The Mortgage Porter

The Difference One Dollar Makes: Conforming vs Jumbo Rates

This morning via Twitter, Talon Title asked me what the difference in rate is between a conforming and jumbo mortgage. Currently, as of October 1, 2011, the jumbo loan limit is set to be reduced unless Congress passes an extension.  In the Seattle area, the loan amount for jumbos will be anything over $506,000 (currently the loan limit is $567,500) for a single family dwelling. Ben Bernanke has stated that private banking will step in to finance these borrowers needing a mortgage over the conforming loan amounts...this is at a price.  He doesn't feel this will squeeze those borrowers out of the market.  I wonder if this will squeeze more buyers into adjustable rate mortgages.

Here's the difference in rates based on current pricing (as of 8:30 a.m. on July 14, 2011) with 740+ credit and an 80% loan to value.  We know the difference in the greater Seattle area between a jumbo and conforming rate will be $61,500 in down payment or equity.

Conforming loan amount of $417,000 or lower.

30 Year Fixed:  4.500% (apr 4.602).  

5/1 ARM: 3.000% (apr 3.292).  With 5/2/5 caps, this product is fixed at 3.000% for 60 months (P&I $1686) and then may adjust up 5% to 8.000% at the 61st payment (P&I $2744) or as low as 2.25% (P&I $1114). The rate will continue adjust up or down no more than 2% annually on the anniversary date and may never be higher than 8% or lower than 2.25%. Based on a $400,000 loan amount.

Conforming High Balance loan amount of $417,001 to $567,500 (for King County, Snohomish County or Pierce County).

30 Year Fixed:  4.625% (apr 4.602).  

5/1 ARM: 3.875% (apr 3.912).  With 5/2/5 caps, this product is fixed at 3.875% for 60 months (P&I $2379) and then may adjust up 5% to 8.875% at the 61st payment (P&I $3786) or as low as 2.75% (P&I $2102). The rate will continue adjust up or down no more than 2% annually on the anniversary date and may never be higher than 8.875% or lower than 2.75%.  Based on a $506,000 loan amount.

5/1 ARM: 2.875% (apr 3.231).  With 5/2/5 caps, this product is fixed at 2.875% for 60 months (P&I $2099) and then may adjust up 5% to 7.875% (P&I $3420)at the 61st payment or as low as 2.25% (P&I $1953). The rate will continue adjust up or down no more than 2% annually on the anniversary date and may never be higher than 7.875% or lower than 2.25%.  NOTE: 5% additional down payment (75% LTV) is required for this scenario. Based on a $506,000 loan amount.

Non-Conforming - Jumbo loan amounts $567,501 and higher (until October 1, 2011).

30 Year Fixed:  5.250% (apr 5.371).  

5/1 ARM: 3.875% (apr 3.904).  With 5/2/5 caps, this product is fixed at 3.875% for 60 months (P&I $2669) and then may adjust up 5% to 8.875% at the 61st payment (P&I $4246) or as low as 2.75% (P&I $2358). The rate will continue adjust up or down no more than 2% annually on the anniversary date and may never be higher than 8.875% or lower than 2.75%.  Based on a $567,501 loan amount.

Let's pretend that it's October 1, 2011 and that the changes to conforming loan limits are in place and somehow, mortgage rates are exactly the same as what I've quoted above.

The difference between the conforming high balance and jumbo rates are currently 0.625% in interest rate with the 30 year fixed mortgage. A loan amount of $506,001 or more (proposed future jumbo) would have a $193 higher mortgage payment with the jumbo rate over the conforming high balance based on rates above.

Are people going to stop buying homes that are in the current conforming high balance price range?  I don't think so... I do think that when the conforming loan limits are reduced later this year, it will cause some to select mortgage programs they might not have considered such as adjustable rate mortgages or piggy-back second mortgages.  It seems to me that Congress should allow the temporary higher loan limits to stay in place until housing becomes more stable.  There was some discussion during testimony yesterday by Congressman Miller in California, however as I mentioned, Ben Bernanke doesn't seem to think that the reduction in loan limits will impact housing significantly.  We'll know more in a few months...and don't forget, Fannie has issued "warnings" via their FAQs that we may see loan limits further reduced effective January 1, 2012.

