With banks these days it might be better to loan your money directly out with prosper. At least then you are able to make your own risk assetments instead of letting these bankers do it.
One thing you see here is that CCB (and everyone else) is using things like FICO price adjustments to influence the average FICO of the loans it buys--which improves the g-fee Fannie Mae will offer it. To say that it is "really" pricing individual loan risk is a big problem.
Fact is, the actual default probability difference between loans in the 700-739 bucket and the 740+ bucket is minuscule, and saying that the higher bucket is "worth" another .25 is just plain odd. This pricing strategy--and that's what it is, strategy--means that CCB is trying to attract high-FICO loans to its pipeline as much as it is trying to "price the risk" of them.
A lender whose pipeline is, for whatever reason, already at a very high average FICO might "strategically" refuse to "pay up" for higher FICOs, to bring that average down a little (and average yields up a little). These mechanisms happen at very large pool levels. To translate this practice into the marketing slogan of "risk based pricing is individualized and means lower rates to higher-quality borrowers" is to, well, smoke some marketing dope.
We could look at rate sheets all day and not get to a "market price of risk" that consumers could use to reality-test a rate quote. The industry would have to really change its pricing practices for that to occur, not just its disclosure of its pricing practices.
Tanta,here in california the training given to loan Brokers the last few years is ALL done by the lenders,who throw in a free lunch.I would estimate that a little more than half of the LO's working for Brokers are reasonably honest and ethical.far fewer have any competence or understanding of how the system works.they are salespeople and have no idea of what a fiduciary responsibility is,even though they have one if they are licensed by the california DRE.yep,you have a fiduciary responsibility to your principal if you are a licensed real estate salesperson acting as a loan Broker in california.however since the test to become a sales agent is essentially a vocabulary and reading skills test on real estate that my cat could pass on a good day,and the lack of consequences for those that are unethical or even criminal....Moral Hazard is an inadequate term.
the next time I buy a home, I will go to at least 5 brokers and also 5 pure lenders and ask them to run "lots of scenarios" so that I can go home and figure out which is best.
the biggest fraud in all of this has been the assertion over the years that Realtors are EXPERTS. Because of this, many people (like me) trust them to help us with the biggest financial decision of our lives.
I was quite ignorant of all of this when I got my home loan. My Realtor said "these guys are good" so I went with them.
Luckily for me, I had a 30 year fixed products... so it was relatively easy to compare... but even then I only compred 2 places...
who knows, I could have gotten 0.125% off my interest rate... over time that's a lot of cash!
i see you've been studying hard to fulfill your dream of becoming a broker
I am fulfilling my lifelong dream of making complete strangers pay for the fact that I spent many of the best years of my life trying to train loan officers how to read rate sheets, having to make up rate sheets, and having to wade through large files which consititute the results of rate sheets.
So far it's working. You people will read anything.
the lender has to pay for giving you people rate locks; they're taking on interest-rate risk which they have to hedge, which they do by selling forward into the TBA market, or with interest rate futures, options, etc.
the lender has to pay for giving you people rate locks
Of course. And I didn't stray into the time value of money because holy shit, how long can these posts get?
But there is a connection between lock length and credit risk. Part of the whole thing about "going low doc" involves trying to shorten the processing time on a loan, so that Broker A can offer you a better rate (shorter lock) than Broker B, but you don't know that that's because Broker B is figuring we'll have to wade through your tax returns and wait until a 4506-T comes back.
Also, you notice that CCB doesn't offer a 30-day lock. You can imagine that this means that most loans are either fast processing (low doc or salaried borrowers and/or AUS) or they're a slow pain in the butt. Actually, you can also imagine that purchase-money borrowers are either always getting 45 days (even if they only need 30) or they're being made to float until after loan approval and getting the 15-day.
Wholesalers have so many operational problems with brokers that they have become increasingly unwilling to lock loans before they are approved. In the old retail days we locked customers the day they applied, because our fallout was more manageable. Brokers routinely send the same application to three or four different wholesalers, to see who approves it first or with fewer conditions. This creates a lot of fallout for the other lenders. As fallout increases, the hedge costs of convering a rate lock increase.
So there are lots of impacts of the "origination channel" or business model or operational setup on things as apparently unconnected as the time/price function.
If a federal law comes into place that makes the pricing sheets available to the public, then this would alleviate most of the problem. But maybe this is just a dream.
The common wisdom is that the mortgage brokerage business is going to be cleaned up, but it will re-emerge with stronger standards.
I think not.
This business is basically finished. Its explosion was an aberation due to lack of borrower education/concern, lack of regulator oversight, overheated market, low rates, etc.
There's no profit incentive for mortgage brokers to work in a heavily regulated environment of fiduciary responsibility and smarter consumers who shop around.
This has happened before...to mutual funds during the 70s, when uninformed investors were paying commissions of up to 20% to buy tanking mutual funds on contractual plans. Those plans disappeared as investors wised up, and so did most "mutual fund-only" salespeople. The no-load fund industry was born right there.
Mortgage brokers as we know them are dead in the water. The smart lenders are beefing up their direct side. The Internet will add to loan evaluation transparency for all consumers.
CCB's rates are laughable on the fixed and always have been.
Brokering conforming fixed rate loans is laughable, and always has been.
As I argued in my "origination channels" post, it makes no sense to broker commodity product like a CFRM. Subprime, maybe. "Alt-A" or boutique product, maybe. Vanilla agency FRMs? You are seeing tons of "pricing adjustments" that are really compensating for the risk created by the fact that the loan is brokered. We are moving backwards here in terms of price to consumer.
Click on Residential
Then Matrixes
They call subprime something prettier now: "non prime"
The fundamental nature of the relationship between the retail mortgage salesperson and the LO must be changed to that of fiduciary, no matter where the LO works: banker, broker, consumer finance company, etc.
File this under "The more things change, the more they stay the same."
This whole thing is set up to deliberately fleece as many borrowers as possible, minorities and low-income people heading the list.
It used to be the raw prejudice of bank officers, which at least gave it a face. Now it is built into the system, like so many other things these days.
I see a lot of programs and adjustments, but not rates (premiums,points,etc.). Kind of binary tool. So, I'm still looking for an "apples-to-apples" comparison tool.
btw,
all those lenders have websites with rate sheets in the wholesale section, but without having a license (and volume), you will have a hard time having their ear as they (AE's) don't want to waste their time educating the "consumer".
If a federal law comes into place that makes the pricing sheets available to the public, then this would alleviate most of the problem. But maybe this is just a dream.
All they would have to do is make the sheets more complicated, a whole lot longer and put it in very tiny print a la all other boiler plates and we're back to square one.
There is no way to regulate away intentional obfuscation.
you should all ignore this one, i'm just amusing myself with an example of calculating points for note rates from HMBS (assumes you've already calculated the optimal GSE passthrough coupon for a 30yr fixed at 6%):
G-fee buydown: -0.60, 0.00
(the 6.25% note must buy down the g-fee, no buydown required for the 6.625% b/c it can be paid out of the note rate after servicing)\t\t
Value of servicing and buydowns: 0.40, 1.70
\t\t
Gross Value: 101.40, 102.70
(MBS price + Servicing value + orig. income)\t\t
Total costs: 2.00, 2.00
(origination, admin, hedging, targeted profit)\t\t
Net Value:\t 99.40, 100.70
\t\t
Gross Points: 0.60, -0.70
(100 less net value)
My last mortgage was originated in 1975 so this is probably a stupid question but could I today go to my local Wachovia branch office where I do all my other banking business and apply for a mortgage (or at least be transferred to another Wachovia agent)? Why would I go to a retail outfit like Countrywide that may sell my mortgage to Wachovia anyway?
This is pretty basic stuff but would be my first thought if I decided to get a mortgage tomorrow - go bank where I always do.
This whole thing is set up to deliberately fleece as many borrowers as possible, minorities and low-income people heading the list.
I'm going to disagree a little here.
It wasn't "deliberately set up" at all. It's a historical accretion of a lot of different practices and market forces. It's kind of the way I feel about accusing the rating agencies of fraud: that assumes that someone "deliberately set up" something that I don't think got created quite like that.
That said, the business structures we have, which could in part have been motivated by a desire to increase minority and low-income lending, are now functioning, "intentionally" or not, to keep those borrowers in high-priced loans.
That said, something has to change, and to argue it only needs to be the minority or low-income borrowers is a bit rich.
Ignorant reporters writing shorthand ("subprime is poor people are sharks") are part of the great unplanned mess. They don't work for the mortgage industry in a literal sense; they do in another sense by recycling our marketing department's bullshit about "individualized" pricing.
3. That said, something has to change, and to argue it only needs to be the minority or low-income borrowers is a bit rich.
Nothing pushes change quite as fast as watching your competition - who did the same things then that you do now - fail. At least pushes change for awhile.
To make the real changes stick you have to have a 'near death' yourself.
And obviously if you happen to be so unlucky as to be one of those who have failed - well, it's a bit late for change.
My guess - and it is only a guess - is there have been enough casualties so that we can bet there will be real permanent changes. The question is what will the new landscape look like like? Will it be better or worse for consumers?
I fear the law of unintended consequences coupled to my lack of faith in the all loving & knowing market. I'm far from believing it will be better for consumers tomorrow just because it was so bad (and stupid) yesterday.
Right. And the rubber meets the road here, among other places.
In the old days g-fee was not "risk based" on things like WA FICO. Now, it is impacted by not just a given pool but the seller/servicer's historical pooling practices.
