Rick's Straight Talk Blog

What goes up comes down.  After the 30 yr. Fixed Conforming shot up from 4.50% to 5.375% in a few days, it has now settled back down to 4.875% - 5.0%.  This is a nice dip, so I would be looking to lock whenever possible.

Let's hope we can stay in te high 4s to low 5s,

Rick Pelleriti

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Recently I wrote about the high cost of procrastination.  For those of you who didn't jump on 4.50% in May, I feel sorry for you.  I had many clients who locked there, and hindsight says that was a very wise decision. 

Then, there are those that wanted to wait for rates to go down further, and then we saw rates climb to 5.375% for the standard, 30 year Conforming.

It has settled down to about 5.125%, but many experts are saying we won't see the mid 4s again.  It's hard to argue against that.

On the one hand, the Fed and the Treasury needs to keep rates low to spur our recovery, but at the same time, the Treasury needs to sell bonds to raise  our insatiable need for money to spend our way out of our economic doldrums.  Economic experts are now writing how you can't have it both ways - and that eventually we can't stop the inevitable inflation - which means higher rates.

Rates will rise -there seems no doubt about it.  My advice is to take an historical perspective - anything under 6.0% is great.  Again - don't be greedy.  You can get very low 5s right now - why on earth would you wait and risk losing your last chance to refi?

Property values aren't going up anytime soon....

There's a scary scenario out there if you are prone to procrastination - or are waiting another month or two because you think rates will be 3.5%, or some other nonsense that the media would have you believe.

Here's the real world, as I am experiencing this every day in the trenches doing home loans throughout California.

Folks, real estate prices are still declining, and banks have lost billions because their portfolios (home loans) are secured by homes whose value is now less than the amount of the mortgage.  You'd have to be an ostrich to not know this if you have read any news at all in the last 6 months.

So here's the lesson.  Lenders are extremely wary of home values.  This means they are scrutinizing appraisals.  They look at how old the appraisal is - and then they expect values to be lower than what is shown.

So - if you are starting the refinance process - and since you need the appraisal to submit a complete loan file, do not delay in supplying any information needed, and signing any forms that need to be signed.

You have a short window of opportunity.  Lenders are taking more than 30 days to just process a loan.  Just when they are about to approve the loan, they notice that a "comp" might be 90 days old.  This scares them.  They then ask for new "comps" to support value.

So - the way to win this game is think of it is a race -get everyrhing done as soon as you can.  There should be a sense of urgency.

You never know if there is going to be an REO Sale or a Short Sale down the block that may become a much lower "comp" and then knock you out of the game.

You may have been expecting to save $300 a month with a nice new 4.5% interest rate.  That amounts to savings of $36,000 over 10 years.  What a shame to lose all that because you waited an extra month hoping to save just a little more - but now you can't refinance at all.

True Story, folks.

Don't delay - procrastination can be VERY expensive.

Rick Pelleriti
California's Upfront Mortgage Broker

As I write this on the afternoon of March 18, 2009, there has been a historic drop in the yield on 10 yr. Treasury Notes. from 3.0% to 2.53% - all in about 2 hours!

That bodes well for mortgage rates, and lenders are starting to re-price favorably.  However - I must warn you to beware of what I will call "False Advertising."

It's easy to fall into this trap.  Here's what I mean.  Most borrowers and lenders will want to close the loan in 30 days, so they typically lock the rate for 30 days - and they lock at the beginning of the loan process.  That used to work fine in the "old days," like maybe 2 months ago.

Now, with such historical low rates and unprecedented volume, lenders simply cannot process loans that fast.

So - while they still advertise rates, and while a mortgage broker may quote rates based on a 30 day lock, you just won't be able to get that rate, when it takes at least 40-50 days to close the loan!

So - buyer beware.  This is like going to a car lot and asking for the advertised special, and then being told they can't have it becuase there was only one and it was already sold.

Go to my webpage on the left entitled "locking the rate" and you will read about strategies where you can get the teaser rate - but there is a smart way to go about it.

I don't tease - I have had to adjust my "Wholesale Rates" table on my website to now reflect a 45 day lock period.  Perhaps there is a lender out there that might quote a better rate - but trust me folks, it's likely a tease.

If you work with me, I'll guide you through the process so you can get what you want and not take on any unhappy surprises at the end.

Regards,

Rick Pelleriti
California's Upfront Mortgage Broker

I hope you read that Subject Line carefully  ;-)

With today's low rates, everyone asks "when can I lock?"  While it is true that many lenders still let you physically lock early in the process, it actually can hurt many people in the long run, including you.

There are many reasons, but here are a few.

