The Mortgage Reports Blog

The Tangible Difference That A Good Loan Officer Can Make

Here's a secret about rate shopping: all loan officers worth their salt give "great rates" because, otherwise, we'd be out of business.  Most mortgage rates are a commodity, after all, so their levels are set by the market -- not by the lender.

This is why home buyers would be well-served to get past "rate" and get onto the important stuff like choosing a responsible mortgage product, or choosing an appropriate structure.

When we get past the rate part of everything, it becomes clear that it actually matters from where a person gets those "great rates".  This is because in the mortgage business, there's a well-known math formula:

"We Do Not Pull Credit" Is Not A Selling Point, It's A Sales Tactic

This ad plays up a long-standing American fear -- that credit inquiries will drop a person's credit score below a hypothetical mortgage "approval line".  It's Fear Selling at its worst, preying on customers that don't know any better to the benefit of the salesman.

So, because the best way to combat fear is with education, let's look at how credit inquiries really work and why they're perfectly safe for mortgage shoppers.

We can start with some credit scoring basics.

"Low Mortgage Rates" Is Not A Selling Feature, It's A Planning Standard

When mortgage rates fell in early-January, it breathed life into a huge swath of loan officers that were getting ready to leave the business.

It's a terrible turn of events for homeowners and homebuyers.  With everyone focused on rate, rate, rate, the lowest-of-the-low loan officers are in their natural habitat.

I am not knocking low rates, of course.  I've just remortgaged my own home down to a lower rate.  I'm just saying that low rates are only one piece of the puzzle.

How Active Mortgage Management Can Reduce Your Monthly Mortgage Payments

The swing in mortgage rates over the last week has been astronomical. 

Some mortgage products popped higher by one-half-percent Wednesday afternoon.  You can exactly when it happened on the chart.  And those losses continued through to Thursday, too. 

As money poured in the stock market and the Dow Jones rallied, it all happened at the expense of mortgage bonds and that jarred rates higher.

Quickly.

Now, directly related to the Fed's surprise rate cut Tuesday morning, mortgage lenders are saying inbound call volume rocketed this week. 

Unfortunately, "this week" is too late. 

Homeowners With "Orphaned Mortgages" Pay More Money

Each year, the mortgage industry loses some of its employees.  Some leave through attrition; some through layoffs; some through natural selection.

When business is growing, lost workers are replaced with new hires and the mortgage machine rolls ahead.  When mortgage business is slowing, new workers aren't hired. 

Collectively, the industry loses experience, wisdom and general know-how. 

A lot of folks look at the situation and say "good riddance".  It's the complete wrong attitude. 

Having fewer qualified loan officers in this country will cost Americans (hundreds of?) millions of dollars.   This is because each time that a loan officer leaves the industry, he leaves his clients and their mortgages behind, too.

Owners of "orphaned" mortgages are at a tremendous cash flow disadvantage versus everyone else:

Another Day, Another Reason To Pre-Qualify Your Loan Officer By Asking One Simple Question

Last week, I implored my readers to turn the tables on loan officers everywhere by prequalifying them instead of the other way around. 

The same way you wouldn't invest your money with a guy who couldn't read and interpret financial news, you shouldn't work with a loan officer who fails the same basic test.

The prequalifying question is an easy one:  "Where do mortgage rates come from?"

Unfortunately, the answer most loan officers give is the wrong one and that's terrible news for the borrowers that trust their home loans to them.

Mortgage rates do not come from the yield of the 10-year treasury note, as many people will confidently tell you.  Mortgage rates are determined by the price of mortgage bonds.  Nothing else.  That's it and that's all.

If your loan officer is saying something different, consider the impact that can have on your long- and short-term financial goals.

In my other recent post on the subject, I posted a snapshot showing how mortgage bonds were down in a trading session in which the 10-year treasury note was up. 

On that day, mortgage rate shoppers watching the proper financial indicators locked their mortgage rates and got the benefit of lower rates.  Those watching the wrong ones (i.e. the 10-year treasury) watched pricing slip away.

That same divergence has occurred in three of the last five trading days, including today's(as shown in the graphic above).  The trend may continue, or it may not.  Either way, it's important that your loan officer knows how to read and interpret financial news to help you make the best mortgage choices possible. 

Let's not forget -- it's your interest rate on the line.

