the “right” local person.

I recommended that she start with a large national bank and ask them about their rates, describe the property that she wanted to buy, and have them pre-qualify her for the purchase. This should give her a base rate from which to compare. The next lender to call would be a local bank and ask them to do the same thing. Finally, start calling the mortgage brokers in the area and compare, giving all the information to each. All of the rates should be within a quarter of a point in rate of each other (e.g. 5.25% to 5.5%, both at 0 points), and the other closing costs will all be within a few hundred dollars. If all the brokers she calls are within this quarter a point and one is a full half point underneath, then I would be really suspicious of that broker’s ability to deliver! Be certain to compare apples to apples, not just the rates but also the fees as well and the lock-in period. If one lender offers the same rate as another lender, but will only “lock-in” that rate when it is time to close, then you are at the mercy of the market and the lender. I also told her to make certain that the lock-in time provided was long enough to close the escrow- a 30 day lock-in for a 60 day escrow would not be much good.

Lastly, once she has her choices narrowed down to 2 or 3 lenders, she needs to determine which lender was most responsive to her questions, had questions of their own about the transaction, presented her with different options rather than just a rate quote, and was easiest to reach and called her back when needed. Finally, she needs to decide which lender she felt most comfortable with and had confidence that this lender would perform as promised.

By the time all of these questions are answered and rates and fees are compared, she should have no doubt on which lender to use for her mortgage needs

What Could Go Wrong?

In the real estate and mortgage industry this is the question that is always asked under the good agent’s breath and NEVER uttered out loud. There are so many ways that Murphy’s Law can hit (if something can go wrong, it will) that no one can think of every one.

Last week, on August 15, a large mortgage banker, Capitol Commerce Mortgage abruptly closed its doors and left thousands of borrowers and mortgage brokers in the lurch.

In order to understand what happened, you will need to understand the flow of an interest rate lock. When a mortgage borrower places an application with a mortgage broker, and the broker “guarantees” the rate, the broker locks in that interest rate and terms with a wholesale lender (mortgage banker). It is the wholesale lender that is guarantying the rate to the broker. In order for the lender to protect themselves from rising or falling rates, and thereby losing money, they do what is referred to as a "hedge".

A hedge is the buying or selling of options (through Wall Street) that will increase or decrease in value depending on the movement of interest rates. In a volatile interest rate market most lenders will be 100% hedged. They leave nothing to chance that they will be caught on the wrong side of a major interest rate movement either up or down.

Unfortuantely Capitol Commerce was not 100% hedged according to several representatives of the company.

Over the past 8 weeks interest rates have climbed from the low 5% range at 0 points to the consumer to the mid-6 % range. During this time there wasn't any chance that the rates decreased enough to undo their mistakes and they could get 100% hedged. Kinda like sitting at the black jack table wishing you hadn't taken the last card!

The end came within a couple of days and with no warning. On Wednesday they were funding loans, on Thursday the 14th they knew they had a problem and had everything was on hold. And on Friday , August 15th, they laid off over 700 employees, defaulted on thousands of loan comitments and closed their doors.

When Capitol Commerce closed their doors, any loan that was in the process with them was cancelled. They refused to honor any of their locks, no matter the circumstances. The loan may have been for a purchase or refinance. It may have been ready to fund and close, or it may have been submitted the day before. It didn’t matter. The lender was out of business and borrowers were out of luck.

Mortgage banks have misjudged interest rate markets before and gone out of business defaulting on their commitments, but never at this magnitude and never with such a wide difference in the interest rate that had been locked in and the current rate.

What are borrowers and brokers doing? In many cases there isn’t anything that can be done. Interest rates are much higher now, and with today’s interest rate it makes sense to refinance in certain specific cases. In cases where it was a purchase the borrower may not qualify at these higher interest rates and the terms that they wanted.

If you were unlucky enough to get caught up in this, give me a call and we can discuss your options.

Interest rates for conforming loans (under $322,700) as of 3/20/03 (p.m.) are:

30 year: 5.75% (APR 6.03%) payments are $1,883.19/mo.
15 year: 5.00% (APR 5.47%) payments are $2,551.89/mo.

These are 2-point loans, for 0 point add about a half point to rate.

Bruce McCoy is owner/broker of Mountain Coast Mortgage located in Scotts Valley. He can be reached at 831-438-7130 .