There are a couple, at least, of big seller/servicers who get way better than 20 bps g-fee on FRM. If little CCB wanted to get the g-fee the big boyz do (like 12.5 bps), it would, among other things, want to bring its WA FICO way up. So it might "overpay" for high FICO, as it were, because that brings that g-fee down.
I don't know if that's pointless or not; I suspect that nobody except the 800 pound gorillas ever get 12.5 bps g-fees, and I further suspect those might be a thing of the past pretty soon. Once the GSEs go back to being "the only game in town," they'll fix those g-fees back to something more rational.
My guess - and it is only a guess - is there have been enough casualties so that we can bet there will be real permanent changes.
Well, see, this is my "kick 'em while they're down" school of regulatory policy. The market casualties sober everyone up. In that fairly narrow window of time, the regulators "formalize" these changes in new regs, while everyone is still sorry enough to not object (or still so lacking in credibility that nobody cares if they object).
If you wait until that window closes, you'll be back to fighting a powerful lobby.
Unintended consequences will always be with us, as will the lag between stupid or malicious practice and regulation thereof. But there are better and worse ways, I think, of compensating for that.
Frankly, when I hear "let's not overreact and regulate in the heat of the moment," I hear lobbyists who know this just as well as I do.
Everybody, what bacon dreamz is doing is looking at the question of where that "base price" might come from, particularly the question of how the price differential between note rate increments gets calculated. It's quite a complex issue, and we haven't even dropped the term "negative convexity" yet.
I'm just making the point, to complement bd's point, that there's a "strategic" component to price as well as a "market" or "mathematical" one. There are just a whole lot of moving parts in this industry.
Perhaps some of the lawyers here might be kind enough to enlighten us on the nature of the duties owed by a mortgage broker to his client. I've spent several hours trying to educate myself on that point, and failed to turn up a single case which held that a broker owes his client a "fiduciary duty." Most of the discussions seem to contemplate that a borrower deals with his broker at "arms-length," leaving caveat emptor as the borrower's only protection. It's my impression that the "duty" issue varies from state to state, kind of a patchwork quilt. An unfortunate situation, unless I'm missing something.
To make rate sheets available and transparent will just add one more sheet of paper buyers will not read. In the 15 years I've been a real estate broker I have not had one client read any part of their loan documents other than the headlines...not even the CYA page that assures the world they have read and understood every document and disclosure.
In the real world, we all make major decisions based on incomplete and often faulty knowledge.
More information is not only useless in most cases, but ignored if available.
'Tis the eternal tension between the need to decide and the paralysis of decision making by overload of information to digest.
Thus, rather than call the buyers who don't know all "fools", I'd call them "real life".
Thus, rather than call the buyers who don't know all "fools", I'd call them "real life".
Well said.
Basically, my whole purpose in writing excruciating posts like this is to remind those who like to call other people "stupid" just how excruciating it all is if you really do try to "understand everything."
Certainly I think people ought to spend more time on this: it's the biggest purchase and the biggest debt most people ever encounter, and why it should be "quick and easy" is a good question. If more people had been "paralyzed," fewer would be in FC today, in my view.
Even so, an industry that requires you to be me in order to assure that you get a decent deal is an industry with a problem. And those of you who are not me can quit calling other people who are not me "fools," thanks.
I'm just as "foolish" about, oh, insurance policies than the rest of you are, except for those of you who are insurance specialists. I accept that I take some risk by not fully understanding how insurance pricing works when I sign on the bottom line in order to get my car deal done. But that doesn't mean that the insurance agent has the right to gouge me, or that I am foolish for thinking life is too short to spend it trying to become an expert in everything.
San Diegos high end market had been holding up well. While sales had dropped on the low end due to lack of affordability, higher income buyers were still buying, keeping up prices in the most desirable areas. With low end buyers getting pushed out of the market by higher prices and tighter lending, large homes made up a greater percentage of sales every month, keeping the median price up. Those following the median price without understanding it, made the wrong assumption that prices had not dropped.
We expected the tougher lending standards would impact sales, and they have. Based on August pending sales of 1700 homes, it looks like September sales will be about 1500 homes. This would be an almost 30% drop in sales from August. August 2007 sales were already 26% down year over year, so this forecast for September would put the market at a new low. (For more details on methodology, see the end of this report).
[snip]
Since tracking the sold (close of escrow) activity in the market is an indicator of past activity that is up to 2 months old, we need to find another way to measure current activity. The answer is pending sales. For example, the home that went into escrow in July would be pending in Julys data; we count it in July pending, instead of waiting for it to close and counting it in September sales as Dataquick does.
A few caveats here we take the pending snapshot only once a month, because each day sees changes in the Pending account. Pendings can change staus for numerous reasons like close of escrow fell out of escrow and are put back to Active or they can be taken off of the market after falling out of escrow. We take a snap shot of Pendings and inventory at the same time to keep the data relative.
Nil, this is the broker agreement that HUD requires to be executed for all FHA loans. Notice the choices. My personal robust sense of "fiduciary" is the first option ("I represent you").
Nil,here in California A broker does owe a fiduciary duty to the client because there is an agency relationship.It gets a whole lot more complicated when dealing with the sale of a property rather than loan brokerage because the system just growed,like topsy.I should emphasize that even many of those agents who have some idea of what a fiduciary duty is usually ignore it,since there is no enforcement and no financial incentive to be ethical.some are,most do not understand the concept.
Tanta - Brokering conforming fixed rate loans is laughable, and always has been.
It should be laughable, but how come it occurs? Here's my take: If Shnaps strolls into his favorite 800-pounder's local branch office looking for the most vanilla of CFRMs, there (unfortunately) is no chance that Shnaps is offered a lower rate than the one that very same 800-pounder will end up giving Shnaps via a wholesaler. Even factoring in the cut the wholesaler takes (whether or not Shnaps knows what that cut is), Shnaps comes out ahead by going to the correspondent of 800-lb, Inc.
So if you were Charlie Rangle and not Tanta, what would you propose as a simple measure of comparison so that buyers with limited financial expertise could compare mortgages and identify the best one?
"...the ones we heard from stood up for Countrywide and agreed that the profile of the company in the August 26 New York Times was a gross distortion."
So far it's working. You people will read anything.
There's no profit incentive for mortgage brokers to work in a heavily regulated environment of fiduciary responsibility and smarter consumers who shop around.
There is no way to regulate away intentional obfuscation.
Dumb question, has anyone ever tried to automate this process ? more like, has anyone ever tried to to remove the LO/broker from the 'shop around' such that the borrower can actually see the results of various scenarios and play 'what-if' ?
"You are seeing tons of 'pricing adjustments' that are really compensating for the risk created by the fact that the loan is brokered. We are moving backwards here in terms of price to consumer."
Um, isn't that the point? Compensate for the risk (or more broadly, all the costs including commissions) of a multilevel marketing scheme. As dryfly pointed out, antidisintermediation via obfuscation.
NC Jim:
My experience a few years ago was that the best 30 year fixed rate offered by a real live person at my regular bank was at least 3/4 percent higher than I could get from a broker or Lending Tree. Interestingly, when I got a market rate quote and then called the customer service people on my existing mortgage they matched the quoted rate.
Thanks. I read that such a rule was recently adopted in Minnesota, rejected in Iowa and Colorado, and is up for grabs in Illinois. That agreement required by FHA certainly looks broad enough. I don't understand, though, how you can have a duty without a legal remedy. Assuming a borrower can show something in the way of actual damages, why wouldn't he have an adequate remedy in a court of law, against his broker, where such a rule is recognized. Forgetting about "fiduciary duties," wouldn't the borrower be able to recover by showing that his broker simply failed to exercise due care in trying to find the best deal around? I can't imagine that many brokers are "going naked" on liability coverage. One would think that lenders require it of every broker they do business with. Yet we don't seem to be hearing of much litigation along these lines.
Anyone who thinks mortgage consumers are just idiots who will never get it...they themselves may be the idiots.
After this mess ends, you will see many mortgage consumers getting it. They will learn more, take more time to evaluate costs and choices, and MOST IMPORTANT they will hire fiduciaries who work only for them to help them decide.
How much do you think you should pay to hire an objective consultant who works only for you for a fee, after you have stirred up 4-5 decent offers? This person would evaluate all of those in detail (including fine print, prepayment penalties and resets)and run out a few sheets of analysis.
So if you were Charlie Rangle and not Tanta, what would you propose as a simple measure of comparison so that buyers with limited financial expertise could compare mortgages and identify the best one?
This doesn't exactly answer your question. But maybe it does.
All mortgage lenders in the U.S. should have a right to know (at all times) the identity of the party or parties that hold underlying rights to their mortgages. Not the servicers. The investors.
It could be done with a data base, even if the mortgage is chopped up into hundreds of pieces.
To make rate sheets available and transparent will just add one more sheet of paper buyers will not read. In the 15 years I've been a real estate broker I have not had one client read any part of their loan documents other than the headlines... not even the CYA page that assures the world they have read and understood every document and disclosure.
The day buyers start reading boiler plate on their disclaimer docs is the day the sellers have to add pages, bigger words and finer print to the document.
Where I live that's equivalent to approx. 1.5-2 points on a home buy or about 4-5% of median annual family income. I doubt many if any would pay that willingly.
And frankly - the better heeled have consultants and financial advisers and lawyers on retainer... etc., already. What's one more.
