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To Lock or Not to Lock–That is the Question!

One of the proverbial questions that mortgage professionals hear from their clients and prospects is “when should I lock?” Another variation of this same question is “when are rates going to fall?” So many times, this question is loaded and the mortgage banker, broker, or loan officer is painted into a corner and unsure of the answer to be credible. Indeed, my favorite question is “if I lock now and rates fall, can I get the lower rate?” This is a real song and dance question that I really hate as some lenders let you “float down and others don’t.” The unfortunate thing about this line of questioning is that a blow of the wind can literally spoil the reputation of a mortgage professional, because the science behind locking a rate is out of their hands.  

Where rubber meets the road, locking a rate involves the investment of money and the allocation of capital. Mortgages are just like any other financial instrument (e.g. CDs, mutual funds, stocks, and bonds) in that they provide a return on investment. In many cases, the interest rate on a borrower’s promissory note represents a substantial portion of someone else’s retirement fund. The mortgage industry is huge, and has grown into a money making machine with an established infrastructure which originates, services, sells, and pays off billions of dollars of mortgage loans per day. Across the United States as people lock loans, “secondary” departments across the mortgage spectrum are working full speed to prepare pools of mortgages for sale. As loans of similar characteristics are placed in a mortgage pool to be sliced and diced for the investing publics purview, the secondary departments are trying their best to plan a pipeline. However, so much of pipeline planning is not in their control either. The hunger on “the Street” may be for 3.375% 15-year mortgages or 4.00% 30-year mortgage product, but if the market is “out of sync” it may not happen. As we have seen in 2012, a market rally can drive rates upward and kill a mortgage pool waiting to be filled, as a 15-year mortgage product may increase from 3.375% to 3.75% in the blink of an eye with a jobs report.

Additionally, there could be a stall in the pipeline due to an over abundance of product. You can have too much of a good thing in real estate finance. If a particular lender is getting too much volume for a particular product (high balance Fannies at 4.25%), they will intentionally slow down their pipeline by raising their own rates beyond what the market has justified to something like 4.625%. I can think of more than a few instances where a particular lender will purposefully raise the rate on a mortgage product beyond what the market will bear because their returns on the product are so low to the point when they sell them off to the secondary market there is very little margin for any profit. Accordingly, if economic forces are driving 30-year mortgages down to 3.875%, but one lender chooses to peg their rate at 4.375%, the difference in rate could be explained by that particular lender’s over abundance of product on the books or a very thin profit margin on that product.

Furthermore, Japanese tsunamis, European flu, domestic hurricanes, victory of the socialist party in France or the defeat of an austere fiscal conservative in Greece can send interest rates into uncontrollable gyrations. Each one of these preceding instances is not hypothetical. As we all know, each has occurred in our recent history, and had a noticeable effect on interest rates. Accordingly, when factors such as these which drive the market occur, there is no static strategy for locking rates. Therefore, each mortgage professional will follow their own course of action based on their gut and/or professional experience.

Many believe that if the rate is comparatively low, they should lock it for 45-60 days and not worry about it.  To them, it is better not to tempt fate as the market could change overnight (for the worse). Others are of the opinion that if the general feel of the market is that rates will stay low a borrower shouldn’t lock until the very end of the loan process.  These individuals believe that there is always some piece of data that can push rates lower by waiting. By and large, blips can send rates in the opposite direction. For instance, Apple was seen as running out of steam and out of fresh ideas to continue its torrid pace of growth after Steve Jobs death. Then its earnings came out and they were the best ever. They sold more iPhones and iPads than ever before. The market jumped and so did rates–at a time when the rest of economy was in the doldrums. Since the earnings announcement, rates had remained high until the resurgence of the European flu. So, it doesn’t always pay to play the wait and see game, especially if you are dealing with any type of deadline. Personally, I base my rate lock strategy on a person-by-person philosophy. If you are working with a conservative borrower, lock for the longest viable period needed to close escrow. Conversely, if you are dealing with a Vegas-pro, chances are they will want to let it ride. However, I always advocate disclosing risks and uncontrollable circumstances in writing.

In summary, determining when to lock your interest rate is a decision faced by tens of thousands of borrowers everyday. If you lock too soon, you may miss out on further rate reductions. If you wait too late, a market shift could put your refinance on the shelf. Each borrower needs to decide their risk tolerance for watching and locking a rate in the same way they determine their risk tolerance for investments. A windstorm, parliament, jobs report, or sales of an Apple product can make one’s dream rate seem so far away. It’s a perilous decision to make, so choose wisely.