First, some lenders don't allow you to extend the lock.  That means if you can't close the loan by the lock expiration date, you lose that rate.  If rates went up, that's what you're stuck with, or you don't follow through and you must start again with someone else.  Of course, that is more expensive because now you'll have to pay for another credit report and appraisal, at least.  It also means "burning a lock, and I'll talk more about that, too.

Second, if you lock too early, there is no guarantee the loan can close.  For example, if you lock before the appraisal, and then the value comes in too low, you may no longer be able to refinance because your LTV (Loan to Value) ratio is now too high.  If it's over 80%, it means you will need mortgage insurance so now that very attractive 4.875% rate becomes more like 6.0%.

Another reason may be that you live in a Condo, Townhome, or PUD, which has a Homeowner's Association.  Let's say you lock early, and then when the HOA's Questionnaire is filled out by the HOA organization, it turns out there is some trivial pending litigation.  Guess what?  You cannot refinance, and again you will "burn your lock."  That is a new Fannie Mae Guideline impacting all lenders. 

Probably the most common example of locking too early is simply the fact that the vast majority of lenders are just so swamped that they are taking more than 30 days to close a loan.  That costs extra money, even if you can extend a lock, and unless you have a friendly mortgage broker (like me) who will offer to pay for lock extension fees, any money you thought you'd save by locking early can evaporate.

Lastly, let's talk briefly about what is called "burning a lock."  When you lock a loan, the lender makes a financial commitment to the investor for that loan.  If you do not follow through on the loan for ANY reason, the lender cannot meet that financial obligation.  That costs the lender money.

Lenders, as you now know, have lost billions, and they are no longer lenient when it comes to burning locks.  On the horizon are punitive measures for mortgage brokers who burn too many locks.  Lenders now religiously track this.  If the mortgage broker's "pull through" falls too low, they will no longer be allowed to work with that lender.

That's how you can hurt other people - an entire mortgage company can lose the ability to work with that lender - and that hurts every mortgage broker, and all the potential borrowers that wanted to work with that mortgage broker.

Repeat this event too many times, and you will see mortgage broker companies fold up shop - and that will hurt the mortgage industry as a whole.

So - you see that a little selfish act (I want to lock now!) can have far reaching effects - sort of like a mini-version of one subprime loan that had a temporary beneficial effect for one person, but too many of them down the road helps contribute to an economic collapse.

So as the subject title of this blog warns - don't get too excited about locking too early - there isn't always a happy ending  ;-)

The following is a sad story - so get your Kleenex ready...

Joe Borrower has a $550,000 mortgage at 6.25%.  His house is valued at $725,000, and his payment is $3,386.  He sees rates at an all time low so he wants to refi.  So far so good since today's rates for his scenario are about 5.25%.  His new payment would be $3,037.  Joe is excited about saving $349 per month.

However, Joe saw that last week rates dipped to 5.125%, so he'd like to wait a little while, hoping that rates will drop again.  Joe was hoping to save another $42 a month.

Poor, poor, Joe.  Time to get the Kleenex out.

What Joe didn't realize is that two blocks away, a family was going through a Short Sale, and it just closed escrow.  Joe didn't know this.  The house was near identical to Joe's, and the sale price was $604,000.

As luck would have it, rates dropped to 5.125%, so Joe asked his mortgage broker to lock the loan.  Since Joe wasn't sure about going forward, he hadn't ordered the appraisal yet. 

You can guess the rest.  The appraiser could not support the $725,000 value because of the new "comp" of $604,000.  Joe's Loan to Value ratio went from a respectable 76% to 91%.

Guess what?  Since the LTV was now over 80%, Joe needs Mortgage Insurance.  To make matters worse, there are no mortgage insurance companies who will go more than 90% LTV for loans over $417,000.

So - Joe cannot refinance at all.  No saving of $349 a month.  By the way, Joe thought for sure he'd be in the home for 10 years.  Saving $349 a month for 120 months represented a savings of $41,880.

If Joe's gamble had won, he would have saved an extra $42 a month, or $5,040 over the 10 year.

I'll let you be the judge if Joe's gamble paid off.  As for me, if I knew I had a guaranteed savings of $42,000, I wouldn't risk it ALL to MAYBE get an extra $5,000.

The moral of the story:  Don't wait.  Don't be greedy.  Don't be like Joe.

If you went to a Sports Bar where you can legally bet on, say, a professional football game, you might risk $9 to win $1 on a "near sure thing."  Say if it were the Super Bowl Champions playing the worst team in the league.

But would you make that same bet if you were totally uncertain of the outcome?  Of course not.  Would you bet $$22,000?  I think we would all agree that borders on insanity.