But its the average knuckleheads (like those in my world) who appear to be the ones getting into the most trouble. Expecting them to hire 'qualified help' is asking a lot. They will go to the realtor & banker and pray for the best.
Any solution that doesn't consider the bottom half of the market isn't a real solution.
Dumb question, has anyone ever tried to automate this process ? more like, has anyone ever tried to to remove the LO/broker from the 'shop around' such that the borrower can actually see the results of various scenarios and play 'what-if' ?
Yes, they have. There are two major problems:
Connectivity: lots of folks still don't use the internet for commerce. Especially for anything as sensitive as a loan application. You cannot imagine the amount of personal information you are handing over in a 1003. So the "savviest internet users" are possibly the least likely to do that, because they're appropriately worried about security.
People who use interactive software to take their own loan apps don't sell themselves on the largest possible loan amounts, don't pay for credit life insurance or other "cross-sold" finanial products, and don't charge themselves spiff. Frankly, you people might be OK credit risks but you are terrible salespersons.
Ever done the loan-by-phone thing? There's a human being on the other end of the phone, using a piece of software you cannot see. That software prompts for all the questions and has blanks to fill in and presents all the calculations and . . . well. It exists.
But its the average knuckleheads (like those in my world) who appear to be the ones getting into the most trouble. Expecting them to hire 'qualified help' is asking a lot. They will go to the realtor & banker and pray for the best.
The problem, I think, is that we're assuming this blinding array of choices that requires retained counsel to help with. But will there be that kind of choice in the "post-brokered" loan world?
God, I hope not. A whole lot of that "choice" is just different ways you can choose to pay too much for credit or set yourself up for foreclosure.
Dryfly's right: there will always be no-doc neg am ARMs with extended rate locks for the well-heeled, and they will always have their "private bankers" to handle it for them.
The mass market needs those products like . . . a self-inflicted bullet wound. Get rid of the terrible choices, and the dorky loan officer down at the bank or that sweet young thing on the phone at your local credit union is all you need.
Besides that, you won't care about missing out on another 0.125 in rate if you believed your servicing wouldn't be transferred six times, your tax bills would always be paid promptly, you could get a payoff quote without paying a fee for it, and you wouldn't spend the rest of your days on the phone with a telemarketer trying to get you to add overpriced options to the loan you already have. Would you? You wouldn't. This is a highly "price-sensitive" market because the industry has decreed it to be. It could be a highly service-sensitive industry, and that would make a lot of difference.
It would also make for some better jobs than "broker." Might even get better people to take those jobs. Just sayin'.
As an old junk bond guy, I think this model of risk-based pricing makes little economic sense. If you aren't well enough fixed to qualify for a conforming loan, you certainly can't afford the debt service on subprime.
I understand risk based pricing for insurance. If your driving record stinks, the insurance company should charge more to sell you the same policy a safe driver gets.
I even understand risk based pricing for loans to companies whose ratings are below investment grade. The execs who run these companies, may have a business plan to improve the company's condition, and get to the point where they can refinance at lower rates based on improved credit standing.
The consumer who borrows at subprime rates normally has no way to increase his or her income. They are probably in a loan they shouldn't be in. In real life, they probably can't afford a home (or at least the one they bought).
Subprime does not exist to help those who don't qualify for a conforming loan. It exists to destroy whatever wealth they have, so that they never WILL qualify.
First; awesome post.
So what to do with this information? Basically I see that I have to "trust" my broker; actually I that would seem to "hope" my broker isn't gouging me (for her benefit or for the lender's benefit).
Is the way out of this to become a licensed mortgage broker (which was mentioned as fairly easy to do)? Does this now get me access to the rate charts? So become a licensed broker to have access to the information but presumably still leave the work up to my broker. That way I can brag to my friends that I know I got the best deal possible...and then charge them a few hundred dollars to verify what their broker is getting them (to make back the money for licensing and the time spent working for them).
On the eve of crunch week, Greenspan tells all. From the FT:
US house prices are likely to fall significantly from their present levels, Alan Greenspan has told the Financial Times, admitting that there was a bubble in the US housing market....
Mr Greenspan said the off-balance sheet investment vehicles that issued much of the asset-backed commercial paper represented a savings and loans disaster waiting to happen because of the mismatch between their assets and liabilities....
I even understand risk based pricing for loans to companies whose ratings are below investment grade. The execs who run these companies, may have a business plan to improve the company's condition, and get to the point where they can refinance at lower rates based on improved credit standing.
well, sunlight, in the olden times one thing investors liked about subprime and alt-a paper was that it had a superior convexity profile relative to agencies or prime jumbos. you have higher turnover from credit curing (less extension risk), and less efficient exercise of the refi option when rates fall.
In the 15 years I've been a real estate broker I have not had one client read any part of their loan documents other than the headlines...not even the CYA page that assures the world they have read and understood every document and disclosure.
I didn't see my loan documents until the day of closing. To fully grok my loan documents, I would have needed about 2 days and access to an internet connection and a couple of newsgroups. I think they scheduled about 30 minutes.
Here's how I see it: Mortgage lending has become so complex, that handing a set of government disclosures to a consumer is like a doctor handing a medical textbook to a patient and saying "here, you choose which type of knee surgery is best for you." This blog article is a perfect example. The first person who commented couldn't even read the whole article.
Informed consent and fiduciary duties: If mortgage lending doesn't do this for itself, the government is going to step in and do it for them. They'll leave the bankers alone (as long as the lobbying dollars continue to flow) and start with the brokers.
There are a few things that are not mentioned that should be in the broker vs. retail debate.
1st. Understand that when going retail with someone like Wells or BofA or Wachovia your loan is going to be sold off to an investor, it is just the originating bank will more then likely hold onto the servicing rights so you will never know of the secondary market sale. Granted there will be a few exceptions to this rule but for the most part every loan will be sold. Even credit unions will sell loans to investors and retain servicing in some cases. So, in my opinion the entire marketing crap about "our money, our rules" is absolute BS and needs to be squashed. Retail, wholesale etc. we (mortgage originators) are all pushing the exact same products.
Secondly, the major depository banks as well as the mortgage only banks all had wholesale channels that called on us brokers. These bank account executives called on brokers and turned a blind eye to the hundreds of mortgage shops that had unlicensed loan hacks ripping people off. Here in CA when a brokerage shop was originating loans anyone engaged in the actual sale of mortgage to consumers is supposed to be licensed. Well, a shop would have 1 or 2 licensed people yet would be doing 100 loan per month with all these unlicensed asshacks doing loans under the name of the 1 or 2. Well, guess what. WAMU, BofA, Wells, Wachovia and countless other mortgage only banks would have their army of AE's come in to get our business and "ignore" the fact that all these hacks were originating loans without a license. This retail vs. wholesale broker debate is a bunch of crap.
If a person looking to refinance or purchase tunes out the marketing hype (which is really heavy from the 800 lb shops), look at the actual person and use some common sense they will find a honest originator on either side of the origination channel. How many years experience do they have, are they homeowners themselves, do they have the basics like their own website with scans of the actual testimonials from past clients, are there some realtors willing to recommend this person etc..... It is cheap and easy to have a website built, your own email address (not some lame ass @yahoo or @aol junk) keep it updated with actual thank you letters and be able to efficiently present your ability and integrity.
If the people shopping for loans were to actually take their heads out of their asses, use some common sense and logic odds are they won't be screwed. Example, I know loans well but I don't know much about construction. I just remodeled a house from the ground up. I called out three general contractors. Two came out in their fancy cars, talked fast and gave me a verbal quote on the spot after an hour or so in the house. The third guy set the appointment over the phone, two days later I get a package in the mail from that company. It contained a copy of their license, photos of past jobs, names and phone numbers of people to ch
@Brian23 | 09.16.07 - 12:30 pm If a federal law comes into place that makes the pricing sheets available to the public, then this would alleviate most of the problem.
Uh, did you actually look at the CCB rate sheet? Cleared everything right up, eh?
@dryfly | 09.16.07 - 1:08 pm All they would have to do is make the sheets more complicated, a whole lot longer and put it in very tiny print a la all other boiler plates and we're back to square one.
Uh, did you actually look at the CCB rate sheet? Already done!
@NC Jim | 09.16.07 - 1:10 pm [C]ould I today go to my local Wachovia branch office where I do all my other banking business and apply for a mortgage? [...] Why would I go to a retail outfit like Countrywide that may sell my mortgage to Wachovia anyway?
I tried that with BofA, who quoted a rate 1.25% higher... not to worry though, within a month the company had sold my servicing rights to... BofA!
@Bobby | 09.16.07 - 1:35 pm uhm, Tanta, is there any chance that cliff notes are available for this post?
Those were the cliff notes!
@Brian | 09.16.07 - 8:23 pm If the people shopping for loans were to [xxx], use some common sense and logic odds are they won't be screwed.
Back to my first comment: did you actually look at the CCB rate sheet? Bet your common sense really helped cut though the clutter, right?
At the risk of repeating myself (which risk is not priced on the internet), I think the solution involves getting rid of the choices, not learning how to compare them.
It is so ingrained in Americans that "choice" is a good thing that we're drinking the underlying Kool Aid: that any risk should be allowed, but at a price is number one, and that "group insurance plans" should be done away with and all borrowers should pay their own risk ticket is number two.
If you maintain a certain set of standards, you can charge everyone the same rate/price and do fine, because the risk on a big pool of loans is the average risk, not the worst risk in the pool. I don't have to get another 50 bps from the 655 FICO guy, because my pool does not perform at an average FICO of 655.
