Mortgage Rates – A “volatile” market this month

Interest rates have been very volatile in June. This Poll Post on Seattle Bubble and the chart below are a good reminder that interest rates were at 5.5% in the Summer of 2009 and at or above 6% quite a few times in 2007 and 2008.

I thought you might find this chart of where interest rates have been for the last 40 years of interest. I borrowed it, with permission, from my friend Jay Thompson’s blog.

Personally I think they will run between 4.5% and 5.5%, but that’s a pretty big spread for people looking at homes to buy. A 1 point spread on a $417,000 conforming loan is $255 a month.


Of more concern to me is the variance in Real Estate Taxes from one property to the next.

When you get pre-approved, make sure you know what payment vs Purchase Price you are being approved for, and what assumptions are being made as to Taxes and Insurance.

I looked at the 30 homes sold in King County for $500,000 in the last 6 months, and the range of Annual Real Estate Tax went from $3,600 on the low side, to $8,000 on the high side. HUGE SPREAD. The Real Estate Taxes could easily turn your pre-approval into a Failed Pending Sale.

Be sure to know the underlying basis of your pre-approval, and make adjustments as needed from one house to the next. If it’s a super-deal, the taxes may be out of proportion to the sold price.

Perhaps You Should Lock Your Rate Today

If you are “floating” a conventional rate right now,  you might want to contact your mortgage originator to discuss whether or not you should lock today.  Typically, I don’t like to make bold predictions with mortgage rates as there are too many factors that impact their direction and traders may  not always react consistently to these factors… but today I can tell you quite confidently that Monday’s conforming rate will cost more from many wholesale lenders.

Fannie Mae and Freddie Mac are revising their price adjustments (LLPA) on mortgages with a term greater than 15 years.   This will go into effect on loans they purchase April 1, 2011 or later.  However, this means that wholesale lenders need to make their adjustments well in advance so that by the time Fannie or Freddie buys the loan from them, the wholesale lender isn’t stuck with that price hit…not to mention, if they sell the loans prior to the April Fools increase, they’ve made some extra coin.  

The adjustments range from 0 – 0.5% in fee depending on credit score and loan-to-value.   For example, someone locking today with a credit score of 740 and a loan to value of 80% or higher does not have a base price adjustment.   With the new LLPA, this person has a price adjustment of 0.25% in fee.   On a $400,000 loan amount, this boils down to $1,000 in fee and may or may not make a difference in rate (typically 1% in fee = 0.25% in rate) depending on how pricing is at that moment.  

Someone with a 680-699 mid-credit score and a loan to value over 80% will see an increase of 0.5% to fee for their conforming mortgage rate.   0.5% in fee tends to pencil out to a 0.125-0.25% higher interest rate or the borrower can pay 0.5% more in fee (discount) to buy their rate down.   

Homebuyers who are putting less than 20% down payment with credit scores below 740 should make sure their mortgage professional is approved to originate FHA loans as they are well worth the consideration.   As always, I strongly recommend getting started with the preapproval process early so that you can work on improving credit, if needed, as one digit lower may ding your mortgage rate.

If you or your mortgage professional are convinced that rates will be going down, then you may not want to lock.  They will just need to go down low enough to compensate for the increase to conforming price adjustments (LLPA) which will be factored into the pricing of conforming rates.

30 Year Fixed Hits New Record Low

Yesterday and so far this morning, you can lock in 4.00% for a 30 year fixed rate (apr 4.147) based on the standard criteria that I use for my Friday Rate posts at Rain City Guide:

  • Priced with 1 point total (origination/discount)
  • 740 or higher mid-credit score
  • $400,000 loan amount
  • 80% loan to value or lower
  • closing in 45 days

If any of the above variables are different, it may impact the pricing of the rate.    

This morning, mortgagae backed securities are in a position for a reprice for the worse so it’s hard to say how long this rate will be available.

I just had to share in case tomorrow’s rates appear to be the unchanged.  Remember rates are a moving target and change throughout the day….sometimes often!

Lower Interest Rate – Escrow Timeframe

1) How long is Escrow?

The correct answer is it can be as long or short as the buyer and seller want it to be. However a long escrow timeframe can cause an escrow to fail, because it can create a situation where the buyer no longer qualifies for the mortgage. Just because the buyer qualified when the offer was submitted, doesn’t mean the buyer will continue to qualify on the day the lender is supposed to fund the loan so the escrow can close.