Pre-Qualify Your Loan Officer By Asking: "Where Do Mortgage Rates Come From?"

This snapshot comes from my Mortgage Market Guide dashboard.  It perfectly illustrates an important point I make over and over again.

If you want to know in which direction mortgage rates are moving, watch the price of mortgage bonds, not the 10-year treasury note.

Mortgage rates are "made" from the price of mortgage bonds using a mathematical bond formula.  This is fact.  And by exclusion, this also means that mortgage rates do not come from the price of the 10-year treasury note.

This premise is as simple as it is essential. 

Unfortunately, a large percentage of the media, the real estate corps, and <gasp!> the mortgage industry incorrectly track the 10-year treasury note as a mortgage rate indicator instead.  As the majority, these people are consistently pushing "bad information" into the collective consciousness.

And, it's excusable to a point. 

After all, respected publications such as the Washington Post and Business Week tell us that the 10-year treasury is linked to the path of mortgage rates, so we're inclined to believe it. 

The reality is that the mortgage-backed securities market is esoteric; it's foreign to most people.  It's not in-your-face clear what mortgage rates will do when the FNMA 6.000% 30-year moves from $100.34 to $100.36 in a day.  We tend to ignore what we don't understand -- it's human nature.

By contrast, it's not tough to figure out what happened when the 10-year treasury note drops from 4.27% to 4.23%.  This is one major reason why people incorrectly use the 10-year treasury to track mortgage rates -- it's easier to follow. 

But that doesn't make it right.

As a layperson, you are not expected to know why the 10-year treasury note has nothing to do with mortgage rates.  It's a common misconception.  Your loan officer, on the other hand, is supposed to know the difference. 

Your loan officer is an mortgage expert and an industry insider.  He absotively posilutely should know the different between treasuries and mortgage bonds.  And he must be watching the right market indicators if he's going to do his job for you properly.

So, let's hammer the point home.

As of 2:00 P.M. ET yesterday, the U.S. treasury market was rallying.  The bond market looked good from 30,000 feet.  A check into the mortgage bond market, though, showed that mortgage prices were getting killed, off 25 basis points. 

This is about the same time that my inbox starting dinging with new mortgage rate sheets reflecting higher rates from our nation's lenders. 

I wasn't surprised by the reprice for the worse because I had been watching the market slowly slip away on my MBS ticker all day.  I had ample time to contact a few clients and get them locked in at lower rates before the reprice.

But for people not watching mortgage bonds at 2:00 P.M. ET yesterday, everything looked fine.  The market was actually rallying and it looked like a good day to let a mortgage rate just hang out there.  People watching the wrong indicators were unaware that pricing was slipping away with every passing minute.

I once showed a client my live mortgage bond ticker feed and he asked a really simple question: "Why don't all loan officers use this?"  I don't know, I said, it probably has something to do with cost. 

Getting access to real-time market data is not free.  Rather than pay for it, most loan officers choose to "get by" using free sources of data that aren't quite accurate.  Maybe this is why people quote the 10-year treasury so often -- you only have to turn on CNBC to find it. 

The best loan officers are always watching the proper market indicators in real-time.  You wouldn't work with a stockbroker quoting yesterday's closing price, and you shouldn't work with a loan officer ignorant to the mortgage bond market.  After all, mortgage bonds trade just like stocks and change minute-by-minute.

In the game of home loans and high finance, those with the best information preserve the most wealth, so next time you're talking to a loan officer, just ask the simple question: "Where do mortgage rates come from?".  If the answer is anything other than "mortgage-backed securities", end the relationship on the spot -- you deserve a better loan officer than that.

(Image courtesy: Mortgage Market Guide, STinSV.com, Bob Pitch)

CMPS : Earning An Advanced Degree In Mortgage Lending

After successfully completing the 3-day coursework and (rigorous!) examwork of the CMPS Institute, my new industry title is Certified Mortgage Planning Specialist. 

As a blogger, I don't often talk about my education or background because the focus of The Mortgage Reports is you, my clients and readers.

Today, though, I am going to break that "rule".  I can't stress how important an advanced industry "degree" like CMPS is to every loan officer in the country and all of his clients.

Even for me -- a guy with above-average experience in financial markets and a somewhat obsessive approach to mortgage-related news -- there was something to learn and immediately apply for my clients.

