Why Efficient Markets provide a foundation for Service and Relationships to Flourish

My outlook inbox has a constant flow of information and accolades for great service.  Every now and then I see an email that resonates with me and has a deeper message that can benefit others in our industry.  The email chain below is a clear example of an incorrect notion and does not add value in today’s Real Estate environment.

 

Rodney Camren is a very successful Owner and Real Estate Professional.  Not only is he a great partner to Southeast Mortgage, SEM, he understands the value proposition that can be leveraged with a high service Direct GSE Lender.  A great mortgage experience creates new referrals for Real Estate Agents.  If one happy client refers three others, that is efficiency and a win for everyone (Clients, Realtors, and the Mortgage Professional).

My whole career I have heard the brash statement “my rates are lower”.  In efficient markets https://en.wikipedia.org/wiki/Efficient-market_hypothesis there are no deals in stocks or bonds given all relevant information is already priced into them and thus sustainable accounting makes rates the same and relative.  Our economy is built on this theory.  As a result and in my opinion, the statement “my rates are lower because I am a Broker” is false because all Direct GSE Lenders hedge at the same prices assuming identically timed trades.  Brokers have to get product from Direct GSE Lenders given they do not have the certifications to access the markets which creates another level of expense thus their rates have to be theoretically higher than a GSE Lender.

In efficient markets, all GSE Lender mortgage rates will be similar if sustainable.  The only exception is a Lender who artificially lowers rates below sustainability or attaches unrealistic SRP values in an a recovery that does not fit historic molds.  If they do this, they only borrow their future because expenses are generally fixed and unrealized revenue has to be removed resulting in a panic cost cutting effort or closing their doors.  Neither scenario is good for Clients, Realtors, Mortgage Brokers, or their MLOs once the accountants explain 2+2 cannot = 10.   It will eventually = 4 so price for sustainability today.

Thank you Rodney for allowing me to provide a real life experience for our readers so they can modify their prospecting to create a more effective model. 

Sell Service - Sell how you communicate with your Partner’s/Realtor’s - Sell how you are going to fill your Partner’s/Realtor’s OPEN HOUSES - Sell how you get more clients approved - Sell how you will help them sell more homes. 

That is the secret formula all Realtors and Builders want - DO THIS and you will create Relationships that are truly mutually beneficial and long lasting.

This is what Southeast Mortgage delivers.   

-----Original Message-----

'Tom '

Sent: Wednesday, September 09, 2015 1:40 PM

To: Rodney Camren
Subject: Catch up

Afternoon sir, I hope you and the team are doing great!  I just wanted to drop a specific note your way on where I think we could have an opportunity to do a little business together.

I know you have a great relationship with Shaun and he does a great job for your team. I would like to propose that we could be a valuable resource as your #2 option. Everyone needs a couple good folks for the funky situations.

Specifically when it comes to highly rate sensitive buyers who are going to go shop around. I wouldn't want you to get stuck with a client using an Internet lender because the rates were cheaper than Shaun's only to end up with a bad experience.

As a broker our rates are way below the competition and I would love to fill that void for you. I wouldn't want your clients in a weak moment to get stuck with a weak lender:) Let me know your thoughts sir and when we can get together to chat!

Tom XXXXXXXXXXXXXXXXXX

Mobile 678-XXXXXXXXXXXXX
NMLS: 4XXXX9
Sent from my iPhone

-----Original Message-----

From: Rodney Camren
Sent: Wednesday, September 09, 2015 2:28 PM
To: 'Tom '
Subject: RE: Catch up

Tom

Thank you so much for reaching out to me.  I really do appreciate holding me in high value to want to work with me and my team.  As much as I would love to keep you in my holding spot for a #2 we haven't had a need for it to be honest with you.   Shaun's rates and superior service has been untouched. Shaun's continued success in not only his growth but the growth of SEM has been amazing.  He has several of his loan officers that work with all of our buyers at any given moment we need him.   In fact when we get contracts for our listings we have the potential buyers do their pre-quals through Shaun's team.  They usually switch over to him as well.   As far as internet loans, I educate both my buyers and sellers away from those.  I appreciate the BOLD language and terminology and can assure you there are no "weak" links on this team or with our preferred vendors.   I appreciate your friendship and wish you the best of luck with your continued success. However, if you ever need to look for a place of employment, I am all too happy to put in a good word for you to Shaun and SEM.  I hope to see you very soon.

