Graeme

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Predicting Rates: The Newest Vegas Tablegame

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at January 25, 2008 in Mortgage Musings and Why I Hate My Industry. 11 Comments

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vegas vacation I’m back. Hold your applause please.

It has been several weeks since my last post. I promised the Blown Mortgage cognoscenti that I wouldn’t write posts unless I was moved to do so. I should probably be moved more often, but I digress.

The past four days have been a whirlwind at Brown Ram Mortgage as they have surely been elsewhere. I can break the week down into four parts:

1) Rates Hit the Floor- As 30-year Fixed Mortgages hit 5% the leads from prospective clients roll in real time. My partner and I brace for the windfall of new applications.

2) Existing Clients Want in on the Action- After sending out a flurry of applications to potential clients, old clients come calling with one demand: they want in on the action. Many of those clients whose rates have not changed as a result of the Fed Rates Cut (i.e. 99% of them) heard the news on Good Morning America about “rates being cut.” Why can’t theirs be cut too???

3) Pleading for Clients to Send in Their Applications- My partner and I hit the phones pleading with clients to take advantage of our free 30-day rate lock. “We can lock the 5% for free for 30-days. Worst case scenario you get the 5%, with the best case being a continuing drop in rates, whereby I will move you into the better loan.” Our fax sits quietly at its desk, waiting to be called upon.

4) Mortgage Rates Return to Normalcy (and by normalcy I mean still well below historical averages)- My partner and I call each potential client to let them know that we can no longer honor the rates on the applications due to back-to-back midday rate changes. Tears well up in our eyes; defiant prospects point to another “rate cut meeting” at the end of the month. Frustration brews a cup of coffee in our office kitchen.

So why did people wait? Why did they not send in their application and lock their interest rates at 5%? Why did homeowner’s who could merely swap their 6.625% for a 5.625% without cost hold-off??? Because Predicting Rates is the Newest Vegas Table Game.

This forum has already been used to bemoan the fact that everyone is an “expert” on mortgages, especially those people who aren’t involved in the industry at all. If I knew as much about my potential borrowers jobs as they knew about mine, I would be a qualified auto-mechanic, doctor, lawyer and geologist all at the same time! That mortgage arrogance, as I would like to deem it, is certainly part of the problem. However, there is a greater problem which is greed. Much like at the blackjack, craps or poker tables, mortgage shoppers always want more. Cutting their rate by .5% or even 1.25% isn’t enough because they want more. And much like that friend of yours who “knows how to win at blackjack” because they read a book, each mortgage shopper has the inside scoop from their trusted source about the direction of rates. “I heard on the_________(radio, TV, neighbor, newspaper, etc.) that rates are going to go down even more, so I am going to hold out.”

Well, I have heard that if you double down on 11, split 9’s or higher, and hold on 16, that you can win more money playing blackjack. But, I can count on one hand the amount of times that advice has panned out, so I’d rather take the guaranteed money (or savings) and push away from the table.

Refinance Now? Yes!

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Graeme

at December 5, 2007 in Consumer Mortgage Tips, Market Update, Mortgage News/Insight and Random Thoughts. 3 Comments

I get paid to assist people with their mortgage. Let’s get that out of the way at the beginning. Without splitting hairs, I have to sell people on why they should work with me as opposed to someone else. But what is truly strange in this market is that I also have to sell people on why they should refinance NOW. The reason is because more and more I hear my potential clients saying that they are going to “hold-off for now” because “rates are going to go down even lower.”

My job would be so much easier if I had the crystal balls that these people have stuffed away in their basements. Oftentimes I will ask them if they know how many children that I will have or if I can expect a full-head of hair at 60. It would be much easier for these people to answer my questions instead of looking at the birthrates or genealogies of my family. Heck, let’s just throw the question out to the random guy Jim from Gardena, CA who told me this morning that, “Bush will lower the rates because he is already in a mess in
Iraq.” Zoiks!!! Remind me not to invite him to the Christmas party or let him baby-sit my nephew!

Maybe we should look at the history of Conventional 30-year rates instead of speculating on them like horses at the Del Mar Racetrack? The only guy I knew who bet on horses for a living actually lived in his van (and still does not surprisingly). Did you know that since 1971, in only 3 calendar years did 30-year Fixed Conventional loans average below 6%? To make that point even clearer: out of 432 potential months, only 28(!) of those months averaged a below 6% Monthly 30-year Fixed Average. Right now you can get close to a 5.5% 30-year Fixed Conventional Loan (obviously cash-out and LTV can adjust this). What rates are people waiting for?

In addition to the rates being at historical lows, home values are plummeting as discussed in detail on these very same pages. So, let me get this straight: sit tight, wait for your neighbor’s house to foreclose and kill your home’s value, and then hope that rates go down another .5%. How does that make sense? What if rates do go down another .5%? On a $300,000 loan that saves you exactly $93 a month, or about $1,200 a year. No small amount mind you, that is a substantial sum. But guess what? The odds of those rates returning are about as good as the odds at your local casino. Actually, we’d all probably do pretty well at the casino with our knowledgeable soothsayer Jim from
Gardena.