Just for fun... since we're pretending to be in the future, here's a trip down 80s memory lane: 

Ben Bernanke's Testimony to Congress

As I write this post, Fed Chairman Ben Bernanke is before the Financial Services committee of the House for the Semiannual Monetary Report to Congress. 

From his prepared testimony:

"...the ongoing weakness in home values is holding down household wealth and weighing on consumer sentiment."

This is why I feel so strongly that the Home Affordable Refinance program (HARP) should not require appraisal for borrowers who qualify based on credit, income and employment. The home is already depreciated, why not allow the homeowner to reduce their mortgage payment and possibly prevent a foreclosure?

Case in point, one of my clients in Federal Way contacted me to refinance their home. They are being relocated out of state and are converting their existing home to a rental since selling it right now is not an option.  They have a 5/1 ARM (set to adjust in 13 months) and are interested in a 7/1 ARM as they do not plan on retaining the home beyond 7 years. Their mortgage is securitized by Fannie Mae so they qualify for a Home Affordable refi which provides them a lower rate and allows higher loan-to-values (lower appraised values) for an investment property. With this proposed refinance, they are going to reduce their monthly mortgage payment by $389!  That's more money in the economy and helps this family manage having a rental with their relocation scenario....then we receive the appraisal which comes in lower than anticipated. 

Now my clients options are to (1) bring in cash to closing by reducing the loan amount to 95% of the appraised value (what's allowed with a HARP refi for investment properties) or (2) cancel the transaction. They elect to cancel. It just doesn't make sense to invest more in the home with the relocation especially with the timing of the relocation.  

More from Bernanke's prepared testimony:

"Mortgage interest rates are near record lows, but access to mortgage credit continues to be constrained. Also, many potential homebuyers remain concerned about buying into a falling market, as weak demand for homes, the substantial backlog of vacant properties for sale, and the high proportion of distressed sales are keeping downward pressure on house prices."

Allowing Home Affordable refi's to be more like an FHA Streamline refinance by not requiring an appraisal would also help stabilize home values by preventing additional homes from becoming distressed.  

These are highly qualified borrowers who want to keep their property (would prefer to sell but cannot) and who want to take advantage of low mortgage rates. It makes no sense to me that appraised values are factored in when the rest of transaction is strong.

This is a solution that could really help our housing recover.

Ben, the Fed and Mortgage Interest Rates [Live Post]

Today the Fed will announce if they're going to change the Fed Funds rate. It's highly anticipated that they will leave the rate where it's currently at.  What ever action the Fed takes does not directly change mortgage rates, however it does have a strong INFLUENCE on mortgage rates.  Following the Fed's announcement, Ben Bernanke will be holding a press conference which may also impact mortgage rates. Remember, mortgage rates are based on mortgage backed securities (bonds) and inflation will drive mortgage rates higher.  

This is a live post to illustrate how the Feds actions may impact mortgage rates, assuming the markets don't shrug off the information.

As of 9:00 am this morning, prior to the Fed's monetary decision and MBS (FNMA 30yr 4.00%) are up 34bps.  What you and I probably relate to more than mortgage backed securities (MBS) are how this translates to mortgage rates. 

I can lock in a 30 year fixed at 4.375% (based on the criteria I use for rate quotes) with a discount of 0.198% (apr 4.503).  

5/1 ARM is currently at 2.875% (apr 3.256) with a discount of 0.043%.  5/1 ARM is fixed for 60 months and has caps of 5/2/5.  The highest this rate can be at the 61st payment (or the life of the loan) is 7.875%. 

11:10 am: we're minutes before Ben Bernanke's news conference.  Mortgage rates that I've quoted are unchanged.

9:25 am: DOW is down about 7 points.