Loyal to SEM!

Rodney Camren

Rodney
Owner, President
STAR Team Atlanta

 

 

 

Low Mortgage Rates - Prosperity & Diminishing Benefit by Cal Haupt

Low Mortgage Rates - Prosperity & Diminishing Benefit

Quantitative Easing, QE, in its various forms, is an activity that drips monetary policy directives into the economy and builds potency like medicine in your body.  See Definition Below.  When you take a pill, you want immediate results; however, medicine does not work that way.  That is why antibiotics are taken over 5 -6 days to build potency and eliminate its target.  Get impatient and take too much medicine and there are consequences.  With respect to QE, these consequences occur as risk profiles change and rates rise, creating an optimistic mentality in the economy.  If the correct dose of monetary policy is applied, the scenario plays out well for all; however, if too much is applied, a point of diminishing return can occur, slowing the economy to the next recession and or depression.  You need just enough medicine to cure the patient and not create a terminal event.  The issue is there are no directions, the weight of the patient is unknown, and the illness being treated is not clear.  Odds are with an overdose at some point in the next 5 years.

The US economy is still absorbing QE 1–3.  This level of stimulus is historic.  The normal result of a QE 1 is some level of inflation once the economy recovers.  With QE 1-3, inflation is a given at some point. It is a matter of when and how much.  There is no data to correlate the outcome of the current level of stimulus in the economy from QE 1-3.  It will cause home prices to rise, inputs to home construction to rise, and equity markets to rise.  People feel better about life in general when their stock portfolio rises and their homes are more valuable.  As a result of this “happy…happy” time, everyone loses sight of 2008 and buys stock at highs, new homes, vacations, cars etc. which creates the expansion cycle.  In my opinion, we are about to experience one of the best periods we will ever see in the Real Estate Industry.  If QE 1-3 was the correct dose of medicine, this will all play out nicely with little disruption or dislocation.  We will know in a few years as the full effect of QE 1-3 is absorbed by the US economy.

History proves there is a point of diminishing return of lower mortgage rates for Consumers and the Real Estate Industry.

Every 7-8 years everyone – Mortgage Borrowers, Realtors, and General Business – cheers the decline in the rates needed to stimulate the economy out of a slump.  This stimulus is necessary and generally short-lived.

The backlash of low rates is normally tighter credit for borrowers and home builders.  The lower rate environment excludes many participants in two important segments of the Real Estate Industry.  Why does this happen?  In an economic slump, there is a flight to safety and some builders and consumers get caught off guard and experience various levels of financial hardship.  Banks and Secondary Markets all take the same path and tighten credit to protect their balance sheets until a recovery is on the horizon.

While rates remain low, there is a corresponding tighter credit policy. Banks retain their risk adverse posture until there is visibility on a better risk return profile.  Builders and Developers have to seek private money or borrower construction perms to fund projects, thus constraining inventory.  Once banks can earn an acceptable return for risk at higher rates, they will open the gates to their coffers and housing will take off.

Banks and Secondary Markets think a lot like a consumer.  If you were offered .25% for your $5,000 in savings, you are probably indifferent between stashing the money under your mattress or depositing it into your savings account.  In an economic decline, trust is lacking and the mattress looks good.  If you are offered 5% at the bank, you are probably willing to take additional risk for the return and do not want to forgo the interest for the safety of your mattress.  As a result, you put your money to work in the bank’s capital structure.  The same logic is used at Banks.  If rates are low, they prefer to mitigate risk and put it in safe instruments like Treasuries or other instruments with low risk.  When yields are higher, they assume more risk and put their deposits to work which provides the capital to expand the economy further – especially the Real Estate Industry.