Yes, in theory that means that the lowest-risk consumers get a slightly worse rate in exchange for the highest-risk consumers getting a slightly better rate. But your alternative today is that everyone can be gouged, and that the mispricing on the bottom tier (putting people in loans they can't afford) drives up pricing for everyone. You 750 FICO people only think you're getting a better deal.
Compare it to health insurance: young healthy people always think they're getting a good deal on a high-deductible plan that doesn't cover a lot of "catastrophic" stuff that mostly impacts older weaker people. So instead of having big mixed risk pools, we drop the sickies and insurers compete for the healthiest. Insurance becomes unaffordable for the oldest and sickest, they cannot pay their own costs, and between the exorbitant overhead/admin costs of complex insurance arrangments and the weight of the uninsured and the skewing of the various pools, costs skyrocket for everyone.
My point: nobody is actually paying "the true cost" of his own credit risk. You might think you are, but that's marketing dope.
The regulation needs to go after the mortgage products, the pricing practices of lenders, and the barriers to entry/lender risk management/market transparency of third-party origination. That will shake out enough of the incomprehensible "consumer choices" that you will inevitably become more able to "read the menu."
To start from the point of teaching menu-reading is WAY. BESIDE. THE. POINT.
I think the solution involves getting rid of the choices, not learning how to compare them
clearly people don't have a conceptual problem with limited choice, i don't think, except for more mundane things like brand of cereal. as you move up the importance scale towards mortgage, you should be fine with less choices. and voting for president? choose 'a' or 'b'.
I think the solution involves getting rid of the choices, not learning how to compare them.
In the IT world, this is what Scott "Dilbert" Adams calls a confusopoly. You've got more or less a commodity product, you could compete directly on price, but of course most sensible businesses want to avoid that like the plague. I don't want competition; do you?
So you set up your products with a bunch of different features, add in some complex restrictions, and several strategically-chosen tiers that rarely correspond with your competitors'. This ensures that not only is it difficult to compare products with one another for one consumer, another consumer's decision space will be completely different so you can't generalize.
This is the main problem with expecting consumers to understand everything themselves: the amount of information that you have to process for one transaction is getting larger and larger by design, and there are more and more transactions that you have to deal with. Nobody can keep up.
Let's assume for a second that it is possible to arm the average dude with rate sheets and product guidelines, then deliver a system that can make meaningful comparisons between the blinding array of rate, price, and product variables. All this in order to self-analyze the best "deal."
But the best deal defined as what? The lowest rate for your borrowing profile? The least interest over time? The lowest total cost over time? Least risk? Some combination of the above?
Problem is, getting to that magic place, however you choose to define it, is easier said than done, since there are a few variables that even the brightest among us can't predict:
How long will you own the house, actually, exactly (count the days, every dollar matters)? What if it appreciates? What if it loses value? Does it matter?
What, exactly, will interest rates do after you close your loan? Up? Down? Does it matter?
Point being, one can really only determine the best "deal" in hindsight. Same for your broker/banker/originator/real estate agent/magic 8-ball.
Even if we could sprinkle enough pixie dust on the current system too both add total transparency of choice and remove the "my broker/bank/lender/originator screwed me" risk entirely from the equation, is the consumer really in a better place? Do they have less risk, really? Might a few consumers screw themselves unintentionally? Then what?
Nightmare Fuel: Maybe they can federalize the whole mortgage finance system and we can all take a number get our mortgages from Phyllis - along with our license plates - at the DMV? Take a number and a clipboard and wait in line...
Simplifying choices, adding fiduciary responsibility, and barriers to entry all are reasonable steps. There's lot of lobbying money protecting those rice bowls, however.
You've lost me. Isn't some scheming competitor going to offer the 750 FICO guy a deal that actually is more attractive than your "pool" deal? Are we talking some sort of monopoly here?
Sorry, I get fired up. The consumer needs to make sure they do their homework on who they are asking information from. If they ask 3 people who have limited experience and are in it for the buck they will get far different answers than if they asked someone like me. I've been telling people for a long time now to absolutely, positivity not purchase a home, WAIT. My less educated and less experienced competition tells a different story that involved things like "they ain't making more land" and "truly rich people got there via real estate" and sucker people into these situations. The consumer fails to analyze the situation with common sense and fails to analyze who is delivering the message. They get caught up in the hype and further the pocket book of an idiot who has no business dolling out information on most peoples largest investments.
"It is supposed to be the role of a mortgage broker to locate the best price for a consumer...."
It would be reasonable to suppose so, based on the usual understanding of the term "broker". But it is not correct. Mortgage brokers are essentially retailers, just like the loan officers of banks, offering home loans on a take-it-or-leave-it basis. The main difference is that mortgage brokers provide retail services for many lenders (some of whom also have their own in-house retailers) rather than just one. Once you understand that mortgage brokers are retailers, you will understand why it is unnecessary and unhelpful to compel brokers to disclose their YSP or to compel wholesalers to publish their ratesheets --- the information is just as irrelevant to the consumer's decision-making as is the wholesale price that Sears, or Macy's, or any other retailer pays to their suppliers. The only price that is relevant to the consumer is the price that he/she must pay to the retailer. Like other retailers, brokers shop among wholesale lenders so that they can compete with other lender/brokers on rates AND also maximize their revenue by finding the cheapest wholesale supplier. And it IS fairly easy to shop for a home loan: apply with two or three lender/brokers, get approved, and see what they offer you when you are in a position to ask your lender/broker "what rate can you offer and LOCK for me today?").
"Traditionally, the origination fee on a loan is the lenders overhead, which includes commission to the loan officer or profit to the broker."
It is true that 1% is the traditional origination fee. But, traditionally, home loans were made by banks which also earned points in yield spread premium as well. And some amount of the yield spread premium must have also covered the lenders overhead and the loan officer's commission. When mortgage brokers came on the scene, they competed (and still do compete) with the banks by being willing to earn less yield spread premium than the banks were earning and thereby offer loans with lower rates. There is no particular reason why 1% should be sufficient to cover costs; it is mostly just a tradition that is enforced by past practice. And because 1% is usually not enough to cover costs on most home loans, both banks and mortgage brokers typically offer rates that allow them to earn 1 or 2 points in YSP. To get a "par rate" (0 YSP) from a broker, you will usually have to pay a discount point to compensate the broker for what he/she would otherwise earn in YSP --- and this is exactly equivalent to paying a discount point to buy the rate down.
The HUD mortgage broker contract cited by one of your commentators is not required by HUD and so is not evidence of what the relationship of the broker to his/her client should be.
Disclosure: I work as a loan officer for an Oregon branch of a large national lender/broker and I also have an MA in economics. And nothing annoys me more than the w
Welcome to the worst I have ever seen. I am a Mortgage Broker and can offer many items. The new adjustments are unfair and unreal. Take a 400,000 loan, and take a Fico score of 679. Yes 1 point of 680. The pricing adjustments come in at 1.75% or 400,000 x 1.75% = 7000.00 extra, that the borrower will pay.? But it gets better. Imagine the newer rule, Soft Market, a 5% reduction from a current appraisal, yes this may make a borrower go over the 80% mark to avoid Mortgage Ins. Lets add .35 for the MI An extra 388.00 dollars per month. Lets assume the borrower wants to cash out - for college, debt consolodation ect. Add another .75, not .50 but .75. 400,000 x .75% = 3000.00 extra the borrower will pay, ontop of everything else. The answer? Leave borrowers alone, forget FHA. And tell Fannie/Freddie to go away. We need outside banks or investors to save the mortgage market, because we can't. Where are the State regulators for this nightmare? hmmmmmm I see, they can't get involved. I wish everyone would explaint the actual costs to the consumer, then the refi business would die, and force Fannie/Freddie to cease the bullshit they have done. Nobody told Fannie.Freddie to do 2/28 ARMS with a Neg Am featur I/O with a 2 or 3 year pre-Pay. Yes, those products where poor. The idiots who entered the business from car sales are now gone. Originators now must be licensed. Can we now get back to making money and stop screwing the consumer! Next time you do a mortgage, ask yourself this? Is it really worth hurting the borrower to make your money? I Think Not! So why let Fannie/Freddie guide you in this direction.
Too big for a troll to read and make intelligent comments. Is it the first time you hear that?
With banks these days it might be better to loan your money directly out with prosper. At least then you are able to make your own risk assetments instead of letting these bankers do it.
To continue to glaze eyes . . .
One thing you see here is that CCB (and everyone else) is using things like FICO price adjustments to influence the average FICO of the loans it buys--which improves the g-fee Fannie Mae will offer it. To say that it is "really" pricing individual loan risk is a big problem.
Fact is, the actual default probability difference between loans in the 700-739 bucket and the 740+ bucket is minuscule, and saying that the higher bucket is "worth" another .25 is just plain odd. This pricing strategy--and that's what it is, strategy--means that CCB is trying to attract high-FICO loans to its pipeline as much as it is trying to "price the risk" of them.
A lender whose pipeline is, for whatever reason, already at a very high average FICO might "strategically" refuse to "pay up" for higher FICOs, to bring that average down a little (and average yields up a little). These mechanisms happen at very large pool levels. To translate this practice into the marketing slogan of "risk based pricing is individualized and means lower rates to higher-quality borrowers" is to, well, smoke some marketing dope.
We could look at rate sheets all day and not get to a "market price of risk" that consumers could use to reality-test a rate quote. The industry would have to really change its pricing practices for that to occur, not just its disclosure of its pricing practices.