Preston Howard is a mortgage broker and Principal of Rose City Realty, Inc. in Pasadena, CA. Specializing in various facets of real estate finance, he can be reached at howardpr@rosecityrealtyinc.flywheelsites.com.

For the longest time, economic indicators like consumer confidence, new home sales, GDP, durable goods orders, and retail sales moved mortgage rates in a significant fashion. If the Federal agencies in charge of economic statistics released data that was either widely positive or negative, mortgage rates could jump or fall by .375 – 1.00% in a single day. As powerful as these market indicators were in the past, they don’t hold the same sway as once before. Instead, we look to Greece, Japan, Italy, Germany, Spain and Portugal for indications as to where rates are headed nowadays and it has now become the norm.

During the month of April, the traditional domestic indicators were released to the public. Surprisingly, there was barely a mention of the announcements. At best, the market will move .125% in one direction or the other once the announcement is made and then settles down by the end of the trading session. This year, new home sales didn’t do much. Gross Domestic Product (GDP) didn’t receive any Dow Jones attention whatsoever, and even the market-moving initial jobless claims report stirred up only .125% – .25%. The two closely aligned heavyweights–the unemployment rate and the Non Farm Payroll reports can still send the markets gyrating wildly out of control, but by and large, domestic economic indicators aren’t driving market movements like they used to.

Now, let’s expand our worldview. Last year, when the Japanese Tsunami hit and worldwide supply chains were decimated, the markets and interest rates fell. Recently, we’ve seen the French elections rocking the market too, as worries that conservative leader Nicolas Sarkozy may lose his presidential post to Socialist leader Francois Hollande. The markets lost over 100 points and interest rates fell .25% – .5%, (depending on the lender queried) as fears that Mr. Hollande will oppose Germany’s Chancellor, Angela Merkel who favors austerity as a remedy to France’s large budget deficit and slow economy.

Over the last six months, the domestic manufacturing index had no effect on interest rates in the US, Greece’s financial woes did. A deepening financial recession, political instability, and an unhappy public setting fire to the streets of Athens, put the world’s financial markets into a daily tail spin as traders, bankers, and investors teetered on the edge of their seats, waiting to find out if Greece would accept or reject a European Central Bank (ECB) brokered bailout package. News from the Netherlands also struck the markets as well during the last week of April. Reports that their prime minister resigned amid budget deficit woes and high debts caused the Dow to give back 102 points and fall below 13,000 for the first time in weeks. The flight to safety within Treasury bonds sent its rate down .34% in less than one hour with mortgage rates correspondingly falling not to far behind.

Clearly, as we watch the drama unfold, it’s no longer just Federal Reserve Chief Ben Bernanke and/or Treasury Secretary Timothy Geithner who roil the markets as we dissect their every word. Additional voices that we need to lend our ears to and gain insight from include Mario Draghi, head of the European Central Bank (ECB), Christine Lagarde, head of the International Monetary Fund, Mervyn King, governor of the Bank of England, and Zhou Xiaochuan, governor of the Central Bank of China. The advancement of trade across borders has facilitated cross-cultural growth. This has opened up the investment in goods, services, stocks, bonds, and currency between nations, which has a direct effect on domestic finance within the U.S. The trillions of American dollars which are held in Chinese foreign currency reserves (a liability for the U.S.) and the billions of dollars of mortgage backed securities on the balance sheets of not only Swedish banks, but other financial institutions across the European Union, render our markets vulnerable not only to domestic economic swings, but also world wide volatility. Consequently, we learn that we need to be students not only of our country, but students of our world in order to survive.

Finally, ABC World News Tonight now has a new significance to me. In the past, I just wanted a glimpse of what the rest of the world looked like. As a kid, I found the international news stories fascinating and good material for supplemental information to put into my third grade book reports. Nowadays, I tune into world events because they can cripple a deal pipeline in a matter of seconds. Currently, what Ben Bernanke says doesn’t concern me half as much as what Mario Draghi feels that the ECB is going to have to do to keep Europe from going off a financial cliff; if Angela Merkel has to butt heads with a new French President; if Greece burns through its bailout funds; if Spain continues to experience 28% unemployment; or if China decides to dump its trillion dollar holdings of Treasury bills on the open market, we will have front page news from “Main Street to Wall Street” and interest rate gyrations to go along with it. Therefore, we should expand our worldview, not only for dinner conversation, but also for economic survival in our industry. Previously, I may have said that with regards to interest rates, we pray for bad news. This is still true. Bad economic news usually means lower rates. Now, we are praying for bad news at a worldwide level, as it currently give us more bang for our buck (pun intended).