The same holds true for consumers.  They will accept higher risk as they feel better about the economy and their income prospects.  Even though rates are higher, consumers tend to buy homes when they are confident.  The same holds true for the stock market.  Most consumers never buy during a correction and tend to buy when highs are reached and euphoria exists in the market.  The current low rates are not stimulating new home buyers; however, as rates rise credit will moderate which stimulates new home purchases from the new entrants to the housing market.  At the same time, Bank’s will adjust their posture and fund builders and developers which will create a surge in inventory.

Economic slumps given time will generally seek an equilibrium in the free market; however, the government usually does not have time to allow a natural solution to occur.  This is what occurred in “The Great Recession”.   As a result of necessity or political pressure, our government engaged in monetary policy initiatives to stimulate the economy. 

Everyone should want rates to normalize and seek their natural higher level based on current economic data points.  It will be great for Consumers, the Mortgage Industry, Real Estate Sales Industry, and Builders / Developers.

Cal Haupt

Chairman and CEO
Southeast Mortgage of Georgia, Inc.
www.southeastmortgage.com

http://en.wikipedia.org/wiki/Quantitative_easing

Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the economy when standard monetary policy has become ineffective.  A central bank implements quantitative easing by buying specified amounts of financial assets from commercial banks and other private institutions, thus raising the prices of those financial assets and lowering their yield, while simultaneously increasing the monetary base.   This is distinguished from the more usual policy of buying or selling short-term government bonds in order to keep interbank interest rates at a specified target value.

10 Year Bond (Fact or Fiction) - This one is playing out real time - TBD

The 10 year Bond is one of the primary indicators Mortgage Professionals use to guess rate direction and analysts use for Bank Non-Interest Income potential.

Normally the 10 year bond yield would be higher with the Stock market at all-time highs, high consumer confidence, rising housing prices, and rising household income.

 

I read posts from originators in the industry cheering a lower bond yield and the prospects of lower mortgage rates.  This baffles me in that the originators doing this are missing the bigger picture.  Rates are already at historical lows and a further reduction in bond yields (higher bond prices) could cripple the foundation that supports their client’s confidence to buy.  Consumers buy homes for various reasons.  The most common is security for their family, a sense of belonging to a community, better schools for their children, and the benefits an investment in a home has over renting.  There is a saying “people forget rates but never forget poor service”.

 

As an industry and as a consumer, we should all appreciate the favorable rate environment QE1, QE2, and QE3 provided and understand a healthy economy is more important than short term gratification.

 

So why is the 10 year bond yield falling?  Is it an aberration or is something more insidious brewing?

Ø  Short Covering as the month is ending and quarter drawing to an end?

Ø  Flight to safety for foreign entities?

Ø  Veil Government monetary policy contrary to public taper?

 The consequences of a falling 10 year bond yield?

Ø  Given the reduced channels of income available to Banks, without spreads provided from deposits to overnight and mid-term investing, recovery could be in question and could facilitate a conservative credit posture thus slowing growth

Ø  If banks miss earnings due to Non-Interest Income, the market could interpret this as a slowing economy initiating an overreaction by the overall market creating a severe correction and consumer pull back

Ø  Investors could extrapolate bank earnings to other healthy sectors forcing a broad sell off and a reversion to 2009 mind sets

Ø  A broad sell off greater than 20% could impact consumer / business confidence enough to severely impact jobs and the current economic recovery pushing us closer to the next recession or worse

Recessions occur roughly every 7 years and the US is 5+ years out of the last one with the Stock Market at all-time highs.  As a business person and consumer, I prefer the growth periods versus the contraction periods.  The current economic growth can continue with a more stable base provided by a steeper yield curve and bonds coupled to historical relationships.