Tanta,here in california the training given to loan Brokers the last few years is ALL done by the lenders,who throw in a free lunch.I would estimate that a little more than half of the LO's working for Brokers are reasonably honest and ethical.far fewer have any competence or understanding of how the system works.they are salespeople and have no idea of what a fiduciary responsibility is,even though they have one if they are licensed by the california DRE.yep,you have a fiduciary responsibility to your principal if you are a licensed real estate salesperson acting as a loan Broker in california.however since the test to become a sales agent is essentially a vocabulary and reading skills test on real estate that my cat could pass on a good day,and the lack of consequences for those that are unethical or even criminal....Moral Hazard is an inadequate term.
Oy vey! There goes my Sunday.
i see you've been studying hard to fulfill your dream of becoming a broker, Eunice! Good work!
this is highly enlightening.
the next time I buy a home, I will go to at least 5 brokers and also 5 pure lenders and ask them to run "lots of scenarios" so that I can go home and figure out which is best.
the biggest fraud in all of this has been the assertion over the years that Realtors are EXPERTS. Because of this, many people (like me) trust them to help us with the biggest financial decision of our lives.
I was quite ignorant of all of this when I got my home loan. My Realtor said "these guys are good" so I went with them.
Luckily for me, I had a 30 year fixed products... so it was relatively easy to compare... but even then I only compred 2 places...
who knows, I could have gotten 0.125% off my interest rate... over time that's a lot of cash!
Ah, Tanta, have you looked into the Federal Witness Protection program?
i see you've been studying hard to fulfill your dream of becoming a broker
I am fulfilling my lifelong dream of making complete strangers pay for the fact that I spent many of the best years of my life trying to train loan officers how to read rate sheets, having to make up rate sheets, and having to wade through large files which consititute the results of rate sheets.
So far it's working. You people will read anything.
Tanta,
Once again at the risk of being too repetitive - thanks for being your BAD self!
the lender has to pay for giving you people rate locks; they're taking on interest-rate risk which they have to hedge, which they do by selling forward into the TBA market, or with interest rate futures, options, etc.
the lender has to pay for giving you people rate locks
Of course. And I didn't stray into the time value of money because holy shit, how long can these posts get?
But there is a connection between lock length and credit risk. Part of the whole thing about "going low doc" involves trying to shorten the processing time on a loan, so that Broker A can offer you a better rate (shorter lock) than Broker B, but you don't know that that's because Broker B is figuring we'll have to wade through your tax returns and wait until a 4506-T comes back.
Also, you notice that CCB doesn't offer a 30-day lock. You can imagine that this means that most loans are either fast processing (low doc or salaried borrowers and/or AUS) or they're a slow pain in the butt. Actually, you can also imagine that purchase-money borrowers are either always getting 45 days (even if they only need 30) or they're being made to float until after loan approval and getting the 15-day.
Wholesalers have so many operational problems with brokers that they have become increasingly unwilling to lock loans before they are approved. In the old retail days we locked customers the day they applied, because our fallout was more manageable. Brokers routinely send the same application to three or four different wholesalers, to see who approves it first or with fewer conditions. This creates a lot of fallout for the other lenders. As fallout increases, the hedge costs of convering a rate lock increase.
So there are lots of impacts of the "origination channel" or business model or operational setup on things as apparently unconnected as the time/price function.
You people will read anything.
the lender has to pay for giving you people rate locks
Guilty to the first charge and so,...what's the point, hmmm, what's the concern? to the second.
I'm pretty sure every rate lock I've ever encountered cost me something.
Tanta,
CCB's rates are laughable on the fixed and always have been.
They have were first to the plate in DC area with LIBOR 1 month and "cash flow arms."
However, other lenders soon picked up on this and started offering better deals.
People that shopped around got margins on the libor 1 month of 1.375% when CCB was still at 2.25% ( both margins paid one on the back).
I know my people did well.
If a federal law comes into place that makes the pricing sheets available to the public, then this would alleviate most of the problem. But maybe this is just a dream.
You do good work, Tanta!
The common wisdom is that the mortgage brokerage business is going to be cleaned up, but it will re-emerge with stronger standards.
I think not.
This business is basically finished. Its explosion was an aberation due to lack of borrower education/concern, lack of regulator oversight, overheated market, low rates, etc.
There's no profit incentive for mortgage brokers to work in a heavily regulated environment of fiduciary responsibility and smarter consumers who shop around.
This has happened before...to mutual funds during the 70s, when uninformed investors were paying commissions of up to 20% to buy tanking mutual funds on contractual plans. Those plans disappeared as investors wised up, and so did most "mutual fund-only" salespeople. The no-load fund industry was born right there.
Mortgage brokers as we know them are dead in the water. The smart lenders are beefing up their direct side. The Internet will add to loan evaluation transparency for all consumers.
CCB's rates are laughable on the fixed and always have been.
Brokering conforming fixed rate loans is laughable, and always has been.
As I argued in my "origination channels" post, it makes no sense to broker commodity product like a CFRM. Subprime, maybe. "Alt-A" or boutique product, maybe. Vanilla agency FRMs? You are seeing tons of "pricing adjustments" that are really compensating for the risk created by the fact that the loan is brokered. We are moving backwards here in terms of price to consumer.
Here's access to wholesale price sheets nationwide.
Scotsman Guide: The Leading Resource for Mortgage Originators - Scotsman Guide
Click on Residential
Then Matrixes
They call subprime something prettier now: "non prime"
The fundamental nature of the relationship between the retail mortgage salesperson and the LO must be changed to that of fiduciary, no matter where the LO works: banker, broker, consumer finance company, etc.
File this under "The more things change, the more they stay the same."
This whole thing is set up to deliberately fleece as many borrowers as possible, minorities and low-income people heading the list.
It used to be the raw prejudice of bank officers, which at least gave it a face. Now it is built into the system, like so many other things these days.
Tanta, thanks. I'm going to read that again tomorrow just to nail it.
Jillayne,
I see a lot of programs and adjustments, but not rates (premiums,points,etc.). Kind of binary tool. So, I'm still looking for an "apples-to-apples" comparison tool.
btw,
all those lenders have websites with rate sheets in the wholesale section, but without having a license (and volume), you will have a hard time having their ear as they (AE's) don't want to waste their time educating the "consumer".
If a federal law comes into place that makes the pricing sheets available to the public, then this would alleviate most of the problem. But maybe this is just a dream.
All they would have to do is make the sheets more complicated, a whole lot longer and put it in very tiny print a la all other boiler plates and we're back to square one.
There is no way to regulate away intentional obfuscation.
you should all ignore this one, i'm just amusing myself with an example of calculating points for note rates from HMBS (assumes you've already calculated the optimal GSE passthrough coupon for a 30yr fixed at 6%):
Note Rate:\t 6.25, 6.625
Optimal passthrough coupon: 6.00, 6.00
MBS passthrough price: 101.00, 101.00
\t\t
Servicing values:
\t\t
Base servicing:\t1.00, 1.00
(25 bps w/ 4x multiple)
\t\t
Excess servicing: 0.00, 0.70
(net of 20 bps g-fee)\t
(20 bps g-fee, assumes 4x multiple)\t\t
G-fee buydown: -0.60, 0.00
(the 6.25% note must buy down the g-fee, no buydown required for the 6.625% b/c it can be paid out of the note rate after servicing)\t\t
Value of servicing and buydowns: 0.40, 1.70
\t\t
Gross Value: 101.40, 102.70
(MBS price + Servicing value + orig. income)\t\t
Total costs: 2.00, 2.00
(origination, admin, hedging, targeted profit)\t\t
Net Value:\t 99.40, 100.70
\t\t
Gross Points: 0.60, -0.70
(100 less net value)
My last mortgage was originated in 1975 so this is probably a stupid question but could I today go to my local Wachovia branch office where I do all my other banking business and apply for a mortgage (or at least be transferred to another Wachovia agent)? Why would I go to a retail outfit like Countrywide that may sell my mortgage to Wachovia anyway?
This is pretty basic stuff but would be my first thought if I decided to get a mortgage tomorrow - go bank where I always do.
This whole thing is set up to deliberately fleece as many borrowers as possible, minorities and low-income people heading the list.
I'm going to disagree a little here.
that excess servicing line should be a 4x multiple on the excess servicing, in case anyone actually read that mess.
3. That said, something has to change, and to argue it only needs to be the minority or low-income borrowers is a bit rich.
Nothing pushes change quite as fast as watching your competition - who did the same things then that you do now - fail. At least pushes change for awhile.
To make the real changes stick you have to have a 'near death' yourself.
And obviously if you happen to be so unlucky as to be one of those who have failed - well, it's a bit late for change.
My guess - and it is only a guess - is there have been enough casualties so that we can bet there will be real permanent changes. The question is what will the new landscape look like like? Will it be better or worse for consumers?
I fear the law of unintended consequences coupled to my lack of faith in the all loving & knowing market. I'm far from believing it will be better for consumers tomorrow just because it was so bad (and stupid) yesterday.
Please tell me I'm wrong to worry.
net of 20 bps g-fee
Right. And the rubber meets the road here, among other places.
In the old days g-fee was not "risk based" on things like WA FICO. Now, it is impacted by not just a given pool but the seller/servicer's historical pooling practices.
There are a couple, at least, of big seller/servicers who get way better than 20 bps g-fee on FRM. If little CCB wanted to get the g-fee the big boyz do (like 12.5 bps), it would, among other things, want to bring its WA FICO way up. So it might "overpay" for high FICO, as it were, because that brings that g-fee down.