In mortgage planning, my goal is to help clients meet their long- and short-term financial goals while paying heed to their monthly payment objectives.  The CMPS coursework is helping me do that better.

One relevant topic related to tax deductions and how they apply to mortgages.  The session included talks on tax basis, capital gains law, 1031 exchanges and depreciation.  These are obviously accountant-type topics, but as a mortgage planner, it's important to understand how the IRS treats mortgages and homes.

I learned, for example, that paying down a mortgage's principal balance may lower the home's basis to a point where extra taxes may be due when the home sells.

The IRS tax code is complicated and can be a homeowner's best friend if he's working with a strong personal accountant.  Sure, it's more expensive than H & R Block, but you're going to pay for your taxes one way or the other -- you may as well work with a professional that's available 12 months out of the year.

Meanwhile, my favorite remark during the entire 3-day session came from Barry Habib.  He was discussing how mortgage rates are set and after explaining the nuances of mortgage-backed securities.  Barry paused for a second and said, "Now, this is something we all should have been taught on our first day."

When I looked around the room, I realized that most of the people at the sessions were hearing this for the very first time.  How many other "loan officers" didn't understand the basics of their business?

This is why attending the CMPS Institute should be basic, required licensing for all mortgage planners.

• Day 1, get your state license
• Day 2, register for CMPS

Understanding tax law, having basic fiscal literacy, and understanding how to evaluate real estate investment properties should be basic training because every loan officer will impact his clients in one of two ways:

1. He will help them reach their financial goals smoothly
2. He will irreversably damage their financial progress for decades

With CMPS training, it's much more likely to be #1.  And even though the class was mostly review, I am ashamed I didn't attend sooner.

For those who care, in the pictures above, that's me with Gibran Nicholas, Sue Woodard and Barry Habib, respectively.  I had the pleasure of dining with them privately last week and can say that their knowledge of the mortgage industry is matched only by their sincerity and their friendliness.

No Matter Your Level Of Education, You're As Likely To Make Costly Mortgage Mistakes As The Next Guy

A telling tidbit comes from today's Wall Street Journal, courtesy of Dennis K. Berman.  It turns out Harvard and Wharton MBA students do no better than "average" folks in identifying the true cost of owning mutual funds.

In other words, an elite education does not prevent a person from making costly financial planning mistakes.  This is especially true with mortgages.

High-school dropout or Kellogg graduate, you're as likely to choose the wrong mortgage product for your short- and long-term financial goals as the next guy.

It's easy to understand why. There is no classroom syllabus, father-daughter lecture, or homebuying experience that can truly teach you everything you need to know about properly sizing up home loan options and the mortgage market in general.

Heck, even guys who do it every day of their lives get it wrong sometimes. 

If a loan officer that lives, eats, sleeps and breathes mortgages isn't right 100% of the time, what chance is there a lay person with an education from any one of the following:

• 30 classroom hours over the course of a few semesters
• 30 days of reading the news and watching television
• 30 minutes of conversation over Thanksgiving dinner

The best chance that you have -- regardless of education -- to make the "right choices" when it comes to your home loan is to work with a mortgage professional that listens to your short- and long-term financial goals and helps you plan to meet your payment and equity objectives.

You're not going to get that from Ron Insana.  News is news, and it's never personal -- news is for the masses.

Socrates said: "The only true wisdom is in knowing that you know nothing."  Sometimes, we all need to make like Ted Theodore Logan and realize: "That's us, dude."

(Image courtesy: Cinema Blend)

How To Properly Shop For A Mortgage, As Told By A Guy With Everything To Lose

For even the smartest of "smart shoppers", the process of shopping for a mortgage can be a real challenge.  One major reason for that is the tremendous amount of information dissymetry between the shopper (you) and the shoppee (the loan officer).

No matter how much a person reads in books, newspapers, Web sites or blogs, home loans have a "personal" element to them that makes it hard to generalize a product or strategy. 

This personal effect creates the potential for tens of options that can cloud the "true price" of a home loan.

This is akin to buying a car where each "package" or feature changes what you're truly buying.  Just like you can't compare the relative value of pre-installed satellite radio to a tow-anchor, you can't always compare mortgage options.