Well...that is exactly what a lot of people are doing right now.  Consider a common case that I see on a recurring basis.  A borrower has a $600K loan, and has a 6.0% interest rate.  As I write this the market is hovering around 5.0% at wholesale.  A refinance at 5.0% would save the borrower $376 per month.  Over a reasonable 5 year period, the savings would total $22,560.

That's a SURE THING.

Now - let's look at what they are doing.  many are saying - I'd like to hold out until the rate drops some more - even if it's just one-eighth to 4.875%.

The amount they might incrementally save is $46 a month.  That is about 1/9th of what they could save right now by refinancing at 5.0% - hence the reference to betting $9 to save $1.

Now, here's the good part (or not so good part).  By waiting, here's what's happening.

1st - property values are going down - the rule of thumb realtors and appraisers are using is 1-2% per month.  This could happen drastically and suddenly, as a Short Sale gets closed or an REO is sold, and your "comps" all of a sudden drop by $100,000.  There goes your LTV (Loan to Value) ratio.

That alone could eliminate you from refinancing altogether, or take you to an LTV % above 80%, thus requiring mortgage insurance, which will add about 1% to your interest rate - and now you can kiss your $376 savings goodbye.

2nd:  The market begins to absord the Trillion dollars or so that is being pumped into the economy to "stabilize" housing values.  Experts are now writing that this must eventually lead to inflation - and inflation goes hand in hand with higher interest rates.  Strike two for waiting for rates to go down - they will start creeping back up.

3rd:  Job losses are rampant and layoffs are increasing.  I just lost two loans recently because the borrower was "unexpectedly laid off."  So much for documenting your income and being able to refinance.  Strike three.

Sorry for mixing metaphors -- football and baseball  ;-)

I don't believe I need to belabor the point.

There is a HUGE risk in waiting.  It's a Bad Bet!

Rick Pelleriti
Upfront Mortgage Broker
408-238-2746

Can you imagine going to the most popular restaurant in New York City on a Saturday night at 8pm and expecting to get a table?  That would be silly.  You would be asked if you had a reservation - and then you'd probably still wait a bit.

Well that's exactly what's happening now in the mortgage industry.  Lenders are quoting turn times of 12 or 15, days, and even longer.

That means you have to wait at least two weeks before your file is even looked at.

What's the smart thing to do?  Make a reservation!

What does that mean?  It means going through the loan application process, running credit, getting the appraisal done, signing and returning all the forms, and sending in all the required documentation, which are pay stubs, W2s, and bank statements.

That is called a "complete file," and that's the equivalent of a "reservation."  Many lenders won't even look at you until all this is in.  Some lenders might let you lock the rate, but you have to complete all of this within five days.

So - to avoid the long wait - make that reservation first.  Get your ducks in a row and then lock.  That way you avoid the rush "somewhat" and can even get preferred pricing.

Rick Pelleriti
Upfront Mortgage Broker

Interest Rates have fallen to historical lows, as most of us know by now.  For a couple of hours two days ago, some lenders were quoting 4.375% for a 30 yr. fixed, Conforming.

Then it popped right back up to 4.50%, and has drifted to 4.625%, and today 4.75%.

Will it go back down?  Maybe.  Will it go higher.  Probably.

Should I lock now?  Only if you can be happy that you got one of the best rates in history, a 30 yr. loan less than 5.0%.

If you're reading this and you're on the fence to refinance or lock, I can only offer you this - I have seen it time and again where someone wants an extra "eighth," or thinks it might go "just a little lower," only to lose the opportunity to significantly improve their financial situation.

They had to wait many months for the market to reverse.  They would have been better off not waiting.

I would ask myself, will 5.0% significantly improve my financial situation?  If your break-even point is less than 24 months, that that's a great thing.  Anything lower than that is gravy.

You can call me for a free break-even analysis, and we can figure out if it makes financial sense for you to refinance at anything below 5.0%.

Sincerely,

Rick Pelleriti
408-238-2746

Wholesale rates for a 30 year fixed conforming loan are now at 5.25% - the lowest I have ever seen.  The yield on the 10 year Treasury Note has dropped to 2.8% - the lowest since its inception in 1962.

I have watched these rates carefully every day over the past 4 years - and my advice has always been - anything below 6.0% is very good.

Might they go lower?  Sure - anything can happen.  It is also true that there are always market corrections - so don't be surprised if rates shoot back up to 6.0% by Christmas. 

But if you can refinance or purchase with a mortgage in the "low 5s," you will be very happy over the long term.

Very few people can say that.  Don't wait.

Rick Pelleriti
Upfront Mortgage Broker
408-238-2746