NOTES FROM A MORTGAGE PROFESSIONAL

MORTGAGE RATES VS. INTEREST RATES

By Mathew Schulz President/Owner at Firelight Mortgage, Board of Directors at the Colorado Mortgage Lenders Association

June 13, 2022: Stop the presses, hold the phones, the Federal Reserve will be increasing interest rates tomorrow, lock in your mortgage rate before it’s too late!

Six weeks later: Mortgage interest rates have fallen by more than 1%.

We’ve all heard the ads and seen the news stories. And you may have found that your clients are more confused now when seeking a mortgage for their home purchase. Here’s an in-depth explanation to the rising/falling interest rates we keep hearing about.

WHAT REALLY HAPPENED?

There have been three main factors driving our economy since the beginning of the year: an impending recession, Omicron, and INFLATION. We have all felt the pain of inflation at the pump recently and a gallon of milk now might as well cost the same as a month of rent.

SO, INTEREST RATES WENT UP?

When the Federal Reserve raised interest rates in June and July of 2022, there were two rates that they increased.

The Federal Funds Rate is typically known as the rate at which banks and the Federal Reserve lends money to other banks on a very short-term basis. The other type of rate raised was the Prime Rate, which is much more tied to car loans, student loans, and credit cards, but NOT to mortgage rates.

WHY THE CONFLICTING MESSAGES?

Mortgage rates are determined by the Mortgage-Backed Securities Market and these securities are bonds. Some people think it is based on the 10-Year Treasury, and that is not the case.

As you may know, bonds are investment securities that are secured or guaranteed by something, whereas stocks are a sheet of paper that state you own a fraction of a given company and nothing more. Since Mortgage-Backed Securities are sold as bonds, they are considered a much safer investment tool and have a much lower likelihood of default or losing money. Based on that added security to the investor, they also tend to pay out at a much smaller rate of return compared to stocks.

Since bonds don’t pay out much money in the first place, when the inflation rate is high, bonds will technically pay the investor even less money over time. So, when the Federal Reserve announces in their monetary (economic) policy that the reason they are raising the Federal Funds Rate and the Prime Rate is in an effort to curb inflation, bond investors love this! If the Federal Reserve can tone down inflation, the bond investor’s investment can make them more money.

When purchases of bonds increase, the corresponding yield falls, and so do mortgage rates. When the economy is expected to do well, investors jump into stocks, forcing bond prices lower and pushing the yield (and mortgage rates) higher.

Bond investment is up! Therefore, mortgage rates have fallen in the past six weeks. The opposite can also occur when the Federal Reserve is cutting their rates.

Mortgage-Backed Securities are investments, just like the stock market, there are a multitude of factors that can impact the price at which these bonds are being bought and sold. On a side note, as bond prices increase, mortgage rates decrease. As bond investors are more motivated to buy bonds, their prices will inevitably go up. When the Fed is taking steps to curb inflation, this is a motivator to bond investors incentivizing them to pay more for a bond.

NOTES FROM A MORTGAGE PROFESSIONAL: WIN MORE PURCHASE TRANSACTION OFFERS

Does your preferred lender run Fannie Mae and Freddie Mac’s automated underwriting systems prior to you submitting an offer on a property? Of course, they should be doing this at the very beginning of the pre-approval process, but are they running it on each individual property?

As many of you know, part of running automated underwriting is to determine if an appraisal will be needed to complete the transaction on a given property. Both Fannie Mae and Freddie Mac are offering Property Inspection Waivers (PIWs), using confusing verbiage as it truly means a Property “Appraisal” Waiver. By the rule, a borrower purchasing a primary or secondary residence up to an 80% loan-to-value or a 20% down payment is eligible for a PIW.

The beauty of a PIW is that the borrower is not “waiving” their appraisal, an appraisal is simply not needed in the first place. When this occurs, the selling agent writing the offer may leave all appraisal deadlines empty in the purchase contract. This can be a major selling factor, making a “loan” offer appear more like a “cash” offer.

It is then my job as the loan officer to ensure this is indicated in my pre-approval letter. I like to proactively reach out to the listing agent on every transaction my clients offer on to sell that point to the listing agent.

Two key critical points; in theory, a PIW can be lost through the underwriting process. If this happens, it tends to be loan officer error. When it comes to automated underwriting, the adage “Junk In, Junk Out” rings true. It is very important that the information being submitted to automated underwriting is accurate, especially when it comes to the property details.

The second very important point is that if the purchase price is countered to a higher price, it is important to re-run findings at the higher price to ensure that the appraisal waiver holds at the higher “proposed price.”

I try very hard to reiterate this point to agents, but it has happened to me on more than one occasion that a counter is presented and accepted with a higher price without consulting me, and when I run it at the higher price, I inevitably have lost the waiver. This creates the uncomfortable conversation about how I wasn’t consulted and no longer have the waiver, upsetting the seller and their agent.

Mathew Schulz, CML, is the President of Firelight Mortgage Consultants in Greenwood Village, Colo., a mortgage company that he has owned for 15 years. He is also a board member and past president of the Colorado Mortgage Lenders Association. You can reach him at mschulz@ FirelightMortgage.com. Matthew provides a regular look into the market called MMG Weekly.