But, versus shopping for an automobile, the stakes in shopping for mortgages are much larger.  You're not buying a $25,000 car -- you're buying a financing package that can be 10 times that amount, or more.

Comparison shopping for mortgages has its own rules and even the smartest shoppers are unaware of how they work.  That ignorance can swing the long-term cost of a poor decision well into six figures.

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Rule #1: Mortgage rates are in constant flux

Unlike with consumer goods such as cell phones and televisions -- financial instruments do not retain their "price" day after day.  Just like stock prices change day after day, so do mortgage rates. 

There are other rules that you should pay heed to as well.  I've listed them below.

Rule #2: Do your shopping in one day

Because mortgage rates change daily (and sometimes more often than that), be ready to shop and commit in one day.  Reputable loan officers should be able to issue a Good Faith Estimate complete with rates and charges shortly after "interviewing" you.

Rule #3: Compare identical mortgage products 

Comparing a fixed-rate mortgage to an adjustable-rate mortgage is like comparing a desktop to a laptop.  They both serve the same function, but have completely different purposes.  The same is true for variances of fixed rate and/or ARM products

Rule #4: Don't keep secrets from a loan officer

Loan officers need to know exactly what qualifications you bring to the table in order to give you an accurate and fair quote.  If you're not willing to share valuable information including income, assets, and/or social security numbers with the loan officer, you can't expect the loan officer to take you seriously.  And let your credit scores get checked -- if you're shopping on the same day, the credit bureaus protect you.

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There's more to it, of course, but this can be start.

Be smart when comparison shopping for mortgages and understand that financial instruments do not operate like digital cameras or mattresses.  Prices change daily and your monthly payment is not set in stone until your rate is locked.

And, when all else fails, ask a friend for a trusted referral.

The Banks Say: Customer Service Gets Priority When Mortgage Volume Is Down

I saw this lead-in for a recent article about the Mortgage industry:

An end to the boom times of rampant home lending could see banks turning their attention to customer service to maintain profits.

I don't mean to ask the obvious question but: "Why aren't banks offering customer service now?"

The answer may surprise you.

Most call center-based loan officers are one-trick ponies -- they take an application and then tell a customer if they're approved or not. They do not ask probing questions about the customer and they do not look at the mortgage as a component of a larger financial portfolio.

So, when banks take about investing in "Customer Service", the loose translation is:

With rates going up, we won't have as much loan volume so we better become better at originating mortgages.

This is a step in the right direction, but it also implies that Customer Service was neglected just because "business was booming".

What do you think will happen during the next mortgage "boom" cycle?

(Image courtesy: Count5)

When Real Estate Brokers Offers Mortgages, Too: Who Wins and Who Loses

There is a disturbing trend in Real Estate sales. Some people are calling it "good business" but those people invariably seem to be the ones in charge.

A number of Real Estate Broker-Owners have entered the Mortgage business. On the surface, it seems to make a lot of sense. "One-Stop Shop for all your homebuying needs!" Few people buy homes without finding a mortgage for the property and there is terrific money to be made in the origination and secondary markets for mortgages.

The arrangement is pitched as a bonus to the consumer, but the real beneficiary is the Broker-Owner of the Real Estate firm -- he just created another source of solid revenue for himself. But at what cost, we should all ask?

You've seen the ads on a real estate agent's business cards, promoting their co-owned mortgage company:

• GUARANTEED LOWEST RATE OR $500 OFF YOUR MORTGAGE
• WE PROMISE THE LOWEST RATES OR $250 OFF YOUR MORTGAGE
• OUR RATES ARE THE LOWEST IN THE BUSINESS OR $500 OFF YOUR MORTGAGE

Rate, rate, rate. Any originator worth his salt will tell you -- it's not about the rate, it's about the product. If you've ever been trapped talking to a good originator at a cocktail party, you know exactly what I am talking about. Good originators abhor the thought of LOWEST RATE because it drives home the wrong message.

I walked into the office of a GUARANTEED LOWEST RATE shop today -- the kind that actively seeks investment from Broker-Owners . They are proud of that image and even tout it in their corporate name and identity. In their office, hanging on the wall, is the corporate mission statement.

To paraphrase: We want to be the market leader in 30-year and 15-Year Fixed Rate mortgages under $650,000. That is a great niche for a lender and I applaud that the company has identified their "Main Thing".