I don't know if that's pointless or not; I suspect that nobody except the 800 pound gorillas ever get 12.5 bps g-fees, and I further suspect those might be a thing of the past pretty soon. Once the GSEs go back to being "the only game in town," they'll fix those g-fees back to something more rational.
My guess - and it is only a guess - is there have been enough casualties so that we can bet there will be real permanent changes.
Well, see, this is my "kick 'em while they're down" school of regulatory policy. The market casualties sober everyone up. In that fairly narrow window of time, the regulators "formalize" these changes in new regs, while everyone is still sorry enough to not object (or still so lacking in credibility that nobody cares if they object).
If you wait until that window closes, you'll be back to fighting a powerful lobby.
Unintended consequences will always be with us, as will the lag between stupid or malicious practice and regulation thereof. But there are better and worse ways, I think, of compensating for that.
Frankly, when I hear "let's not overreact and regulate in the heat of the moment," I hear lobbyists who know this just as well as I do.
So it might "overpay" for high FICO, as it were, because that brings that g-fee down.
true. i was (ineffectively, i'm sure) trying to show how things like servicing and g-fees affect the pricing of points.
You people will read anything.
uhm, Tanta, is there any chance that cliff notes are available for this post?
Everybody, what bacon dreamz is doing is looking at the question of where that "base price" might come from, particularly the question of how the price differential between note rate increments gets calculated. It's quite a complex issue, and we haven't even dropped the term "negative convexity" yet.
I'm just making the point, to complement bd's point, that there's a "strategic" component to price as well as a "market" or "mathematical" one. There are just a whole lot of moving parts in this industry.
uhm, Tanta, is there any chance that cliff notes are available for this post?
That's actually what we have a comment section for.
what she said. sorry, i should have explained myself.
Perhaps some of the lawyers here might be kind enough to enlighten us on the nature of the duties owed by a mortgage broker to his client. I've spent several hours trying to educate myself on that point, and failed to turn up a single case which held that a broker owes his client a "fiduciary duty." Most of the discussions seem to contemplate that a borrower deals with his broker at "arms-length," leaving caveat emptor as the borrower's only protection. It's my impression that the "duty" issue varies from state to state, kind of a patchwork quilt. An unfortunate situation, unless I'm missing something.
Talk to the hand!
This Modern World - Salon.com
To make rate sheets available and transparent will just add one more sheet of paper buyers will not read. In the 15 years I've been a real estate broker I have not had one client read any part of their loan documents other than the headlines...not even the CYA page that assures the world they have read and understood every document and disclosure.
In the real world, we all make major decisions based on incomplete and often faulty knowledge.
More information is not only useless in most cases, but ignored if available.
'Tis the eternal tension between the need to decide and the paralysis of decision making by overload of information to digest.
Thus, rather than call the buyers who don't know all "fools", I'd call them "real life".
Thus, rather than call the buyers who don't know all "fools", I'd call them "real life".
Well said.
Basically, my whole purpose in writing excruciating posts like this is to remind those who like to call other people "stupid" just how excruciating it all is if you really do try to "understand everything."
Certainly I think people ought to spend more time on this: it's the biggest purchase and the biggest debt most people ever encounter, and why it should be "quick and easy" is a good question. If more people had been "paralyzed," fewer would be in FC today, in my view.
Even so, an industry that requires you to be me in order to assure that you get a decent deal is an industry with a problem. And those of you who are not me can quit calling other people who are not me "fools," thanks.
I'm just as "foolish" about, oh, insurance policies than the rest of you are, except for those of you who are insurance specialists. I accept that I take some risk by not fully understanding how insurance pricing works when I sign on the bottom line in order to get my car deal done. But that doesn't mean that the insurance agent has the right to gouge me, or that I am foolish for thinking life is too short to spend it trying to become an expert in everything.
Apologies if this has been previously posted...
San Diego slowdown spreads to high end, sales activity falls 33%
San Diegos high end market had been holding up well. While sales had dropped on the low end due to lack of affordability, higher income buyers were still buying, keeping up prices in the most desirable areas. With low end buyers getting pushed out of the market by higher prices and tighter lending, large homes made up a greater percentage of sales every month, keeping the median price up. Those following the median price without understanding it, made the wrong assumption that prices had not dropped.
We expected the tougher lending standards would impact sales, and they have. Based on August pending sales of 1700 homes, it looks like September sales will be about 1500 homes. This would be an almost 30% drop in sales from August. August 2007 sales were already 26% down year over year, so this forecast for September would put the market at a new low. (For more details on methodology, see the end of this report).
[snip]
Since tracking the sold (close of escrow) activity in the market is an indicator of past activity that is up to 2 months old, we need to find another way to measure current activity. The answer is pending sales. For example, the home that went into escrow in July would be pending in Julys data; we count it in July pending, instead of waiting for it to close and counting it in September sales as Dataquick does.
A few caveats here we take the pending snapshot only once a month, because each day sees changes in the Pending account. Pendings can change staus for numerous reasons like close of escrow fell out of escrow and are put back to Active or they can be taken off of the market after falling out of escrow. We take a snap shot of Pendings and inventory at the same time to keep the data relative.
Nil, this is the broker agreement that HUD requires to be executed for all FHA loans. Notice the choices. My personal robust sense of "fiduciary" is the first option ("I represent you").
http://www.hud.gov/offices/hsg/sfh/res/mbcontr.pdf
In other words, real estate is overpriced and filled with fraud and I couldn't get a house paid off now anyway due to age.
In other words, I have no reason to buy real estate in the US anymore.
Thanks, I'd already reached that conclusion intuitively!
...just how excruciating it all is if you really do try to "understand everything."
hat tip bacon dreamz.
Off topic, but thought some might like to know:
The Maestro will be on "60 Minutes" this evening to tout his new book. Conjure Bag wants to watch, so it could be interesting.
Tanta:
- So far it's working. You people will read anything. -
Some may just read you because you are funny.
Anyway, love the post.
Nil,here in California A broker does owe a fiduciary duty to the client because there is an agency relationship.It gets a whole lot more complicated when dealing with the sale of a property rather than loan brokerage because the system just growed,like topsy.I should emphasize that even many of those agents who have some idea of what a fiduciary duty is usually ignore it,since there is no enforcement and no financial incentive to be ethical.some are,most do not understand the concept.
Donna - That was funny.
Rich - you r prolly right.
Tanta - Brokering conforming fixed rate loans is laughable, and always has been.
It should be laughable, but how come it occurs? Here's my take: If Shnaps strolls into his favorite 800-pounder's local branch office looking for the most vanilla of CFRMs, there (unfortunately) is no chance that Shnaps is offered a lower rate than the one that very same 800-pounder will end up giving Shnaps via a wholesaler. Even factoring in the cut the wholesaler takes (whether or not Shnaps knows what that cut is), Shnaps comes out ahead by going to the correspondent of 800-lb, Inc.
So if you were Charlie Rangle and not Tanta, what would you propose as a simple measure of comparison so that buyers with limited financial expertise could compare mortgages and identify the best one?
Countrywide Employees Speak Out
"...the ones we heard from stood up for Countrywide and agreed that the profile of the company in the August 26 New York Times was a gross distortion."
Countrywide Employees Speak Out -- Seeking Alpha
So far it's working. You people will read anything.
There's no profit incentive for mortgage brokers to work in a heavily regulated environment of fiduciary responsibility and smarter consumers who shop around.
There is no way to regulate away intentional obfuscation.
Dumb question, has anyone ever tried to automate this process ? more like, has anyone ever tried to to remove the LO/broker from the 'shop around' such that the borrower can actually see the results of various scenarios and play 'what-if' ?
"You are seeing tons of 'pricing adjustments' that are really compensating for the risk created by the fact that the loan is brokered. We are moving backwards here in terms of price to consumer."
Um, isn't that the point? Compensate for the risk (or more broadly, all the costs including commissions) of a multilevel marketing scheme. As dryfly pointed out, antidisintermediation via obfuscation.
NC Jim:
My experience a few years ago was that the best 30 year fixed rate offered by a real live person at my regular bank was at least 3/4 percent higher than I could get from a broker or Lending Tree. Interestingly, when I got a market rate quote and then called the customer service people on my existing mortgage they matched the quoted rate.
Thanks. I read that such a rule was recently adopted in Minnesota, rejected in Iowa and Colorado, and is up for grabs in Illinois. That agreement required by FHA certainly looks broad enough. I don't understand, though, how you can have a duty without a legal remedy. Assuming a borrower can show something in the way of actual damages, why wouldn't he have an adequate remedy in a court of law, against his broker, where such a rule is recognized. Forgetting about "fiduciary duties," wouldn't the borrower be able to recover by showing that his broker simply failed to exercise due care in trying to find the best deal around? I can't imagine that many brokers are "going naked" on liability coverage. One would think that lenders require it of every broker they do business with. Yet we don't seem to be hearing of much litigation along these lines.
Anyone who thinks mortgage consumers are just idiots who will never get it...they themselves may be the idiots.
After this mess ends, you will see many mortgage consumers getting it. They will learn more, take more time to evaluate costs and choices, and MOST IMPORTANT they will hire fiduciaries who work only for them to help them decide.
How much do you think you should pay to hire an objective consultant who works only for you for a fee, after you have stirred up 4-5 decent offers? This person would evaluate all of those in detail (including fine print, prepayment penalties and resets)and run out a few sheets of analysis.
