The Fed Leaves the Funds Rate Unchanged

benbIt’s no surprise that the Federal Reserve left the funds rate at the current lows of 0 – 0.25% on the heals of continued weak housing data.   What investors are looking for is “what” is being said in the FOMC Statement that is released in conjunction with their rate decision.

If you have a home equity line of credit that is tied to the prime rate, your rate should be unchanged (for now).   Otherwise, this decision does not have a direct impact on mortgage rates.  It does influence the markets (stocks and bonds) which impacts mortgage rates.

Here’s what I extracted from today’s Statement:

Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit….employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months….subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

Prior to the FOMC Statement, mortgage backed securites are flat (but still at record levels with very low mortgage rates).   Follow me on Twitter to see live rate quotes.   If I have intraday rate changes today, I’ll update this post.

Unhonored Rate Locks

Did you know that a locked rate is a commitment for a loan to be delivered to a lender?   Mortgage companies and loan originators are often judged by how many loans they deliver or what their lock fall-out ratio is.   A normal expection used to be around 70-75% of locked loans to be delivered–now I’m hearing reports of 30-40% of locked loans actually being delivered to the lender.  

This is dangerous for mortgage brokers and correspondent lenders.  Why?  Wholesale lenders are cutting back and “cherry picking” which companies they’ll work with.   A significant factor is lock-fall out.  If odds are, a locked  loan is not going to be delivered, why should they work with that mortgage company?    

Sometimes the wholesale lender may be ordering the mortgage company to be “cut off” of future business and sometimes it may be the wholesale lender having their Account Executives that they need to reduce their client base to a certain amount of accounts (as a way to reduce the commission they’re paying the AE’s). 

There can be many reasons for a locked loan not to be delivered, such as:

  • the loan could not be approved because of the property (appraisal issues) or the borrower.
  • private mortgage insurance issues.
  • the borrower decides not to proceed with the transaction.

Here’s how one wholesale lender rates fallout:

  • 0-24.99% = Full approval.
  • 25-34.99% = Monitor
  • 35-49.99% = Watch
  • 50-74.99% = Probation
  • 75% or more = Inactivated.   Good by wholesale relationship with that lender.

Wholesale lenders don’t care if it’s due to the borrower not proceeding with the refi or if it was their underwriting that “killed the deal”…it often counts towards that dreaded lock fallout ratio.

A disturbing trend I heard from a local title insurance company is “double applications”.  Where a borrower is proceeding with a refinance transaction with two different lenders.   If both loan originators have the loan locked, someone is going to lose!   Not to mention, the expense to the title and escrow companies who are working on a transaction a consumer is not going to honor.   The only way this is caught, is if the title or escrow company happen to be the same one that the two loan originators the consumer is using.   Regardless of if both loans are locked or not, it’s unscrupulous behavior.    

Borrowers–please do not have two loan applications going on at the same time with two different loan originators.   When you do decide to lock in a rate with a mortgage professional, understand it IS a commitment.

Major Credit Score Rate Adjustments — The Hits Keep Coming

Fannie and Freddie are implementing new loan level price adjustments (LLPA) based on credit score and loan to value. This is a
change for the worse from my previous post announcing the original LLPA. Now your credit score is even more critical. Some lenders are implementing these changes immediately with terms on when the loans must be locked and closed.

The following information is for purchases and rate/term refinances with mortgage terms longer than 15 years (cash out refi’s have additional hits).

The hits shown below are “to price” and not to rate.

LTV (loan to value) 60.01% to 70%
Credit Score 720 or better — no hit
Credit Score 640 -719 is a 0.500% hit to price.
Credit Score 620 – 639 is a 0.750% hit to price.

LTV 70.01 or More
Credit Score 720 or better — no hit
Credit Score 680 to 719 is a 0.500% hit to price.
Credit Score 660 – 679 is a 1.250% hit to price.
Credit Score 640 – 659 is a 1.750% hit to price.
Credit Score 620 – 639 is a 2.500% hit to price.

These “hits” are in addition to other factors that are used for pricing rates and even though I quoted lower credit scores, don’t count on Fannie/Freddie (conforming) financing…especially if you’re eyeing the temporary conforming-jumbo which requires a minimum 660 credit score.

So if you have a 719 credit score and are putting 20% down using a 30 or 20 year fixed rate mortgage, you are going to pay 0.5% more in fee than your friend with a 720 credit score. If your loan amount is $400,000, this is an additional cost of $2000. Or the “price hit” may be factored into to the interest rate. Typically (but not always) 0.5% in fee would equal about 0.125% – 0.25% higher in rate. A quarter point difference in rate runs around $65.00 per month ($775 per year).

Recommended read: How to Improve Your Credit Score.

I also encourage anyone who is considering buying or refinancing a home to meet with a Mortgage Professional as soon as possible. A little time and elbow grease may save you thousands.