February 06, 2009 - CAMP Money

LETTERS From CAMP Rehoboth

CAMP Money

Rates Gone Wild

With the start of a new year, a new Administration, and finally a new President, hope and optimism abound, right? One would think. But turn on CNN or pick up the WSJ, and there is no escaping the reality that we are experiencing an economic crisis that would not have seemed possible just a year ago.

Nearly every day a new stimulus or bail-out 'package' arises from Washington that is going to come along and save the day. To date, however, there are few legitimate signs of recovery and most economists feel the worst has still not been felt.

In December, the Federal Reserve announced it would do its part by buying $500 billion in mortgage-backed securities, hoping to influence the mortgage industry to lower interest rates and ignite the sagging housing industry.

Rates dropped almost immediately to historic lows, and the Fed's efforts quickly became the media's favorite headline. The notion of a 4.50% mortgage became the immediate barometer by which many prospective borrowers gauged their application and lock-in decisions.

Could a 4.5% mortgage be your personal piece of the bailout pie? Perhaps, so long as you know what to expect and how to proceed in this extremely volatile climate.

Unfortunately, the media tends to over-generalize interest rates, as if all borrowers fit the same loan. If only it were that easy. Publicized interest rates typically represent the best-of-the-best, and fit only a small percentage of overall borrowers. A credit score, loan amount (conforming vs. jumbo), the amount of equity in a home (LTV), and residency status all influence rates, and much more so today than in the past.

For example, if a 30 year fixed rate for a person with a 740 credit score and a LTV of 75% were 5.25% today, a 2nd person with a 690 credit score and an 80% LTV would see a quote of 5.75%!

While declining rates is certainly good news, lenders have consequently been inundated with new applications, causing major backlogs for themselves and virtually all service providers involved in the financing process (appraisers, attorneys, title companies, processors, underwriters, etc).

For most lenders, it has become too much too soon, and the best way to slow down the volume is by increasing rates. This is what the media, for the most part, doesn't tell you.

Why is this happening? Faced with the necessity of slashing costs to stay afloat, far fewer banks now have far fewer employees to meet the greatly increased demand. Plus, fluctuations in interest rates that once took weeks, if not months, are now happening within hours. It's not uncommon to see rates climb (or drop).25% to.50% in the same business day, depending on market conditions.

As a result, the window of opportunity for locking a low interest rate usually exists for a very brief period of time. Given these factors, it is now taking longer for loans to reach Closing, and Loan Officers are being required to lock loans for 60 90 days, especially for refinances. The basic business principle of 'supply and demand' applies and may be the best answer to this volatile, but manageable, process.

While most borrowers want to wait for the 'best rate,' it is a risky strategy, and you're likely to discover that locking sooner than later is the best answer. My advice, however, is to work with a mortgage professional who is informed and who you trust. The current climate is certainly temporary, and the lending industry will eventually catch up. Virtually every textbook definition of what determines low interest rates indicates that rates should be lower than they are now. And they will be again, probably sooner than later.

If you are at all considering refinancing, or buying a home (best advice of all!), get started now. For refinances, it is especially important to complete a loan application now, allowing your Loan Officer to work on your behalf at the appropriate time. Obtaining the best rate is only possible for those who plan ahead, react quickly and follow the advice of the professionals.

After all, calling won't cost you a dime...not calling could cost you a fortune.

Chris Beagle is a senior loan officer for Fairway Independent Mortgage. Email him at christopherb@fairwaymc.com.

LETTERS From CAMP Rehoboth, Vol. 19, No. 01 February 06, 2009