A lender assumes a given interest rate when they qualify the buyer. If that interest rate is different for the reasons detailed below, at time of close, the buyer may not qualify at that changed interest rate.

2) Why do most agents write a contract to close in 30 days or less?

Dan Green of The Mortgage Reports wrote a post today explaining why a shorter escrow timeframe equals a lower mortgage interest rate. His post explains that a 60 day lock “costs more” than a 30 day lock, often in terms of higher interest rate vs. higher cash costs to close.

In order for the buyer to get the rate they think they are getting, they have to be able to lock that rate for no longer than 30 days. While the buyer is not required to lock that rate, it should at least be a possibility. If a buyer looks at a rate quote of 5%, they often are not told that assumes a rate lock period of no more than 30 days. So if they sign a contract to close in 60 days, and then try to lock the rate in the first week of their contract, they will find the rate to do that is higher than the rate they were quoted the day they made the offer.

The rate can change in a few hours without the issues noted in this post. But even if the rate does not change at all, the rate will be higher if you try to lock it through a 60 day closing vs. a 30 day closing.

The honest lender who asks “what is your proposed closing date” and gives you a “60 day lock rate quote” will be higher than the lender who assumes a 30 day lock. Be sure the lenders are using the same parameters when quoting you a rate prior to making an offer, so that you are comparing apples to apples. In this scenario the most trustworthy lender could appear to have a higher rate, when they are being most honest about the potential for rate if you lock for 60 vs. 30 days.

3) How does the closing date timeframe, chosen at time of offer AND ACCEPTANCE, impact the buyer and seller in other ways?

Buyer A gets a pre-approval letter the day they are submitting an offer. The lender pre-approves the buyer for a $300,000 mortgage at 5%.

Seller B accepts the buyer’s offer BUT asks for a 90 day closing, as the home they are moving to is new construction, and won’t be completed for 90 days.

Buyer A accepts the seller’s counter-offer as to closing date.

30 days later the buyer sees interest rates rising and wants to lock the rate. The lender quotes the “lock rate” and the buyer is confused. “I see the rate on your website is 5%. Why are you quoting me 5.25%?” Lender explains that a 60 day lock vs. a 30 day lock adds 1/4 of a % point to the mortgage interest rate.

Here’s where it gets REALLY complicated…if the buyer doesn’t qualify to buy the house if the rate is 5.25% vs. 5%, he can’t lock it. If he chooses to wait until the closing is within 30 days before he locks the rate, the rate could be at 5.5% at that time. If the timeframe for the finance contingency protecting the buyer’s Earnest Money expires prior to that time (and almost all do), the buyer is painted into a corner by circumstance.

Moral of the story is often a buyer CAN let the seller have 90 days to close if they are renting month to month. But a buyer must consider the impact of the interest rate floating out for 60 of those 90 days and/or the cost of locking for more than 30 days at time of contract.

Today, it is near impossible for a seller to stay in the property for more than 60 days from time of offer and acceptance. You can close in 30 days and let the seller stay or rent back from the buyer. BUT the buyer’s lender will not allow that seller to rent bank for an extended period. If the buyer is qualifying at an “owner occupied” interest rate, they will impose a maximum number of days that the buyer can rent it to the seller. Beyond that time period the buyer’s lender will consider it an “investment” mortgage, and higher investor interest rate and higher downpayment requirements, vs. an “owner occupied” purchase money loan.

The “ifs, ands or buts” that happen in a split second during negotiations, can change the “assumptions” made at the time the buyer received their preapproval letter. The lender is often not “in the room” while these negotiations take place, or consulted for every tiny change in close date or rent back terms. They most often don’t see those “changes” until the buyer and seller both sign the contract as finally negotiated.

These small changes can put the buyer’s Earnest Money “at risk” of loss. The agent is the “protector of the buyer’s Earnest Money”, as related to changes in contract terms during negotiations. Yet how many realize the changed position the buyer is put in when the seller counters for a longer close date?

We see thousands of articles on “How to choose an agent?” Perhaps asking the agent “what happens if the seller wants to close in 90 days, or wants to rent back for 90 days?”, is a better question than “How many homes have you ‘sold’ this year?” The cost of closing is VERY important to the buyer. Not closing at all, due to changes no one played out to the likely eventual worst case scenario, affects both the buyer AND the seller.

Agents don’t “sell” houses. Agents represent the buyer OR the seller AND the transaction as a whole, as it appears at time of offer…AND as it changes during negotiations and escrow.

