Dennis Pease is a broker with RE/MAX Integrity and specializes in the Florence area of Oregon. He has a blog about Eugene and Florence that has some excellent information about the area and several listings. I recently authored this for him about the way loans are priced and how they have changed over the past year of so.  Mortgage lending has changed dramically over this time period. Check out Dennis’s blog for some great information about home, especially for first time home buyers. Remember, many of the homes he is highlighting in the Florence area are also available for the USDA 100% Rural Guaranteed progrm.

Mortgage News

 

Guest authored by Fred Chamberlin, Senior Mortgage Consultant, Alpine Mortgage Planning, Eugene, 541-342-7576.

Warning – Read the following at your own risk, mortgage origination secrets are about to be revealed. Mortgage rates, how do you figure what is good and what is bad? What has changed recently and how?

There has been a lot of discussion about the mortgage melt down, the sub prime crisis and real estate greed and I want to discuss some of the things that happened and are currently happening, some good, some bad.

Greedy mortgage brokers were blamed for the sub prime crisis because they were putting people into loans with higher interest rates because they were receiving rebates from the lenders for the higher interest rates. Rebates, also called yield spread premium, generally followed a fairly easy rate vs. fee formula.

Basically, the par rate was the rate that did not cost anything to get from the lender or pay anything in yield spread premium to the broker. To go up or down in rate either cost or paid money as a percentage of the loan amount. For instance, and remember this is just an example, if the rate was 6% at par, the broker would receive .5% of the loan amount in rebate if he sold you the rate at 6.125% and conversely, would pay .5% of the loan amount in discount to the lender if he offered you a 5.875% rate.

The rule of thumb was that for every .125% in rate, either down or up, it was a cost or rebate of .5% of the loan amount. There was a point of diminishing returns where it didn’t work any longer, and every .125% of rate was not exactly .5%. That is the way it was, but no longer.

In today’s rate environment, there has been a compression of yield spread premium. I am sure that part of that is so clients now are offered a closer to par rate than in the past. It basically leveled the playing field. This also changed things so it is no longer profitable to put someone in a substantially higher interest rate just to get yield spread premium. It also changed the way a lot of people offer loans.

Another example: If the par rate were 6%, you would expect to pay a 1% origination or broker fee. Instead of paying the fee, you could opt for a 6.25% interest rate with 0% origination or broker fee. Again, that is the way it was, but no longer.

Here is where the recent change may not be a total blessing. In today’s market, again with an example, let’s say that the par rate is 5% and you want to get the par rate so you will pay a 1% origination fee. To get the same loan with no origination fee, it will now be a rate of 5.5% and increases in rate over that amount will not make but fractional differences in yield spread premium, sometimes even give less rebate than a lower rate. The investors are not paying premiums for higher rates. At the same time, a lower than par rate could be substantially higher than .5%.

This becomes especially apparent when working with lower credit scores, manufactured homes and investment property. It may not be possible to increase the rate to include the cost for these adjustments and closing costs can increase, sometimes substantially. Also, if the loan officer knows it will take substantially more work to get the loan done, he may charge 1.5 or 2% as the origination fee because he isn’t being paid by the lender any longer.

Finally, this has also affected FHA streamline refinances. It used to be the practice to use yield spread premium to pay the closing cost on this type of loan so that a rate reduction could be given to the client with no money out of pocket or increase in balance. Now, the rebate is no longer available in a large enough amount to make these loans work the same way.

So, now you have it. That is the change and the effect. Some good, some bad. Give me a call and let’s talk about the numbers, I am a numbers type of guy.

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Fred can also be found at his Blog Eugene Loan Guy. Tell Fred you found him here when you call him. As always this is the best place to find Oregon Homes For Sale. Date: Wednesday, December, 24th 2008 @ 04:20:13 PM

Check back for my next entry. I am going to cover pricing changes in conventional mortgage loans. I will discuss what happens with lower credit scores, different type of property (i.e., manufactured homes or investment) and loan to value vs. credit additions. This also will be especially helpful for first time home buyers in determining what they may be facing as far as rate changes based on their circumstances.

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