Saturday, August 16, 2014

Behind the Mortgage Rate Curtain - by Cal Haupt

For the past twenty plus years I have stated Mortgage Rates are what they are and are set by the market.  There is only a market rate.  I.E. If you want to buy AT&T stock, there is one market for the public and the price is set by supply, demand, and valuation and sold by SEC licensed agents.  This holds true for Mortgage Rates except valuation is a little more complicated.  Focusing on client needs and matching the correct product to those needs is the path to organic revenue and a stability for Mortgage Loan Originators, MLOs, and Mortgage Companies.

Only Mortgage Lenders with access to secondary markets can provide true adjustments to market rates via dislocations in hedge activities.  This only lowers rates IF it is not reserved for the unfavorable consequence of the dislocation assuming the market moves to a less favorable level.

I constantly see rate focused MLOs moving from company to company.  The reason they cannot build a career is they are teased with lower unsustainable rates and then move when the company returns rates to sustainable levels.  Brokers and Correspondents cannot take advantage of secondary market dislocation so when they lower rates, the offsetting revenue has to come from somewhere or expenses must be lowered which can reduce MLO service needed for referrals.  In some cases, unsustainable rates are obtained from Wholesalers that sell servicing over and over and over which angers clients and potentially risks their credit rating if they cannot keep up with where their payment should go.

Mortgage Rates are set by the market and if a rate advertised is lower than market the company probably did not account properly and will not be able to balance the equation over time.  Time is not a friend to unsustainable low rate strategies.  Look at history and the names that used this strategy and are no longer in existence.  This is the primary reason companies fail over time or when the economy enters challenging periods.

My advice to MLOs and Clients is to work with the highest certified lender you can find.  The same logic applies to buying stock from an SEC licensed agent, choose a Licensed Mortgage Originator.  The higher the certification, the better access to efficient market rates due to the reduction of hands in the pot and benefits derived from hedging activities. 

This is the hierarchy of Mortgage Providers:

#1 Highest Certification - Direct Lender - Secondary Broker Dealer, Fannie & Freddie Seller Servicer (GSEs), with FHA
Direct Lender with full access to secondary markets and can trade between the GSEs- Can Service Production - Southeast Mortgage of Georgia, Inc., operates in this category of certification

#2 Direct Lender - Fannie & Freddie Seller Servicer
Access to GSEs and considered a direct lender that can service production

#3 Fannie or Freddie Seller
Access to GSEs BUT not qualified or approved to service and will sell servicing rights
#4 Correspondent
Works on behalf of another Direct Lender.  Usually has small warehouse lines and servicing can be re-sold for higher yield by wholesalers 
#5 Broker (very few of these after 2009)
Middle person in the transaction - Works to put a consumer together with a Direct Lender.  Consumer pays the extra cost of the middle person even if the rate appears lower.  Servicing can be sold several times to account for the extra hand in the transaction.

Note: Banks (state-chartered, national banks, or federal thrift/savings banks) can operate in any of the categories above.  Most Georgia Community Banks engage as a correspondent or Fannie / Freddie variation.  Being an FDIC insured institution or Georgia State Bank only exempts their Loan Originators from Federal and State Licensing.  At Banks consumers work with Registered MLOs.  At Non-Bank Mortgage Companies consumers work with Licensed Mortgage Originators as set forth by the 2008 SAFE Act.  Click to learn more about the 2008 SAFE Act passed by our Government.

How can consumers or MLOs find the daily Mortgage Market Rate?  You have to average the daily par rate of Direct Lenders in your geographic area (50 mile circumference) with a sample size of at least 5.  Southeast Mortgage does this daily to keep our Referral partners and clients informed.

Cal Haupt
Chairman and Chief Executive Officer
Southeast Mortgage of Georgia, Inc.

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