I say $2,000. It's peanuts. What do you say?
This doesn't exactly answer your question. But maybe it does.
All mortgage lenders in the U.S. should have a right to know (at all times) the identity of the party or parties that hold underlying rights to their mortgages. Not the servicers. The investors.
It could be done with a data base, even if the mortgage is chopped up into hundreds of pieces.
To make rate sheets available and transparent will just add one more sheet of paper buyers will not read. In the 15 years I've been a real estate broker I have not had one client read any part of their loan documents other than the headlines... not even the CYA page that assures the world they have read and understood every document and disclosure.
The day buyers start reading boiler plate on their disclaimer docs is the day the sellers have to add pages, bigger words and finer print to the document.
Its an arms race, kids. Duck and cover.
I say $2,000. It's peanuts. What do you say?
Where I live that's equivalent to approx. 1.5-2 points on a home buy or about 4-5% of median annual family income. I doubt many if any would pay that willingly.
And frankly - the better heeled have consultants and financial advisers and lawyers on retainer... etc., already. What's one more.
But its the average knuckleheads (like those in my world) who appear to be the ones getting into the most trouble. Expecting them to hire 'qualified help' is asking a lot. They will go to the realtor & banker and pray for the best.
Any solution that doesn't consider the bottom half of the market isn't a real solution.
Dumb question, has anyone ever tried to automate this process ? more like, has anyone ever tried to to remove the LO/broker from the 'shop around' such that the borrower can actually see the results of various scenarios and play 'what-if' ?
Yes, they have. There are two major problems:
Ever done the loan-by-phone thing? There's a human being on the other end of the phone, using a piece of software you cannot see. That software prompts for all the questions and has blanks to fill in and presents all the calculations and . . . well. It exists.
But its the average knuckleheads (like those in my world) who appear to be the ones getting into the most trouble. Expecting them to hire 'qualified help' is asking a lot. They will go to the realtor & banker and pray for the best.
The problem, I think, is that we're assuming this blinding array of choices that requires retained counsel to help with. But will there be that kind of choice in the "post-brokered" loan world?
God, I hope not. A whole lot of that "choice" is just different ways you can choose to pay too much for credit or set yourself up for foreclosure.
Dryfly's right: there will always be no-doc neg am ARMs with extended rate locks for the well-heeled, and they will always have their "private bankers" to handle it for them.
The mass market needs those products like . . . a self-inflicted bullet wound. Get rid of the terrible choices, and the dorky loan officer down at the bank or that sweet young thing on the phone at your local credit union is all you need.
Besides that, you won't care about missing out on another 0.125 in rate if you believed your servicing wouldn't be transferred six times, your tax bills would always be paid promptly, you could get a payoff quote without paying a fee for it, and you wouldn't spend the rest of your days on the phone with a telemarketer trying to get you to add overpriced options to the loan you already have. Would you? You wouldn't. This is a highly "price-sensitive" market because the industry has decreed it to be. It could be a highly service-sensitive industry, and that would make a lot of difference.
It would also make for some better jobs than "broker." Might even get better people to take those jobs. Just sayin'.
Tanta,
Thanks for another great post.
As an old junk bond guy, I think this model of risk-based pricing makes little economic sense. If you aren't well enough fixed to qualify for a conforming loan, you certainly can't afford the debt service on subprime.
I understand risk based pricing for insurance. If your driving record stinks, the insurance company should charge more to sell you the same policy a safe driver gets.
I even understand risk based pricing for loans to companies whose ratings are below investment grade. The execs who run these companies, may have a business plan to improve the company's condition, and get to the point where they can refinance at lower rates based on improved credit standing.
The consumer who borrows at subprime rates normally has no way to increase his or her income. They are probably in a loan they shouldn't be in. In real life, they probably can't afford a home (or at least the one they bought).
Subprime does not exist to help those who don't qualify for a conforming loan. It exists to destroy whatever wealth they have, so that they never WILL qualify.
First; awesome post.
So what to do with this information? Basically I see that I have to "trust" my broker; actually I that would seem to "hope" my broker isn't gouging me (for her benefit or for the lender's benefit).
Is the way out of this to become a licensed mortgage broker (which was mentioned as fairly easy to do)? Does this now get me access to the rate charts? So become a licensed broker to have access to the information but presumably still leave the work up to my broker. That way I can brag to my friends that I know I got the best deal possible...and then charge them a few hundred dollars to verify what their broker is getting them (to make back the money for licensing and the time spent working for them).
On the eve of crunch week, Greenspan tells all. From the FT:
US house prices are likely to fall significantly from their present levels, Alan Greenspan has told the Financial Times, admitting that there was a bubble in the US housing market....
Mr Greenspan said the off-balance sheet investment vehicles that issued much of the asset-backed commercial paper represented a savings and loans disaster waiting to happen because of the mismatch between their assets and liabilities....
FT.com / US & Canada - Greenspan alert on US house prices
I even understand risk based pricing for loans to companies whose ratings are below investment grade. The execs who run these companies, may have a business plan to improve the company's condition, and get to the point where they can refinance at lower rates based on improved credit standing.
well, sunlight, in the olden times one thing investors liked about subprime and alt-a paper was that it had a superior convexity profile relative to agencies or prime jumbos. you have higher turnover from credit curing (less extension risk), and less efficient exercise of the refi option when rates fall.
In the 15 years I've been a real estate broker I have not had one client read any part of their loan documents other than the headlines...not even the CYA page that assures the world they have read and understood every document and disclosure.
I didn't see my loan documents until the day of closing. To fully grok my loan documents, I would have needed about 2 days and access to an internet connection and a couple of newsgroups. I think they scheduled about 30 minutes.
Here's how I see it: Mortgage lending has become so complex, that handing a set of government disclosures to a consumer is like a doctor handing a medical textbook to a patient and saying "here, you choose which type of knee surgery is best for you." This blog article is a perfect example. The first person who commented couldn't even read the whole article.
Informed consent and fiduciary duties: If mortgage lending doesn't do this for itself, the government is going to step in and do it for them. They'll leave the bankers alone (as long as the lobbying dollars continue to flow) and start with the brokers.
There are a few things that are not mentioned that should be in the broker vs. retail debate.
1st. Understand that when going retail with someone like Wells or BofA or Wachovia your loan is going to be sold off to an investor, it is just the originating bank will more then likely hold onto the servicing rights so you will never know of the secondary market sale. Granted there will be a few exceptions to this rule but for the most part every loan will be sold. Even credit unions will sell loans to investors and retain servicing in some cases. So, in my opinion the entire marketing crap about "our money, our rules" is absolute BS and needs to be squashed. Retail, wholesale etc. we (mortgage originators) are all pushing the exact same products.
Secondly, the major depository banks as well as the mortgage only banks all had wholesale channels that called on us brokers. These bank account executives called on brokers and turned a blind eye to the hundreds of mortgage shops that had unlicensed loan hacks ripping people off. Here in CA when a brokerage shop was originating loans anyone engaged in the actual sale of mortgage to consumers is supposed to be licensed. Well, a shop would have 1 or 2 licensed people yet would be doing 100 loan per month with all these unlicensed asshacks doing loans under the name of the 1 or 2. Well, guess what. WAMU, BofA, Wells, Wachovia and countless other mortgage only banks would have their army of AE's come in to get our business and "ignore" the fact that all these hacks were originating loans without a license. This retail vs. wholesale broker debate is a bunch of crap.
If a person looking to refinance or purchase tunes out the marketing hype (which is really heavy from the 800 lb shops), look at the actual person and use some common sense they will find a honest originator on either side of the origination channel. How many years experience do they have, are they homeowners themselves, do they have the basics like their own website with scans of the actual testimonials from past clients, are there some realtors willing to recommend this person etc..... It is cheap and easy to have a website built, your own email address (not some lame ass @yahoo or @aol junk) keep it updated with actual thank you letters and be able to efficiently present your ability and integrity.
If the people shopping for loans were to actually take their heads out of their asses, use some common sense and logic odds are they won't be screwed. Example, I know loans well but I don't know much about construction. I just remodeled a house from the ground up. I called out three general contractors. Two came out in their fancy cars, talked fast and gave me a verbal quote on the spot after an hour or so in the house. The third guy set the appointment over the phone, two days later I get a package in the mail from that company. It contained a copy of their license, photos of past jobs, names and phone numbers of people to ch
Brian - Love the passion in your post. But, sum it up, ol' chap. Tanta is the only one around here that gets to go on like that.
Haloscan - thanks for cutting him off. You are back on my good side.
I see the only way of not being screwed is to pay cash. My funds in canadian dollars look better from day to day
Ah, where to start? Brian23:
@Brian23 | 09.16.07 - 12:30 pm
If a federal law comes into place that makes the pricing sheets available to the public, then this would alleviate most of the problem.
Uh, did you actually look at the CCB rate sheet? Cleared everything right up, eh?
@dryfly | 09.16.07 - 1:08 pm
All they would have to do is make the sheets more complicated, a whole lot longer and put it in very tiny print a la all other boiler plates and we're back to square one.
Uh, did you actually look at the CCB rate sheet? Already done!
@NC Jim | 09.16.07 - 1:10 pm
[C]ould I today go to my local Wachovia branch office where I do all my other banking business and apply for a mortgage? [...] Why would I go to a retail outfit like Countrywide that may sell my mortgage to Wachovia anyway?
I tried that with BofA, who quoted a rate 1.25% higher... not to worry though, within a month the company had sold my servicing rights to... BofA!