Preston Howard is a mortgage broker and Principal of Rose City Realty, Inc. in Pasadena, CA. Specializing in various facets of real estate finance, he can be reached at howardpr@rosecityrealtyinc.flywheelsites.com.

Oh the fanfare that was made about HARP 2.0. When first announced by the Obama Administration in fall 2011, the program was destined to be the one that solved the ill wills of the mortgage market. The first rendition of HARP was a godsend to many who were underwater on their homes. The only requirement was the loan had to be purchased by Fannie Mae or Freddie Mac prior to June 1, 2009, and voila–you had a magical refi with a rate that rivaled the prevailing mortgage market (subject to loan-to-value {LTV} restrictions). Since the arrival of the first rendition of the program, a lot of murmuring and complaining commenced as many Fannie/Freddie borrowers complained of being left out of the party due to ultra high LTV issues. Accordingly, version 2.0 doesn’t include a LTV ceiling, so that a borrower can have a high LTV and still refinance their loan. You would imagine that the problem has been solved, right? Well, let me explain.

First of all, participation in HARP 2.0 is purely voluntary on the part of the lender. In anticipation of the rollout of the program, I called a variety of lenders to determine whether they would offer the product to get a head start on the guidelines, requirements, and restrictions. Surprisingly, at least 1/3^rd of these lenders indicated that they wouldn’t offer the product! The other 2/3^rds indicated that they were planning to offer it, but are in talks with the lender’s credit administrators about the best way to roll it out. By and large, although it was announced in October, the broad majority of lenders didn’t rollout HARP 2.0 until March, and they only offer a few of the components that the federal government intended.

What one is likely to see in a HARP 2.0 offering by a lender is a maximum 95-105% LTV on the 1^st mortgage in question and a maximum combined LTV (CLTV) of 125% for a second mortgage. Some lenders will allow a first mortgage up to 125% LTV, while others will allow the CLTV up to 150%. However, the one thing that I haven’t seen is an unlimited LTV. Those who are severely underwater (and maybe due to no fault of there own, but just market conditions) will not benefit from this program, and there are millions of homeowners who could use the help.

In Southern California, we have two particular areas which serve as interesting case studies: Palmdale and the Inland Empire. Both of these areas experienced significant growth in the first half of the new millennium. Average home prices in these areas were approximately $120,000 throughout the 1990s, but exploded into the $300,000s and even $400,000s as growth came. Developers rushed in, sold thousands of homes in the $350,000 range, and then the bottom fell out and the music stopped. Now, average home prices are hovering in the $150,000 range with tens of thousands of underwater homeowners. Surprisingly, many homeowners are still making all of their mortgage payments on time. Also, given their price tags, the overwhelming majority of these loans are most likely owned by Fannie Mae or Freddie Mac. So they would be perfect candidates for HARP 2.0, right? The technical answer is yes, but where rubber meets the road, the answer is no. As previously stated, the highest LTV that I’ve seen is 125% and the highest CLTV at 150%. Therefore, a person in Palmdale with a $320,000 mortgage on a house constructed in 2005 that is now worth $160,000 needs the unlimited provision, because they have a 200% LTV. Unfortunately, lenders are shying away from this carve out feature in droves. Whether a Fannie Mae/Freddie MAc guarantee to purchase a loan is there or not, a lender’s credit administration department is not keen on making 200+% LTV loans as many believe that Fannie or Freddie may find any reason or excuse not to buy the loan and remove it from the lender’s books. The only caveat to the unlimited LTV debacle is lender-to-lender refis. If a lender originally made an underwater loan they will refinance it (as long as it meets all of the other criteria). However, in my experience, a variety of prospects and clients may meet the criteria, but the lender who initially originated their loan is now out of business. So once again, those who need and deserve the program are shut out.