But, here is where it all ties in. If a Broker-Owner invests in, or even owns, a mortgage lender like this one, one promising the "lowest rates", what services are they really providing to their client?

Take it a step further: If finding your customer the "lowest rate" is your mission and that mission only pertains to TWO mortgage products out of the HUNDREDS available, what happens when the homebuyer doesn't need a 30-Year or 15-Year Fixed mortgage? What does the lender do?

More importantly, does the lender even ask if the client could benefit from a 3/1 Interest Only ARM or an Option ARM or something else? What about 100% financing? What about FHA loans? The questions flooded my brain and I suddenly felt sorry for everybody.

You see, everybody loses:

1. The homebuyer "settles" for a home or can't afford upgrades. Because the homebuyer is working with the "lowest rate" lender, the homebuyer may not receive coaching about mortgage products and how to choose the proper mortgage product for the home. The homebuyer may settle for a 3-bedroom instead of a 4-bedroom because he can't make the payments work or get qualified for the more expensive home. He may also spend more money on a downpayment, tying up free capital that would otherwise be used for upgrades or improvements.
2. The real estate agent selling the deal earns a lower commission. Because the real estate agent is forced to work with the "preferred lender". The preferred lender doesn't maximize the buyer's purchasing power using better mortgage products so the buyer buys a home at a lower list price that he could otherwise afford. Lower sales price = lower sales commission
3. The real estate agent forfeits networking opportunities with Lenders. A good mortgage originator understands that the key to working with real estate agents is reciprocation -- you give me leads, I'll give you leads, we both grow our businesses. It is a very, very simple system. But, when the Broker-Owner owns the lender, what incentive does the originator have to build a real estate agents business? None! The traffic only flows one-way -- from the real estate agent to the lender. The real estate agent forfeits a tremendous amount of business if he does not build his own professional network.
4. The Originator is given a false sense of security and stops developing his professional skills. Originators for the "lowest rate" companies do great volume and that's no lie. Imagine it -- all day long, you sit back and wait for your phone to ring. And it does. So you quote the lowest rate available and the client signs the papers. It can get too easy, and it often does. I have seen these people during interviews and the concept of developing their own book of business is foreign. Serve it up on a platter, and they'll knock it out the park, though. At that point, the interview ends because it is clear that I am talking to a Rate Jockey and not a mortgage originator.

But, the Broker-Owner! The big winner! The Broker-Owner gets the sale of the house and gets the sale of the mortgage. A double prize!

Or, is it? The Broker-Owner operates/owns/invests in a mortgage company, but at the expense of doing more Real Estate business! Follow me on this one? The Broker-Owner sacrifices higher sales volume and higher sales units so that he can be in the mortgage business.

On top of that, he forces his producers to abandon one their best sources of new business -- mortgage originators willing to form reciprocal relationships.

The "One-Stop Shop for Real Estate" is a lose-lose-lose-lose.

A Loan Officer Is Only As Good As His Mortgage Product Selection

A good mortgage originator knows that service is a guarantee, not a feature. Every top producer will deliver as promised and without (too much) hassle.

However, not every top producer will deliver as complete of a product mix.

To elaborate on this point, how does a #1 Mortgage Banker become #1?

A #1 Mortgage Banker understands that the toughest competition in the field -- and I mean true competition! -- will compete in service levels and interest rates on every deal.

But, the field of competitors thins dramatically with respect to product.

To make the matter simple: Would you ever shop at a shoe store that only carried Size 4 and Size 12 shoes? Sure you would... if Size 4 or Size 12 was your best fit.

A mortgage originator needs to sell ALL shoes size because all clients have different size feet.

Most originators only have access to certain fixed products or balloons. For example, a local bank may only carry a 30-Year Fixed and a 7-Year Balloon. And yet, the bank still sells loans and their customer feels the pain of jamming their Size 8 feet into the bank's Size 4 shoe. That is, if the bank can get the deal.

The best mortgage originators not only have access to huge amounts of product, they know how to assess which client fits with which product best. Even with "the lowest rates available", you need to be offering more than the 30-year fixed and a 7/1 Balloon. If you don't, you'll earn far fewer clients and suffer from really sore feet.

Know your product, LOs, or get used to a lot of sore feet.

(Image courtesy: New Balance Tampa)