Handing a contract to escrow and waiting for a commission check is no longer an option. Changes in lending BACK TO the old tried and true rules of the game, requires agents to be on their toes all the way to the day escrow closes…or doesn’t close.

Why are so many escrows not closing these days? Everyone asks that question. Truth is the skills needed by an agent have changed dramatically back to old school…and agents still think “it’s the lender’s job” vs. theirs.

Pointless Pricing Tricks

A few weeks ago, a home buyer shared some pricing scenarios a fellow mortgage originator was offering to them.   


Scenario 1 looks like the mortgage originator wants the borrower to believe they’re only making a half point in loan fees and the borrower is paying an additional 0.625% to buy down the rate further.   How the borrower should look at this is that if they select Scenario 1, they are paying 1.125% to have 4.50% for a rate.  (This was provided to me in mid-March and does not reflect current pricing).

On most current Good Faith Estimates have the following lines designated for “points”

  • Line 801 = Loan Origination
  • Line 802 = Loan Discount
  • Line 808 = Loan Origination if you’re a Mortgage Broker

In all my years (9 as of April Fools) of mortgage originating, I’ve never seen an estimate with 0.5% origination and 0.625% discount points.   It just seems silly to me.   This really illustrates why a consumer should just add up the points paid regardless of if they are entered as discount or origination–if you’ve paid either, you’re paying points.   In fact, as I’m sure I’ve mentioned before (but it’s worth repeating) you should add up all closing costs disclosed in Section 800 of your Good Faith Estimate to see what you are paying for interest rate.   Some lenders may have additional fees, such as processing, underwriting, funding…etc.    Unfortunately, APR is not a fool proof way to compare interest rates.

While I’m dishing out advice, selecting a Mortgage Professional by interest rates–when we are currently receiving a new rate sheet ever 5 hours is crazy.   Odds are, you’re not comparing apples to apples and rate quotes don’t mean anything unless you’re locking in at that moment.

In this current market, make sure:

  • Your loan is locked for enough time to accomodate your closing.  A 30 day quote on a 35 day closing isn’t going to cut it.
  • Will your Mortgage Originator honor the closing costs shown in Section 800 of the Good Faith Estimate? 
  • Will your lender be able to provide loan documents to the escrow company earlier enough to accomodate the escrow company so they can provide you with an estimate HUD to review prior to signing?  (You need to request this, if you want to have your estimated HUD-1 Settlement prior to your signing appointment–it’s generally not requested by borrowers).

FOMC leaves rates unchanged

There’s really nowhere to go but up with the target Fed Funds rate.   From the Press release:

“To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion.”

As of the time of writing this post, I have yet to see lenders issue new rate sheets for the better in spite of significant improvements with mortgage backed securities.    We should be seeing improved rates soon. 

If you are in the market for a mortgage, whether you are buying a home or refinancing, be sure to provide your Mortgage Professional with all the required documentation needed.   We are all ready in the midst of a “refi boom” and this will compound the delays.   

Real Estate Agents: I highly recommend that you make sure the mortgage companies you have transactions with prioritize purchases over refinance business. 

Homeowners who are considering refinancing:  watch out for mortgage originators who are promising quick closings.  Every aspect of the refinance transaction will become clogged.

Everyone needs to be patient.

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.

And the Fed…

With the Fed’s key rates all ready at a rock bottom 0-0.25%, no one anticipates rates to be lowered.  Any reaction will be from the release of their announcement which is anytime. 

Dan Green, one of my favorite mortgage bloggers, is documenting the impact of today’s Fed announcement to mortgage rates via Twitter.   Check it out.

I’ll update this post in a few moments with my two cents following the FOMC announcement.

Update 11:20 am.  

The Fed leaves the Funds Rate unchanged stating that “the economy has weakened furthe”r since their last meeting in  December.   They also reaffirmed their committment to continue buying mortgage backed securities:

“The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee’s policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve’s balance sheet at a high level. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant.”

Click here for today’s FOMC Statement and be sure to follow Dan Green’s reporting on the reaction of mortgage backed securities.