In summary, HARP 2.0 was a great idea; however, it’s a failure because it has no teeth. Banks aren’t participating and if so, they aren’t offering an unlimited LTV; except for loans already in their system. A true guarantee of purchase by Fannie Mae and Freddie Mac needs to be made available; otherwise, only a very select few will benefit. Who knows, this could be cause for the creation of HARP 3.0, but with the limited success of the first two versions, I’d prefer that a mortgagee drown their sorrows listening to a well-tuned harp from the symphony to take the pain away, as the HARPs coming out of Washington sure won’t.

Preston Howard is a mortgage broker and Principal of Rose City Realty, Inc. in Pasadena, CA. Specializing in various facets of real estate finance, he can be reached at howardpr@rosecityrealtyinc.flywheelsites.com.

As bureaucracy becomes a larger slice of America’s fabric, a host of new government agencies emerges in the rankings of institutions most likely to slow progress. At the top of this new list is the Consumer Financial Protections Bureau (CFPB). CFPB is set to regulate bank accounts, credit cards, debit cards (banks themselves), mortgages, and virtually any financial institution or products that can touch the hands of consumers. While the bureau’s mission statement (to make markets for consumer financial products and services work for Americans) seems noble enough, its purpose will border on the mundane, particularly in the mortgage system.

The CFPB is charged with providing more transparency and accountability in the mortgage servicing system. As it stands, the servicing industry was found guilty of “systematic sloppy recordkeeping” in its “robo-signing” debacle of 2011. Mortgage servicers were also found guilty of being lax in how they deal with borrowers facing a pending default. Accordingly, the Dodd-Frank law of 2010 made way for the CFPB to step in and navigate the process of enforcing more regulations on servicers. Originally, servicers were set up to simply collect, process, and apply a borrower’s payments to their loan balances and work with them in the event of default. Now, the CFPB is charged with ensuring that borrowers have “clear monthly statements” with definitions and how payments are applied, dates for the next payment, recent activity, fees, and warnings for late fees.

Other changes include warnings for interest adjustments, good faith estimates of the new payment and alternatives if the payment is unaffordable and contact information for housing counselors. Servicers will now be required to contact a borrower if they have missed a mortgage payment. Servicers will have to call a borrower if their insurance is about to lapse and in cases where insurance is forced onto a borrower. Finally, servicers are required to institute “common-sense rules and procedures” for handling consumer accounts and establishing reasonable management procedures to minimize errors. As I read this, I immediately thought to myself that this new bureau will be a bureaucratic nightmare.

By and large, tin many states, the majority of mortgage holders pay their mortgages on time. They also pay their property taxes early (if they don’t impound them). Moreover, they shop insurance like they look around for cars, stereos, and TVs. These responsible citizens look for the highest coverage, the lowest deductible, and the best rate. Therefore, the idea of having “forced insurance” coverage is foreign to them. These borrowers review of their disclosures when they start the mortgage process to understand the product offering along with all of the costs associated with borrowing. They also read their loan documents before they sign them, particularly the note and adjustable payment riders. As such, the people for whom these rules are being written for are the borrowers on the fringes who probably should not have purchased a property in the first place.

Ideally, the new role of the CFPB could change a mortgage statement from a one-page document to a ten-page dissertation. Credit card and bank statements that were once short in length may now become thesis projects that no one reads, with three of the pages filled with balances and account activity, while another 4-6 pages are filled with privacy statements, blank pages, and disclosures that waste paper and time. Accordingly, the increased bureaucracy meant to protect all will serve a few, but affect all concerned in the form of increased account fees, higher rates, and new “costs of doing business” to cover the increased general, service, and administration charges levied by institutions to cover the added costs for additional information. Therefore, in the end, to do justice for a few will hurt many.

In summary, the Consumer Financial Protection Bureau is here, and it appears that it is here to stay.  Whether consumers are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products, their goal is to make markets for financial products and services “work for Americans.” My only concern is whether we are all going to have to work harder to pay for extra bank fees.

Preston Howard is a mortgage broker and Principal of Rose City Realty, Inc. in Pasadena, CA. Specializing in various facets of real estate finance, he can be reached at howardpr@rosecityrealtyinc.flywheelsites.com.

In the years gone by, I had always thought that this obscure acronym was an entity owned by Countrywide, as the term was always used in their Deeds of Trust. However, as I started to work with a more diverse set of financial institutions, the more I found myself running across this four-letter word. I never really paid it much attention until one day out of curiosity I stopped and peeled back the layers on this entity. Later, I learned that MERS is in the middle of the current malaise, which permeates our dysfunctional mortgage market in a big way. Let me explain.

