Last week I explained some of the behind the scenes business practices that lenders employ that leverage YSP to develop and retain business. Today, I read Dan Green’s post on why MBS’s are so much more important to follow than the 10yr note, I felt a follow up to both posts were in order.
When I first started originating, I signed up for a service that sent messages to my pager (yes, it was that long ago) to tell me if rates were in danger of rising or falling. There was a phone number that I could call any time that gave me the latest bond information and advised me on how to proceed. I subscribed to a news service that faxed me a report every Monday. I was into it.
But the more I learned, the more I got burned. I understood how the market worked, and what would make rates move one way or another. What I never understood though was why I always had the misfortune of having my loan submitted to the one lender in the industry who never seemed to follow suite with conventional thinking. That is, until I worked for a lender.
In his article, Dan asks”Where do Mortgage Rates Come From?” He’s dead on correct that MBS’s are where interest rates start. They’re also an excellent indicator of how the market will move as a whole. But when it comes to individual lenders, there’s more to the equation. Let’s work backwards and look at all the folks who could be effecting the rates you can offer to a client.
Your own broker/manager - If you do not have direct access to the actual rate sheet that’s provided by the lender, there’s a chance that the broker is taking a cut. This is pretty rare these days since the total amount of YSP has to be disclosed on the Hud- 1, but then ask yourself, do you have any part in the closing of the loan? Do you see the Hud-1? You may not being seeing improvements in the market because your own manager is taking them for themselves.
The Account Executive - I documented this pretty well in my last post, so we’ll move on.
The Wholesaler’s Branch Manager - This one is likely the biggest factor. Most Branch Managers have some control over rates. When the office is slow, they’ll cut their margins, and lower rates. When they’re swamped, they may raise their rates, or hesitate to lower them, even though the market improves. Branches are also graded on the number of locks that result in closings. So when brokers play the market by locking with more than one lender, they drive up rates for everyone. If the fall out on rates locks is to high, it’s a sign that the branches rates are better than their service. Raising rates help to curb the shoppers.
The Wholesale Lender’s Secondary Department - This is where the picture turns gray for me. I do understand a few principals however. Getting back to those locks. When a broker locks a loan, the secondary department needs to make sure the money to loan that loan is available. As more loans are locked, the commitment, and the level of risk is higher for the lender. When the secondary department sees more locks coming in than it knows each branch will be able to deliver, they know they need slow down the whole system by raising rates.
So what does this all mean? To me it meant that I really couldn’t give lock vs float advice to a borrower because I couldn’t see the whole picture for myself. As I moved away from originating loans, my interest in the market completely waned. Still, I do think it’s important for every originator to be familiar with what factors are going to generally effect rates. The problem is, I don’t care enough to give you that advice. Over the last two months, I’ve been looking for a contributor with a passion to provide this line of content, and so long as everything goes as planned, you should see the fruits of that search next week.
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{ 3 comments… read them below or add one }
I like how you illuminated the idea that there can be a lack of transparency, at times, even between a group of loan officers and their manager.
It’s easy to find yourself in a bind when rates are volatile. As an LO, what do you do if a client asks whether to lock or not? A good faith answer from me would be that if it was a rate they could live with it wasn’t worth risking an increase. If the borrower barely got approved at the current rate they could lose an approval by waiting if rates worsened.
However, if the borrower locked and rates improved significantly I’d have to let the deal go–never worked for a boss / wholesaler who was willing to suck it up to help me keep the deal. So I was faced with 2 choices–either advise the borrower to float, even when not in his / her best interest (which I didn’t do if it put them at risk), or lock with a wholesaler and broker the deal if my own company’s rates got worse.
In a system where borrowers want a commitment from you but aren’t required to make one in return, you’re pretty much forced into this. I only brokered to a couple of wholesalers and they got enough business from me that I think they were willing to suck up an occasional broken lock.
The only way around this that I can see is to either force borrowers to close with a lender they lock with or for the industry to impose lock fees across the board–wholesalers to brokers, originators to borrowers. If a broker wants to absorb the wholesaler’s lock fee as a cost of doing business that seems okay. But the system as it is now doesn’t work for anyone–the extra admin, the added risk to both brokers and wholesalers, etc., raise the costs to all–including the borrowers who think that by lock-jumping they are getting a better deal.
Todd…pretty good insight into the behind the scenes look at how, and who, gets paid through the whole process. It would be nice if “transparency” could be truly achieved, but it will never happen in entirety. For now, as mortgage professionals, we should do our best to be transparent, even if the law doesn’t require it.
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