 
 

 

In my opinion all outcomes are possibilities; however, the Federal Reserve will ensure banks remain healthy and thus the 10 year yields will go north due to basic economic relationships or monetary intervention.  We should all hope there is a keen eye on this subject.

 

Cal Haupt

Chief Executive Officer

Southeast Mortgage of Georgia, Inc.
www.southeastmortgage.com

Rob Chrisman Report - "Cal-Culator Report"

http://www.robchrisman.com/category/daily-mortgage-news/

Atlanta has a new metric for measuring the health of the Atlanta residential real estate market, thanks in part to Georgia’s largest non-bank mortgage lender Southeast Mortgage. The “Cal-Culator report” will be distributed to media outlets prior to being published on Southeast Mortgage’s Thought Leadership blog on SaportaReport.com, Atlanta’s authoritative civic website. The monthly Cal-Culator number rating will be based on a variety of factors including mortgage rate trends, single-family housing starts, the inventory of Atlanta homes, consumer confidence and the Atlanta economy. Staff will be consulting numerous sources, such as the S&P Case-Shiller Home Price Indices, Atlanta’s On Numbers Economic Index, the Conference Board Consumer Confidence Index and more. The Cal-Culator for August 2013 can be viewed here:
http://saportareport.com/leadership/homemortgages/2013/09/09/introducing-the-cal-culator-atlanta-residential-mortgage-index/.

www.southeastmortgage.com
770-279-0222
clientservices@southeastmortgage.com

Why Mortgage Rates Don’t Matter (And Why They Do)

It seems that every day we open our newspapers (or Internet browser) there’s more news of mortgage rates hitting new record lows. In 2011, the record low was 4.45%. Last week, rates dropped to 3.56%. The low rates garner media attention, but they don’t matter to buyers as much as you’d think.

Someone confident in the economy, their own job security, and ready to move into a home of their own is a potential buyer regardless of rates. In the 1990s, the average mortgage rate was 8.2%. It was also the decade of the housing boom. It’s consumer confidence, not rates, that puts buyers into homes.

We can easily look to our history for more evidence that rates don’t make much difference. When rates took a dip in 2011, the media compared it to the low rates of the 1950s and 60s. In the post-WWII economy, pent-up consumer demand fueled economic growth and a housing boom. Mortgage rates in that era averaged from 5.5 to 6%. Low rates weren’t putting people into homes; returning GIs and the baby boom were responsible for the growth in housing.

Even though rates arguably don’t matter to buyers, they should matter more, especially right now. I’ve written in this column before that now is a great time to buy, despite what some naysayers believe. There has never been a time in history when low rates and a still recovering housing market have combined to create the most housing value. Consumers can buy a lot more house for a lot less money over time.

Homeowners with good credit ratings should watch rates as well. Even if there’s no pressing need for you to refinance, with rates as low as they are, it’s a smart financial move. Here’s an example of what homeowners have done, and what you could save: one of our clients purchased a home in May of 2010 with a 5% 30-year fixed interest rate. Say their home cost $200,000. That would mean they’d pay $186,511 in interest over 30 years.

A little over a year later, when rates dropped, the client was able to get a refinance with no closing costs, rolling the initial equity line into the first mortgage and lowering their rate to 4.38%. Eight months after the initial refinance, they were able to refinance again and get a 3.88% rate. A $200,000 home with a 3.88% rate costs $138,777 in interest over 30 years. All told, the client was able to save themselves $47,734.

Unfortunately, consumer confidence remains low. We focus on the fear that comes with buying a home in uncertain times. This is the best time in our history to become a homeowner if you are reasonably confident in your personal economy. The benefits of buying a home in this market should be enough to overcome buyer apprehension.

– J.D. Crowe, Senior Vice President, Southeast Mortgage