The True Definition of Insanity...

 It is said that the true definition of insanity is doing the same thing again and again and expecting a different result. Nowhere is this saying more true than in the application of our marketing plans. Many of us deliver the same marketing pieces day-after-day, month-after-month, and even year-after-year. We do not change our approach because either we are receiving some benefit or even though we are not receiving any benefit, we do not have time or expertise to evaluate and make adjustments.

Truly effective marketing plans require constant evaluation and adjustment. The targets you are trying to reach are changing constantly. The economic conditions creating the needs for your targets are changing constantly. Even the mediums through which you are attempting to reach these targets are changing constantly—especially because of technological advances. So doesn’t it make sense that your marketing plan must change as well?

What must you evaluate? Here are a just a few areas that will need monitoring:

· The goals of your marketing;

· The quality and quantity of your present responses;

· The timing of your marketing actions;

· The message you are delivering;

· The value of your offering;

· How your actions are linked to each other to achieve maximum synergy; and,

· The way(s) in which you are reacting to responses to your marketing actions.

Do not get the impression that you must start over again every month with a brand new marketing campaign. The need for evaluation does not override the message of consistency. The changes you make might be minor. Making minor adjustments on a monthly basis makes much more sense than complete overhauls once every two years.

Do not let your marketing plan become stagnant. Look at the competition, other industries and keep up with changes in economic conditions and technology to stay on top of where you need to move. A five percent improvement in response rates each month can double your income in just over one year. That is real results instead of insanity.

Mike Ervin

Senior Mortgage Banker

NMLS # 282715

Office: 650-735-5261

Cell: 650-766-8500

mike@mikeervin.com

Benefits of a Slow Down

Right now the markets are warily eyeing a possible slowdown in the economic recovery. While we can't tell you if we are indeed in the middle of another pause, we can tell you that we are already reaping some benefits of even the hint of a pause. What are these benefits? Oil prices, interest rates and gold prices have all fallen. It is easy to see the benefits of lower gas prices and rates with regard to the economy. Lower gas prices give consumers more money to spend. Lower rates encourage refinancing as well as home and automobile purchases. The real estate and auto industries were already in recovery mode before interest rates eased back. For example, in March nearly 1.5 million cars and trucks were sold, a number not seen since May 2007. In addition, housing starts broke the 1.0 million mark in March, the strongest performance since June of 2008. On the other hand, why should we care that gold prices are dropping?

Of the three, the move in gold has been much steeper than oil or rates. When the financial crisis hit five years ago, there was a threat that the financial system would collapse and move us into a depression. Gold soared in response to this threat. Even during the recovery -- every time we had a pause -- gold prices stayed strong because there was a threat of a double dip recession. Today, there is a possibility of a pause, but gold prices are weak. Is it because we are no longer worried about our economy slipping back into recession or is it because countries in trouble like Cyprus could be selling their stores of gold? In either case, we can say that gold is falling back at a time in which the economy continues to grow at a pace which will not ignite inflation. That is the best type of growth possible. Lower energy prices, lower interest rates and positive economic growth are a strong combination. Of course, we all wish that the economic recovery would become even stronger. However, there are benefits to a moderate recovery -- especially if it does not come with the threat of a recession around the corner or inflation down the road.

 

Mike Ervin

Senior Mortgage Banker

NMLS # 282715

Office: 650-735-5261

Cell: 650-766-8500

mike@mikeervin.com

What Does One Report Mean?

With almost 900,000 jobs added in the previous four employment reports, the news that less than 90,000 jobs were added for the month of March came as quite a disappointment for the markets. The question is---how much does one employment report mean? On one hand, not much -- especially considering the fact that this report will be subject to additional revisions in the coming month. On the other hand, if it is indeed the start of a trend, then the markets may be right in being concerned. The markets have recent memories of an economic recovery that has been subjected to "stops and starts" for several years. Plus the government budget cuts are expected to make companies cautious as they unfold during negotiations.

Why might this one report not become part of a trend? Two words answer this question -- "real estate." In previous years of the recovery, real estate was not joining the party. There is growing evidence that this real estate rebound is for real and not only is the real estate sector contributing positively to the economic recovery, but construction jobs are being added on a monthly basis. The real estate data being released starting this week will be closely watched by the markets for any slowing trend. In the absence of any slowdown in the real estate sector, it is less likely that our one month of tepid employment growth becomes a trend. For now a dip in interest rates provides another opportunity for the nation to participate in the real estate rebound at bargain prices which may not last long if prices continue to rebound.

Mike Ervin
Senior Mortgage Banker
NMLS # 282715
Office: 650-735-5261
Cell: 650-766-8500
mike@mikeervin.com

Understanding the Lock Game

Every consumer dreads shopping for a mortgage. Not only is the consumer afraid of paying a rate which is too high, they are uneasy regarding the right program for their situation. To make matters worse, they are totally confused about the rules of the mortgage interest rate “game.” For example, when asking a lender about their rates, the lender is likely to respond with a question: “Are you going to lock the rate or float?

Many consumers do not even know what these terms mean, let alone how they may apply to their particular home purchase or refinance situation. It is important to understand the meaning of the terms before we can more fully appreciate the nuances of the rate game–

To lock a loan means that the lender will guarantee a rate for a certain period of time. For example, if you complete a mortgage application on June 1, the lender might lock the loan in at 3.50% and guarantee that rate as long as you close before the last day of May.

To float a loan would be to complete an application without the lender guaranteeing any particular rate. You basically complete loan application with the idea that you will lock a rate sometime before settlement.

