The End of Low Rates?

The biggest year-end story in real estate was undoubtedly rising mortgage rates.  Rates bottomed in July and rose slowly until the election when they went ballistic with one of the steepest rises we have seen in the past 8 years. Whenever we get an outsized move like that there is a lot of anxiety. Many people are projecting much higher rates this year and an end to the historic 'Low Rate Era' of the past 10 years. While the rise in rates is unsettling it is important to keep things in perspective. The chart below shows the swing lows and highs in mortgage rates since 2009. The recent rise brings us closer to the middle of the 8-year range. With the FED projected to raise rates three times in 2017 an upward bias in mortgage rates is expected, but even so, there is further to go before rates break out of the current multi-year range. Until that happens, rates are still very low with the potential to make lower lows in a future economic slowdown.

Where are Rates, Really?

Where do homebuyers get information about mortgage rates and how accurate is it? More than likely from the news media, whether in print, TV, radio or the internet. When we hear about mortgage rates from these sources they are most likely citing the weekly mortgage rate survey published by Freddie Mac each Thursday called the Primary Mortgage Market Survey (PMMS). This survey is a great tool for referencing historical mortgage rates as it goes all the way back to 1971- pretty cool and you can check it out here: http://www.freddiemac.com/pmms/

The PMMS does have a down side, though; it doesn't always keep up with what is happening with rates on a day to day basis. Since the survey data is collected on Monday and Tuesday to be published on Thursday it is often out of whack with the true level of rates. You see, mortgage rates move fluidly just like stock prices. Mortgage rates offered to applicants are a reflection of the most current trading prices of Fannie Mae, Freddie Mac, and Ginnie Mae bonds, which trade on the Chicago Mercantile Exchange (CME) most every business day of the year. So by the time the survey is published rates have already moved on. This chart shows the discrepancy between the Freddie Mac survey and actual daily rates over the past 3 months.

 

You can see that rarely do rates remain the same by the time the survey is published. In quiet market conditions the survey more closely reflects actual rates, but at other times it can be off by a mile like it was in November and December of this year. This week the survey shows rates at 4.09% when we ended the week closer to 4 1/4.

Mortgage Banker, Mortgage Broker, which is best?

When you get a mortgage there are two possible retail origination channels that your loan can be funded through, a mortgage banking channel or a mortgage broker channel.  The mortgage broker channel has taken a lot of heat over the past several years for delivering a lot of the 'toxic' mortgages which contributed to the housing crash of 2007.  The truth is that both rogue bankers (think corporate boiler room call center operations) and rogue brokers (think short sighted, get rich quick personalities) alike purposefully matched unqualified borrowers to untenable mortgage products in the heyday of the housing mania.  Since 2007, the industry has returned to a more normal state of affairs with most of the bad apples either going under financially or being fenced out by higher licensing standards.

The first thing to understand is that the same type loans are funded through both channels and getting the lowest rate or closing costs is not dependent on the channel you use.  The main difference between the two channels comes down to control over the loan process in the case of banking, and the ability to offer more loan options or flexibility (pricing, guidelines, and time frames) in the case of brokering.  Good arguments can be made from both sides as to which channel is the best, but there is an irony because what is posed to be the superior benefit of each channel can also be its greatest weakness.

In the case of banking, control over the loan process is achieved by handling all the aspects of originating the mortgage in house.  This is a great benefit so long as 'the house' is running an efficient operation and offering competitive interest rates and fees.  Because retail mortgage demand is inconsistent and swings up and down quickly when there are changes in interest rates and the real estate market, there are times when a mortgage banker becomes overwhelmed with loan volume.  Unexpected volume can stretch the loan process from weeks to months and encourage bankers to raise their rates to help slow the incoming volume and increase their per loan profitability.

Brokering, on the other hand, maintains the advantage of having access to the loan offerings of many different mortgage sources.  This is particularly attractive for applicants whose current, specific situation puts their application near the edge or outside of typical underwriting guidelines.  Whether the issue is employment, income, credit, qualifying ratios, loan-to-value, loan amount, property type, property characteristics, loan purpose, source of funds, properties owned, or vesting; having multiple sources of funding helps 'thread the needle' and can turn a denial into an approval, provide better a interest rate, or the most desirable structure for the loan.  This being said, the benefits of brokering are limited to the resources and skills of the mortgage broker.  If a broker only has one source, or does not process enough loan volume to maintain a solid understanding the various guidelines at their disposal, the assumed benefit may not exist.

As a mortgage originator, I have years of experience working in both the banker and broker channels and determining which is best for a particular loan application.  Stratis Financial is licensed in the State of California and we fund mortgages as both a mortgage banker and a mortgage broker.  This gives us the best combination of control and flexibility to serve our clients' specific funding requirements with the best execution of interest rate, closing costs, and service.  If you are interested in learning which funding channel best suits your situation, please send me an e-mail or give me a call.