"No change" to interest rates is announced.  The Feds Funds rate is unchanged at 0 - 0.25%.  Good news to those who have home equity lines of credit which are based on the prime rate, they've dodged another bullet!

Initial reaction: markets seem unmoved. No real surprises in the FOMC press release.

9:31 am: Receiving an intraday rate sheet with pricing for the better from one of the lenders we work with.  This lender did not have as competive pricing as what I quoted above (they're still far from it) as the began the day with worse pricing. The rate quotes above is still current pricing that I have available.

9:50 am: In just over an hour, we'll hear from Fed Head, Ben Bernanke.  Stay tuned. I'll continue to share rate updates and updating this "live" post.

10:30 am: MBS down to session lows at 15bps for the 30yr.

11:10 am: minutes before Ben Bernanke's news conference and mortgage rates are unchanged from what I've quoted above.  DOW is up 7.46.

12:15 pm: Ben Bernanke has wrapped up the news conference.  MBS are up slightly to 22bps with the DOW down 32. Mortgage rates and pricing that I quoted above are unchanged.

I listened to as much of Bernanke's conferene as I could while I was work on my day job, originating mortgage on homes located in Washington.  Some bits that I extracted (and shared on Twitter) are that Bernanke referred to the pace of unemployment being "frustratingly slow".  During the Q&A he said that "we don't use words like "extended period" to be intentionally opaque, it means that we really don't know how long".  Regarding housing, he commented that "those who can get credit, can buy a lot more house than they could a few years ago" referring to low rates and affordable home prices. He would like to see further efforts from mortgage servicers to modify loans when appropriate and to speed up the foreclosure process when appropriate.

DOW closes down 80.34.  

This Week Could be a Doozie for Mortgage Interest Rates

In the past, I've included the scheduled events that may impact mortgage interest rates in my rate weekly rate post.  However, this week is so packed data that I thought it was worthy of a post all its own.  Check this out (items that are bold tend to be the may be the most influential to rates):

Monday, April 25:  New Home Sales

Tuesday, April 26:  Consumer Confidence

Wednesday, April 27:  FOMC Meeting and Durable Goods Orders

Thursday, April 28:  Gross Domestic Product, Initial Jobless Claims, GDP Chain Deflator and Pending Home Sales.

Friday, April 29:  Personal Consumption Expenditures and Core PCE, Employment Cost Index, Chicago PMI and Consumer Sentiment Index (UoM).

Wednesday, we'll learn if the Fed's interest rate decision and possibly gain clues as to their plans with QE2.  Ben Bernanke is going to be having a news conference following the FOMC meeting which many will be tuned into hoping for clarity on his views of the direction of our economy.  You can see the entire week offers plenty of data to be digested.  

Remember, mortgage rates are based on mortgage backed securities (bonds) and are not set by the Fed.  Mortgage rates may are impacted by how MBS are being traded on the bond markets.  When the stock market is rallying or there are signs of inflation, mortgage rates tend to raise higher.  When the stocks are tanking, investors will often seek the safety of bonds which will cause rates to move lower.

Whether or not you should lock or float (not lock) your interest rate depends on your personal risk tolerance.  My general stance is that if you like the rate that is currently available - you should consider locking.  Decide which scenario is worse for you: losing today's rate by not locking or locking todays rate with a rate drop tomorrow.  Please discuss this with your local mortgage professional.  I am a NMLS Licensed Mortgage Originator dedicated solely to Washington State.    If you are interested in a mortgage for a home located anywhere in Washington State, I am happy to help you.

NOTE:  I plan on posting mortgage interest rates today.  Stay tuned!

The Day After the Fed's Rule on Loan Originator Compensation

Like it or not, the Fed's rule on how mortgage originators can be compensated is in full effect today.   It's hard to tell exactly how much this has impacted mortgage rates as mortgage backed securities are being beat up pretty hard from fears of inflation (rates would be higher today regardless of the Fed's rule).