4.5% Interest Rate's Affect on Home Values

When interest rates are up, home values go down.  When interest rates go down, home values go up.  That’s a basic principle, but I do agree with those who expect this market to perform counterintuitively to stablize prices vs. causing them to go up.  Basically that means they go up to where they are, counteracting the continued pressure for them to decrease. (see 5th paragraph below)

In 1990 when I started in real estate, the common walk-in client said “I want to buy a 4 bedroom, 2.5 bath colonial, with a basement and a monthly payment of $1,200”.  Let’s set the bogey at double that and toss out the basement 🙂  The number I hear most often for the neighborhood below is a rental payment of $2,500 a month or a mortgage payment of $3,000 or so with 20% down. (talking SFH Redmond here)

I like using Abbey Road in Redmond as the bogey house.  Kind of like Goldilocks and the Three Bears selection process.  Not too big, not below desirable…just right.  Good schools.  Popular neighborhood;  3 car garage most times. Current median price around $700,000.  Range of pricing from $630,000 to $830,000.  Not too new to be affordable, not too old to be acceptable.

Let’s test the theory with a monthly payment of $2,800 a month not including taxes and insurance which would add about $500 a month to the payment, and using 20% down (see next post for ratio of value to total mortgages of the neighborhood). Let me test that against $3,000 net after tax payment.  The after tax benefit should be about $700 minimum, so $2,800 plus $500 = PITI of $3,300 less $700 gives plenty of breathing room for price to go up to $750,000 or for people to stick at $650,000 if their household income is $100,000 vs, $150,000.  Depends on whether you use 28% or 33% for housing payment.  At 33% of $100,000 you would need about $200,000 down on the $650,000 purchase price.  Fits the basic buyer profile for that area anyway you slice it.

Rates of 6.25% and 20% down and a payment of $2,800 P & I,  would equal a sale price of $570,000.  Current prices would continue to be drawn down toward $570,000 at rates of 6.25% even in a seller’s market (which this neighborhood still is) due to financing qualification changes. Someone asked me from Sunday Night Stats why prices are continuing to go down in Seller’s Market neighborhoods.  That’s your answer.  Qualifying guidelines & interest rates reducing the ability to purchase and pressuring prices downward.

Now let’s change the rate from 6.25% to 4.5% and see what happens to sale price.  Keeping the same monthly at $2,800 and 20% down at 4.5% the sale price would be $690,000. 

So, my gut was right.  As rates go down to 4.5%, it does not increase the price from the $700,000 bogey we started with, but it does stablizes home prices and keeps them from slipping further down.  I always work through these things in my head in real time, testing my perception against reality.  I’m always happy when I prove myself right, and admittedly sometimes scratch the post if I prove myself wrong by the end of the post :).

I test the same theory on Rivertrail Townhomes with a bogey of $1,800 a month P & I.  High end I won’t calculate…and clearly not at 20% down.  I can’t realistically do townhome scenarios until FHA rates get lower.  But the $700,000 give or take single family home market will clearly be supported in value by interest rates of 4.5% preventing prices from slipping further back.

So to answer Jillayne’s question on my Sunday Night Stats post (sorry for the delay, Jillayne; had to test my answer) the 2nd wave of Alt-A’s will not affect pricing in this scenario IF 4.5% interest rates take hold, counter-acting the negative impact.

Sorry for the long drawn out answer to Jillayne’s question, but I don’t answer off the top of my head, even when I think I know the answer in two seconds.  I test my answer first…and this one tests out in this example.  FHA won’t test out, I’m not even going to try to test it out.  Unless FHA rates get much lower, the middle value market is going to win on all fronts.  High end will continue to suffer from Jumbo Loan issues.  Low end will continue to suffer from cash to close issues unless FHA rates come down substantially and toward at least 5% or less.  FHA and VA rates were conspicuously missing from Rhonda’s Friday rate post…  Maybe she can pop her head up from her busy day and catch us up on where those rates are, or at miniumum include them in this week’s Friday Rate Post.

Bottom line…4.5% interest rates will stop property values from declining…at least in my service area of North Seattle and Eastside.  Someone else will have to test the theory in the South End of Seattle and beyond, and for the rest of the Country.

FOMC Cuts Discount Rate by 0.75%

From the FOMC press release:

“The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent….

As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant.  The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities.

…In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 1/2 percent.”

Mortgage rates should continue to improve with the purchase of MBS.   This is why you need to do as Kenneth Harney recommends in this Sunday’s paper:

“Ask your broker or loan officer whether you can lock in today’s rate but still have the ability to move down should cheaper money become available to you.

Not all lenders can accommodate such requests. Some brokers offer 60-day locks with that option; others may charge you”.