@Bobby | 09.16.07 - 1:35 pm
uhm, Tanta, is there any chance that cliff notes are available for this post?
Those were the cliff notes!
@Brian | 09.16.07 - 8:23 pm
If the people shopping for loans were to [xxx], use some common sense and logic odds are they won't be screwed.
Back to my first comment: did you actually look at the CCB rate sheet? Bet your common sense really helped cut though the clutter, right?
Great source of knowledge.
Thank You.
At the risk of repeating myself (which risk is not priced on the internet), I think the solution involves getting rid of the choices, not learning how to compare them.
It is so ingrained in Americans that "choice" is a good thing that we're drinking the underlying Kool Aid: that any risk should be allowed, but at a price is number one, and that "group insurance plans" should be done away with and all borrowers should pay their own risk ticket is number two.
If you maintain a certain set of standards, you can charge everyone the same rate/price and do fine, because the risk on a big pool of loans is the average risk, not the worst risk in the pool. I don't have to get another 50 bps from the 655 FICO guy, because my pool does not perform at an average FICO of 655.
Yes, in theory that means that the lowest-risk consumers get a slightly worse rate in exchange for the highest-risk consumers getting a slightly better rate. But your alternative today is that everyone can be gouged, and that the mispricing on the bottom tier (putting people in loans they can't afford) drives up pricing for everyone. You 750 FICO people only think you're getting a better deal.
Compare it to health insurance: young healthy people always think they're getting a good deal on a high-deductible plan that doesn't cover a lot of "catastrophic" stuff that mostly impacts older weaker people. So instead of having big mixed risk pools, we drop the sickies and insurers compete for the healthiest. Insurance becomes unaffordable for the oldest and sickest, they cannot pay their own costs, and between the exorbitant overhead/admin costs of complex insurance arrangments and the weight of the uninsured and the skewing of the various pools, costs skyrocket for everyone.
My point: nobody is actually paying "the true cost" of his own credit risk. You might think you are, but that's marketing dope.
The regulation needs to go after the mortgage products, the pricing practices of lenders, and the barriers to entry/lender risk management/market transparency of third-party origination. That will shake out enough of the incomprehensible "consumer choices" that you will inevitably become more able to "read the menu."
To start from the point of teaching menu-reading is WAY. BESIDE. THE. POINT.
I think the solution involves getting rid of the choices, not learning how to compare them
clearly people don't have a conceptual problem with limited choice, i don't think, except for more mundane things like brand of cereal. as you move up the importance scale towards mortgage, you should be fine with less choices. and voting for president? choose 'a' or 'b'.
If a federal law comes into place that makes the pricing sheets available to the public, then this would alleviate most of the problem.
Don't forget, this rate sheet was probably designed for Chevy Chase's employees to use. This is probably as simplified as they can make it.
I think the solution involves getting rid of the choices, not learning how to compare them.
In the IT world, this is what Scott "Dilbert" Adams calls a confusopoly. You've got more or less a commodity product, you could compete directly on price, but of course most sensible businesses want to avoid that like the plague. I don't want competition; do you?
So you set up your products with a bunch of different features, add in some complex restrictions, and several strategically-chosen tiers that rarely correspond with your competitors'. This ensures that not only is it difficult to compare products with one another for one consumer, another consumer's decision space will be completely different so you can't generalize.
This is the main problem with expecting consumers to understand everything themselves: the amount of information that you have to process for one transaction is getting larger and larger by design, and there are more and more transactions that you have to deal with. Nobody can keep up.
Let's assume for a second that it is possible to arm the average dude with rate sheets and product guidelines, then deliver a system that can make meaningful comparisons between the blinding array of rate, price, and product variables. All this in order to self-analyze the best "deal."
But the best deal defined as what? The lowest rate for your borrowing profile? The least interest over time? The lowest total cost over time? Least risk? Some combination of the above?
Problem is, getting to that magic place, however you choose to define it, is easier said than done, since there are a few variables that even the brightest among us can't predict:
How long will you own the house, actually, exactly (count the days, every dollar matters)? What if it appreciates? What if it loses value? Does it matter?
What, exactly, will interest rates do after you close your loan? Up? Down? Does it matter?
Point being, one can really only determine the best "deal" in hindsight. Same for your broker/banker/originator/real estate agent/magic 8-ball.
Even if we could sprinkle enough pixie dust on the current system too both add total transparency of choice and remove the "my broker/bank/lender/originator screwed me" risk entirely from the equation, is the consumer really in a better place? Do they have less risk, really? Might a few consumers screw themselves unintentionally? Then what?
Nightmare Fuel: Maybe they can federalize the whole mortgage finance system and we can all take a number get our mortgages from Phyllis - along with our license plates - at the DMV? Take a number and a clipboard and wait in line...
Simplifying choices, adding fiduciary responsibility, and barriers to entry all are reasonable steps. There's lot of lobbying money protecting those rice bowls, however.
You've lost me. Isn't some scheming competitor going to offer the 750 FICO guy a deal that actually is more attractive than your "pool" deal? Are we talking some sort of monopoly here?
Sorry, I get fired up. The consumer needs to make sure they do their homework on who they are asking information from. If they ask 3 people who have limited experience and are in it for the buck they will get far different answers than if they asked someone like me. I've been telling people for a long time now to absolutely, positivity not purchase a home, WAIT. My less educated and less experienced competition tells a different story that involved things like "they ain't making more land" and "truly rich people got there via real estate" and sucker people into these situations. The consumer fails to analyze the situation with common sense and fails to analyze who is delivering the message. They get caught up in the hype and further the pocket book of an idiot who has no business dolling out information on most peoples largest investments.
"It is supposed to be the role of a mortgage broker to locate the best price for a consumer...."
It would be reasonable to suppose so, based on the usual understanding of the term "broker". But it is not correct. Mortgage brokers are essentially retailers, just like the loan officers of banks, offering home loans on a take-it-or-leave-it basis. The main difference is that mortgage brokers provide retail services for many lenders (some of whom also have their own in-house retailers) rather than just one. Once you understand that mortgage brokers are retailers, you will understand why it is unnecessary and unhelpful to compel brokers to disclose their YSP or to compel wholesalers to publish their ratesheets --- the information is just as irrelevant to the consumer's decision-making as is the wholesale price that Sears, or Macy's, or any other retailer pays to their suppliers. The only price that is relevant to the consumer is the price that he/she must pay to the retailer. Like other retailers, brokers shop among wholesale lenders so that they can compete with other lender/brokers on rates AND also maximize their revenue by finding the cheapest wholesale supplier. And it IS fairly easy to shop for a home loan: apply with two or three lender/brokers, get approved, and see what they offer you when you are in a position to ask your lender/broker "what rate can you offer and LOCK for me today?").
"Traditionally, the origination fee on a loan is the lenders overhead, which includes commission to the loan officer or profit to the broker."
It is true that 1% is the traditional origination fee. But, traditionally, home loans were made by banks which also earned points in yield spread premium as well. And some amount of the yield spread premium must have also covered the lenders overhead and the loan officer's commission. When mortgage brokers came on the scene, they competed (and still do compete) with the banks by being willing to earn less yield spread premium than the banks were earning and thereby offer loans with lower rates. There is no particular reason why 1% should be sufficient to cover costs; it is mostly just a tradition that is enforced by past practice. And because 1% is usually not enough to cover costs on most home loans, both banks and mortgage brokers typically offer rates that allow them to earn 1 or 2 points in YSP. To get a "par rate" (0 YSP) from a broker, you will usually have to pay a discount point to compensate the broker for what he/she would otherwise earn in YSP --- and this is exactly equivalent to paying a discount point to buy the rate down.
The HUD mortgage broker contract cited by one of your commentators is not required by HUD and so is not evidence of what the relationship of the broker to his/her client should be.
Disclosure: I work as a loan officer for an Oregon branch of a large national lender/broker and I also have an MA in economics. And nothing annoys me more than the w
Welcome to the worst I have ever seen. I am a Mortgage Broker and can offer many items. The new adjustments are unfair and unreal. Take a 400,000 loan, and take a Fico score of 679. Yes 1 point of 680. The pricing adjustments come in at 1.75% or 400,000 x 1.75% = 7000.00 extra, that the borrower will pay.? But it gets better. Imagine the newer rule, Soft Market, a 5% reduction from a current appraisal, yes this may make a borrower go over the 80% mark to avoid Mortgage Ins. Lets add .35 for the MI An extra 388.00 dollars per month. Lets assume the borrower wants to cash out - for college, debt consolodation ect. Add another .75, not .50 but .75. 400,000 x .75% = 3000.00 extra the borrower will pay, ontop of everything else. The answer? Leave borrowers alone, forget FHA. And tell Fannie/Freddie to go away. We need outside banks or investors to save the mortgage market, because we can't. Where are the State regulators for this nightmare? hmmmmmm I see, they can't get involved. I wish everyone would explaint the actual costs to the consumer, then the refi business would die, and force Fannie/Freddie to cease the bullshit they have done. Nobody told Fannie.Freddie to do 2/28 ARMS with a Neg Am featur I/O with a 2 or 3 year pre-Pay. Yes, those products where poor. The idiots who entered the business from car sales are now gone. Originators now must be licensed. Can we now get back to making money and stop screwing the consumer! Next time you do a mortgage, ask yourself this? Is it really worth hurting the borrower to make your money? I Think Not! So why let Fannie/Freddie guide you in this direction.