Mortgage originators no longer have flexibility to price rates as see as fair.  Mortgage originators can no longer use their commissions to help their clients pay for any closing cost and sometimes, this may take place without the borrower even knowing about it (extension fees, for example).  Even if a mortgage originator makes an error on the good faith estimate beyond the allowed tolerance, the mortgage originator cannot pay for it!   Because of the additional cost of having to pay mortgage originators not based on rate and having to absorb the cost to "cure" a good faith estimate, mortgage companies, credit unions and banks have had to slightly increase rates.   So who winds up paying for the Fed's new rule?  The borrower.

Employers of mortgage originators have had to create to compensation plans since a majority of LOs were paid by the borrower from origination points, the lender with rebate or a combination of both.  Many mortgage companies are trying to use this as an opportunity to recruit LOs by trying to offer a sweeter deal than what they've been presented.   Mortgage originators are also just learning how much their rates  have been adjusted to cover the increased cost.  There's going to be trade-offs.  The higher the LOs pay, the higher the rate will most-likely be...the Feds rule hasn't changed this...it's only prevented the LO from increasing the rate to increase their pay.    Many mortgage originators are receiving RAISES from the new rule if they did not overcharge borrowers in the past.  It's bittersweet since many of us would still rather not have this rule and would prefer to have the ability to help out our clients when they need it.  Mortgage companies can come out with different pricing plans "periodically".

I'm still trying to figure out how I'm going to do Monday's rate post odds are, most rates will not be priced with a flat point.  The consumer will pay or receive rebate what the exact pricing is from the lender.   Before the rule, if a rate was priced just under par, I would often absorb the difference and not charge the borrower - I am forbidden from that now. 

Regardless of what rate you pick, I'm going to be paid the same.  I actually don't mind that.  Here's current pricing for a purchase closing by April 29, 2011 in greater Seattle based on a sales price of $500,000 with 20% down payment and credit scores of 740 or higher using a 30 year fixed rate.  All of my rates will be priced with 1 point (origination) with the lender pricing to the borrower being the variable.   Example for $400,000 loan amount:

4.875% priced with 1% plus 0.042 discount = 1.042% = $4,168 cost. (APR 5.041).

5.000% priced with 1% plus -0.445 rebate = 0.555% = $2,220 cost. (APR 5.124).

5.125% priced w/1% plus -0.861 rebate = 0.139% = $556 cost. (APR 5.213).

5.250% priced w/1% plus -1.920 rebate = 0.92% credit = $3,680 closing cost credit (APR 5.244).

You can see that "rebate pricing" is still available.  The big difference is that credit towards closing cost (as far as your mortgage originator is concerned) can only be done when locking or adjusting the lock.  It cannot be from the mortgage originators commission. 

It will be interesting to see how everyone adjust to this new change and lack of flexibility.  Everything is fine...as long as you stick with the cheeseburger with pepsi and chips.

 

Your choices loan programs and pricing options are disappearing.

Survey Says: Consumers Do NOT Want Higher Mortgage Rates

I posted a survey last week with three questions regarding loan originator compensation for people who either have or who are considering obtaining a mortgage.  Here are the results as of 7:20 this morning (click image for a better view).

 

80% of those who took the poll would rather allow their mortgage originator to have the freedom to price rates as they choose and to be able to use their commission to help with cost after locking (typically at closing).

20% would rather that rates were detached from the LOs commission and are willing to pay a slightly higher rate in order to have this "protection" and have the LOs commission restricted from being allowed to go towards any cost.

The results are overwhelming.  Consumers would much rather leave mortgage originator compensation alone.  They do  not want government interference with how a mortgage originator is paid.   Many mortgage originators do not want this rule either even though many will actually receive a "raise" since their commission will be fixed (no pricing leaning on an easier loan) and their commission is forbidden to be used in the transaction for anything (including helping out paying for an extension or other closing cost).

The Fed's Rule on "LO Comp" has been delayed by dramatic intervervention late Thursday (the eve before the the rule was to go into effect) by the U.S. Circuit Court.  We should have more information this Tuesday.