Graeme isn’t really an angry guy. Occasionally he uses sarcasm to get his point across, but overall he is as happy-go-lucky as they come. Graeme can be reached at gbrown@brownrammortgage.com or www.brownrammortgage.com

Mortgage Shoppers: Shopping for Advocates or Salesmen?

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Graeme

at November 29, 2007 in Consumer Mortgage Tips. 27 Comments

For a mortgage advocacy website, this has to hit home, right??? One of the major issues I face as an originator is people who seem to want a salesman and not an advocate. I am convinced that this is one of the biggest problems facing the mortgage industry today, but unfortunately I don’t think this is on Senator Schumer’s radar. Changing consumer behavior is much more difficult than changing lender behavior.

“Oh great, Morgan has brought on some crazy new contributor to Blown Mortgage. Is this guy passing blame onto the consumer? This guy shouldn’t even be allowed to comment on this page!” Perhaps that is true, but with the amount of loan originations that my partner and I lose to unscrupulous salesmen peddling bad financial sense to unsuspecting yet overanxious homeowners, I know this isn’t just a “me” problem.

Loan originators have the difficult task of balancing two very important goals: 1) make money by selling loans and 2) act in their client’s best interests throughout the loan process. The grey area for Loan Originators is obvious. LO’s need to beat the other guy’s deals to make money. If that means selling a bad buy-down or maybe quoting the 15-day lock rate as opposed to the 30-day lock rate to win the deal, well, the grocery store doesn’t accept honesty in return for food. (I don’t advocate misleading consumers to make a buck, but I see why it happens. The best part is that these shady tactics won’t work with an informed consumer who sticks to their original wish-list.)

However, the unsuspecting homeowner has as difficult job too. They need to sort through emails, phone calls and direct-mail pieces to find the right person (company) to secure a loan for them. Every homeowner starts out their search for a refinance or purchase loan with the correct demands for their chosen company. Everyone wants the lowest rate, the lowest closing costs, and honesty throughout the process. But guess what? Somewhere along the line, they forget that final piece. Honesty is replaced by stubbornness, or dare I say…greed? The same greed that leads LO’s to sell bad loans, makes good homeowners accept bad financial advice.

Here are two examples from THIS WEEK:

1) CA Borrower wants a 30-year fixed loan. He tells me that he makes plenty of money and is prepared to pay his home off in the 30-year time period. He repeats this several times. He also mentions that he loves baseball (awesome, I played professionally) and that he is trying to get his son to go to Dartmouth (another score, I went to an Ivy as well.) He also mentions that he wants the lowest closing costs possible and that he was misled into his current loan. As an originator I am ecstatic; not only do we have a connection, but I know that I can give him exactly what he wants! I explain my access to direct-lender rates, my perfect record with the DRE and my referral letters. I add that without huge overhead I can keep costs very low. He seems delighted! So how does this love-fest work itself out? We chat again (another love-fest) and I outline the deal offering the Par rate with less than a 1% origination fee in closing costs (no need to get greedy with a slam-dunk.) He thanks me, says he will review my proposal and we schedule a follow-up the next day. The next day he misses our appointment. Today, I get him on the phone and he thanks me for my time (bad sign) and tells me that he is going with a guy offering him a “no-cost” loan. I ask what the rate is and he tells me. I counter that the deal he is taking is incongruous with his stated desire to pay off his loan. I add (emphatically), that he will pay over $56,000 in extra interest over the expected life of the note. I explain how “no-cost” loans are simply higher rate loans with Points paid by the lender which are not seen by the consumer. I even take a screen shot of the rate-sheet on my computer and send it to him as proof. After all of that extra work and effort to try to get him what he asked for originally he says, “Thanks, but no thanks.”

2) Another example from yesterday! This time the borrower wants a 5-year ARM. On our initial phone call we hit it off. He likes football instead of baseball and state schools instead of ‘snobby private schools’, but the connection is still palpable. By the end of the discussion he is talking to me like his son, and I am eager to help. With this scenario the Par-rate is still the best option because the buy-down is too expensive to make up for the lower monthly payment, and the buy-up vastly exceeds the 1% total in fees. I send him the GFE and schedule a follow-up call for this morning. So what does he tell me? He has decided to go with a lower rate. I ask if the other lender is buying-down the rate. He says, “Yes, but I get a lower interest rate.” I explain how much he would save in 5 years by accepting the buy-down and how his savings is actually less than what he has to pay to get the lower interest rate. I ask if the lower payment is what he needs, but with a 25% DTI that answer is obvious. “No, the interest rate is what I like.” So what does he do when all facts are presented? He goes with the other company.

Maybe I couldn’t sell a life jacket to a drowning man? Perhaps I have taken the honest approach a bit too far? Both of those are feasible, but I have numerous Top Producer Awards and a clear conscience at night to dismiss both of those explanations. I just wish that consumers would stick to their guns and incorporate honesty, and integrity, into their half of this huge financial decision.

Graeme K. Brown is C.O.O. of Brown Ram Mortgage, specialists in helping people to understand their loan documents before signing them. He can be reached at gbrown@brownrammortgage.com or by visiting www.brownrammortgage.com