What Lenders Learned During Prior Refi Booms
First off, what is happening with interest rates and reduced yield spread premium? 15 years ago it wasn’t uncommon to see nice buy-up schedules on many products, with an increased yield spread premium being offered in return for a higher interest rate. But then along came the refinancing frenzy of 1993 and 1998, followed by the grand daddy refi bonanza of 2002 to 2003. As home loan rates dropped ever lower over the years, you can imagine how the investors felt as they watched loans turn around to be paid off in a relatively short time, as increasingly lower rates made it attractive for clients to refinance, sometimes multiple times in a year. These losses on loans were very costly to lenders.
So…after learning their lesson many times over…the lenders got smarter and started to reduce the amount of par premiums, followed by making those premiums more expensive by demanding even higher rates in return for a smaller premium and have now nearly eliminated that premium pricing which cost them so much money in the past.
Now, who would have ever thought that a credit score of 680 or an LTV of 90% would be considered such risky business? But it’s been a tough year for everyone, including Freddie and Fannie, and risk-based pricing is one measure they can take to protect themselves. Previouly adjustments could fairly easy to build into the rate, with a small bump up in rate. But those days are gone, often leaving the borrower with no choice but to pay points for the adjustment. This can be frustrating to clients who don’t understand why the recent pricing adjustments have to translate into potentially thousands of dollars in cash out of pocket.
Bottlenecks in the Pipeline Keep Rates Artificially Inflated
But wait there’s more…Investors have been slammed with the recent uptick in volume, at a time when they have both shrunk in number and depleted their head count, in an effort to slash costs. So while the increase in volume is certainly a good thing, it is apparently “too much too soon” for some investors to handle…and the only way to slow down the volume is by an increase in pricing. And why wouldn’t they want to do this??? If their capacity is maxed out, raising rates helps increase profits while making the workload manageable by slowing down the flow of incoming files. Not great for us but good for them.
The bottom line is - smart consumers cannot just call a lender and say: “what’s your rate and closing costs?” There are simply so many unknowns with the combination of credit score, loan to value percentages, property type, etc… that it is imperative for your clients to speak with a trusted mortgage advisor before making any final decisions about a property.
We are here to provide honest, straightforward advice. We will take ongoing care of you and anyone you refer to us in the same upfront fashion as we always have and this level of service does not end when a transaction is complete. Adapted from MMG