As of right now, you'll find that some mortgage companies and banks are proceeding with the rule and others are holding back until more is learned on Tuesday.  This can make a significant difference in your interest rate so you may want to check with your mortgage originator if you're locking on Monday if they are proceeding with the Fed LO Comp rule or not. 

Mortgage Master Service Corporation is delaying following the Fed Rule on LO Comp until we learn more on Tuesday from the Circuit Court Judges.   This means that I have freedom to price and lock your rates as I see as "fair" for at least one more day.

I will be posting mortgage rates tomorrow morning on my blog "as usual".  It could be my last mortgage rate post where I'm able to quote rates based on how I want to price them.

Related post:

The Feds Loan Originator Rule is a bad April Fools Joke on You, the Consumer

Mortgage Loan Originator Compensation Changing on April Fools

I'm going to start this post by saying I can bet certain people are going to chime in that this needed to happen and LO's will still thrive and do fine...and I can also bet that those who will sing that song have not recently been a mortgage originator.  They may be exposed to mortgage originators from being employed in the real estate industry, but in my opinion, they are "arm-chair quarterbacks" at best.  Enough said...on to my post.

Effective April 1, 2011 rules regarding how mortgage originators (anyone who takes a residential loan application) may be compensated will be implemented.  Currently most mortgage loan originators (MLO) are paid by the consumer (points), by the wholesale lender (rebate pricing) or a combination of both.  MLOs may also be paid a salary and receive additional compensation based on volume (many banks pay this way).  These rules are created by the Fed through modifications to Reg Z.  Even though the rule goes into effect on April 1, 2011; lenders will probably enact deadlines in advance (sometime in March). 

It's no surprise to me that there are two different sets of rules based on if the mortgage loan originator is employed by a bank or true corresponent lender (like Mortgage Master Service Corporation) verses a mortgage broker.  MLO's who are employed by a bank or true correspondent are not paid directly by the consumer, they are paid by their employer (also referred to as the "creditor").  Mortgage Brokers are once again kicked in the teeth with the changes to Reg Z.  I do wish we all had the same set of rules (including all being licensed) as consumers should not have to determine the type of originator and varying set of the regulations that apply.

Mortgage Brokers will no longer be allowed to receive "dual compensation".  This means that MLOs employed by a mortgage broker will only be able to recieve compensation paid by the consumer OR paid by the wholesale lender.  Let's say that today, a rate priced with zero points is 5.000% (rebate pricing is 1 pt to the broker) and priced with 1 point origination fee paid by the consumer buys the rate to 4.75% (zero rebate from the lender), a mortgage broker could offer these scenarios.  If the consumer decided they would like to have the rate of 4.875% and are willing to pay 0.5% in origination fee with the broker receiving 0.5% from the wholesale lender in rebate, this is not allowed per Reg Z.  From my understanding, retail mortgage loan officers (employed by banks and true correspondents) will still have this option because the consumer is not directly paying the mortgage originator.  I'm very thankful that I work for a correspondent lender, however it's really not fair for the mortgage brokers.

Mortgage Loan Originators may not be paid based on the terms and conditions of the loan.  The loan amount is not considered a term or condition however the interest rate is.   This rule also prohibits "steering" a consumer to lender offering less favorable terms in order to increase the loan originator's compensation".  

Owners of mortgage companies are currently scrambling trying to figure out how to compensate their mortgage originators.  

In my opinion, changes to RegZ seem to favor how many big banks have been paying their mortgage originators: volume.  How does a consumer benefit when the MLO who is taking care of their purchase or refinance is compensated by how many loans they can close in a specific period of time?  Banks will continue to pay their MLOs less per transaction as they complete as many loan applications as possible as they sit and wait for next trusting bank customer to walk into the branch.  In my opinion, banks want to pull the industry (quality of mortgage originator) down to their level so they have less competition.

I'm wondering which industry will our government get into next to control how one is paid?  With what's gone wrong in the housing industry, are the commissions paid to a real estate agent low hanging fruit?

Related post:

If your bank doesn't charge an overage or points, what do you call this? 