MERS stands for Mortgage Electronic Registry System. It sounds big and official, and by volume it is very big. It is perceived as a government-managed repository of every mortgage ever brought into existence. Well, it is and it isn’t.  MERS is a repository of mortgages; however, the government has nothing to do with it, or in the past had nothing legally to do with it–until now. It is privately owned and managed by its parent holding company, MERSCORP, and was originally created to track the assignment and transfer of ownership and servicing rights of real estate loans originated throughout the United States. The reason for this is two-fold. As with the practice of law, licensing for real estate is handled at the state level. Conversely, the recordation of the ownership of real estate is handled at the county level. Every time a property or its underlying mortgage “changes hands,” most counties want a record of the transaction and its corresponding fees. Therefore, MERS seeks to circumvent this requirement by vowing to keep track of every transaction involving a mortgage or mortgage-backed securities registered in its system. By and large, the mortgage industry has bought in. As it stands, over 70% of all home loans are registered with MERS.

Technically, MERS is the “owner of record” for the interest stake that comes from mortgages originated by banks, private lenders, master servicers and pooled investors. Since the start of MERS in 1995, mortgage liens and securities were assigned, traded and sold freely with information on the ultimate owners readily available for those who subscribed to the system. With a Servicer ID, a borrower could easily track down their servicer, which would then be able to identify the ultimate holder of the note to simplify negotiations in event of a imminent default, thereby staving off foreclosure. Fannie and Freddie have bought into MERS as they require registration of eNotes on the MERS e-registry prior to either entity purchasing the loans.  For years, MERS worked well, and then with the advent of the subprime crisis–things changed.   The mortgage implosion has created a new operating paradigm for the organization, along with lawsuits and lots of finger pointing.

From Kansas to California, New York to Nevada, Florida to Washington, and all of the states of the Union in between, MERS has become a controversial entity as the question arose as to whether MERS had ownership and/or decision making authority over the underlying loans in its registry. In some cases, MERS couldn’t prove its interest and foreclosures were suspended. In other cases, litigants argued that MERS lacked the authority to commence foreclosure proceedings and that their deeds of trust or mortgages were unlawful (some states utilize the mortgage instrument, other states, such as California, use a deed of trust). 

By and large, when most plaintiffs take this entity to court, they lose as the basis for their suit is founded on MERS’ legal status as the owner of record. Most courts affirm the company’s ownership status based on the simple fact that the borrower’s signature is on the deed of trust, which outlines and affirms MERS’ ownership position from day one. However, as stated above, recent examples of case law have invalidated MERS’ position and many courts have rejected MERS’ ability to foreclose. Other courts have disavowed their ability to transfer ownership rights, while some have chose to split the difference by stating that while MERS is the owner of an interest in the mortgage, it does not equate to an interest in the underlying note (which in itself is confusing). Courts at all levels have chimed in on this decision (e.g. Federal District Courts, Federal Courts of Appeals, US Bankruptcy Courts, State Superior Courts, State Courts of Appeals, and State Supreme Courts). Ultimately, I believe that given the severity of the issue, the various decisions for and against the registry system, and the extensiveness of MERS’ reach, the U.S. Supreme Court will weigh in with a final decision on its true authority. Once that is done, a formal road map will be drawn for all to follow concerning ownership, transfer rights and assignments for mortgages registered in the MERS system and the confusion should stop.

In summary, MERS is a non-governmental mortgage behemoth. With nearly three out of every four mortgages registered and tracked within its system, when problems and controversy arise, the discourse is grand. With borrowers using every tactic to keep their properties, holes in MERS’ business incorporation and legal status as “owner of record” will be challenged vigorously in a court of law. Some will win while others may lose. Ultimately, the Supreme Court will decide and then we will deal with the consequences of the fallout and the efficiencies (or lack thereof) of the mortgage registration system that will follow. Have you read page one of your deed of trust or mortgage? Does MERS “own” your loan? Are you registered in their system? Are you in default? IS there a possibility that you may need to modify, renegotiate or restructure your loan? Given our recent foreclosure and “robo-signing” controversies, it would be foolhardy not to find out. 

Preston Howard is a mortgage broker and Principal of Rose City Realty, Inc. in Pasadena, CA. Specializing in various facets of real estate finance, he can be reached at howardpr@rosecityrealtyinc.flywheelsites.com.