How am I paid? (2007)

The Fed Leaves Rates Unchanged

It was widely expected that the FOMC would not make changes to the Fed Funds rate today...and that's what happened. 

Here are excerpts from the FOMC statement today:

"Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.... Employers remain reluctant to add to payrolls. Housing starts are at a depressed level. Bank lending has continued to contract, but at a reduced rate in recent months..."

You can read the entire press release here.

If you have a home equity line of credit, your rates should be remaining the same (for now).   Other than loans attached to the prime rate, mortgage rates are not directly controlled by the Fed.  Mortgage rates, however, may be influenced by the actions of the FOMC.   Mortgage interest rates are based on bonds (like mortgage backed securities).  Investors reacting to the FOMC may impact mortgage rates.  Fellow mortgage blogger, Dan Green, has authored an excellent post: The Federal Reserve May *Influence* Mortgage Rates, But It Doesn't *Set* Them.

Mortgage rates remain at very low levels.  As the economy improves, we will see rates trend higher.  Inflation will also cause mortgage rates to rise. 

If you're a home owner (primary or investment) in Washington state, I highly recommend contacting your mortgage professional to see if refinancing today makes sense for you.   If you haven't heard from your mortgage originator in the past few months, it's possible they may no longer be originating as many have left industry.  I'm happy to adopt your mortgage and you as a client, regardless of if you refinance or not.

Poll: How would you prefer to have your mortgage originator compensated?

How a mortgage originator is compensated is being reviewed by the Federal Reserve and Washington State's Department of Financial Institutions (DFI).   The traditional method of being paid based on a percentage of the loan amount is getting some heat.  It's unfortunate because I do believe a majority of the bad actors are no longer in the mortgage industry thanks to the SAFE Act and licensing requirements.   Those who do not want to be held to the licensing standards and who want to stay in the mortgage industry will have work for a bank, where they are only registered.  Many banks are limiting what and how a mortgage originator "appears" to be paid to the consumer.  (Only mortgage brokers have had to disclose their compensation on the back end).   

Currently, a consumer can have their mortgage priced with an origination fee (points) or without points, which means rebate pricing is being used to compensate the originator.  The loan does not have to be priced with a full 1% of the loan amount, if you look back at even recent rate post at Mortgage Porter, you'll see that sometimes I quoting 0.75% for a certain rate--it all depends on where the markets are at that moment.

I would love to hear back from my readers how you feel mortgage originators should be compensated.   I will be leaving the poll on left side of my blog during the month of April.   Please vote and feel free to leave your comments on this post.

I'll be sure to share the results with you.

The choices in this poll are:

Flat Fee:  My opinion is that if mortgage originators are forced to go to a flat fee.  Mortgage companies will still have to compensate them for their "market worth".  It's possible that although the fee might look better, the base rate (without discount points) might be higher as it will be set by the bank or mortgage company, and not the originator.

Points:  This is currently the most common method with how a mortgage originator is paid.  Points can be paid by the consumer or by rebate from the bank/lender.

Hourly:  Consumers could select a mortgage originator based on their hourly rate and an estimation of how many hours the mortgage originator estimates their transaction would take.

Online Surveys & Market Research

Ben Bernanke's Mortgage Rate Exit Strategy

Ben Bernanke will be testifying before the House Finance Servicing Committee regarding the Fed's exit strategy.   From his prepared testimony:

All told, the Federal Reserve purchased $300 billion of Treasury securities and currently anticipates concluding purchases of $1.25 trillion of agency MBS and about $175 billion of agency debt securities at the end of March.

What this means is to you and me is that we will start seeing rates increase well before the end of March as the markets will adjust before the Fed stops their support of keeping mortgage rates artificially low.

This is nothing new.  It will be interesting to hear what else Mr. Bernanke has to say to the Committee today.

And for your morning viewing pleasure, how about this clip from Snagglepuss who's famous for his exits:

I can't believe I used to watch this stuff while eating my sugary cereal in the morning!