It is quite obvious that locking a loan or floating a loan involves risk. The risk is that rates will move in the future—during the period between loan application and settlement. If the applicant floats the loan, there is a risk that rates will move up before the purchase or refinance transaction is closed. If the applicant locks the loan, there is a risk that rates might move down. For a lender there is a very similar risk—if the loan is locked and rates go up in the future, the lender is subject to losing money.

Because the risk involves the movement of interest rates sometime in the future, the lender must find a way to mitigate these risks—otherwise consumers would not be offered the opportunity of rate protection through locks. The lender does this by participating in a futures market.

The futures market enables a participant to sell a commodity sometime in the future. In this case, the commodity is a mortgage loan with particular characteristics (such as a conventional 30 year fixed) and a particular interest rate. It is no different than a farmer selling corn at the beginning of the planting season to mitigate the risk of the corn falling to prices which are below the costs incurred to produce the corn. When the lender sells the mortgage in the futures market, that lender is guaranteeing delivery of the loan at a certain interest rate. Within the secondary markets that exist for mortgage loans, larger lenders pool many loans together to form mortgage securities.

The risk for the lender does not end with the selling of the mortgage loan in the future. What if the loan does not close? This could happen for several reasons, including a purchase agreement falling through or the loan not being approved. The lender has agreed to deliver a loan, and now the lender can’t. In a perfect world, the lender would now be liable for purchasing a similar loan and delivering it. If rates had moved down, it will cost that lender more money to purchase a replacement mortgage because the commodity is now more valuable. In reality, the lender guarantees delivery of a certain amount of mortgages that includes a pre-calculated amount of fall-out. The real risk involves major interest rate moves which would cause more or less fallout than originally predicted.

What does this mean to the consumer? For one thing, because locking a loan involves risk to the lender, the consumer may be charged a fee up-front to lock the mortgage (we do not charge a lock fee). The fee paid up-front may or not be applicable to the closing costs quoted. It is more common to pay lock-in fees for longer term locks. For example, a 120 day lock for a new home is more likely to require a fee than a 60 day lock for the purchase of an existing home.

In addition, because locking a mortgage loan involves futures risk, the longer the lock period, the higher the rate quote. For example, if a consumer would like to lock a loan in for 30 days, the quote may be 3.75%. For 90 days, the quote may be 4.00%. The shorter the lock period, the lower the risk to the lender. Of course, consumers purchasing new homes are in need of the longest lock periods because of the longer delivery times associated with new homes.

The ultimate protection for the consumer? This involves a lender offering a locked rate that will move down if rates move down before closing. The lender offering this option would have to purchase an optional delivery in the futures market which is more expensive and this cost is likely to be passed on to the consumer. Cap protection? Sounds like a topic for future discussion.

Mike Ervin

Senior Mortgage Banker

PH: 650-735-5261

CEL: 650-766-8500

NMLS # 282715
mike@mikeervin.com

More on the Numbers ....

Last week I compared the gains for the stock market and housing over the past 20 years. The moral of the story was that numbers can be deceiving in the short-run, but in the long-run, the gains are easy to see. However, one may look at the fact that the Dow is up 400% over twenty years and house prices up 120% over twenty years and conclude that their money should go into the stock market. That was not intended to be my message. For one, a home is more than an investment, it is your home. Secondly, the numbers presented do not take into account the investments requirement to purchase the asset. For example, stocks may cost 100% of their value. Even if you are able to purchase stocks "on margin," they would still likely cost at least 50% of the value.

Homes may be able to be purchased for as little as 3.5% to 10% down. Therefore, the return on money invested may actually be greater with regard to housing -- especially considering the tax deduction on mortgage interest and the fact that you are replacing rental expense. I am not saying that housing is a better investment than stocks. I'm only again making the point that the numbers can be deceiving. In this case 400% to 120% is not an "apples-to-apples" comparison. Speaking of numbers, the employment report released on Friday was pretty interesting. The number of jobs created was much less than expected. One bad month does not derail a recovery, but does mean that the increase in the stock market and rates may have gone a bit too far too fast. Stocks did not retract that much, but rates have again moved lower. This creates another opportunity -- perhaps temporary -- for those who are purchasing or refinancing real estate.

Mike Ervin

Senior Mortgage Banker

California Retail Division

(650) 735-5261

mike@mikeervin.com

NMLS # 282715

The Numbers Are Not Always What They Seem....

Numbers can be misleading. For example, the stock market has been up over 10% thus far this year. That is great news for those who bought stocks last year. As a matter of fact, stocks are up a huge 125% from the lows hit during the financial crisis four years ago. That is a great rate of return for those who purchased stocks at that time. On the other hand, if you purchased stocks at the peak five and one-half years ago, the returns would have been close to nothing. Let's add one more level of analysis. If you purchased stocks twenty years ago, the Dow is up more than 400%. We can say the same thing about housing prices. Last year, median home prices rose to almost $180,000 -- up 10% in the past year.

On the other hand, the median home price was almost $220,000 in 2005. Twenty years ago? The median home price was hovering just over $100,000. Obviously, which stock you purchased or which home you purchased will have a big factor in your rate of gain. Different stock sectors and different geographic locations have performed very differently over time. Here we are only taking into account time. Timing any market should be left to professionals and even they are often wrong. Those who are looking to time their purchase of real estate or stocks to get in at the right moment are much more likely to be wrong. The right moment was twenty years ago. Today is likely to be the right moment twenty years from now. The key is a long-term mentality and then you can take the day-to-day or year-to-year out of the equation. Numbers are not always what they seem to be when you look at the small picture. The employment numbers released this week can have an important affect upon what will happen Friday and next week. But not twenty years from now.

 

Mike Ervin

Senior Mortgage Banker

PH: 650-735-5261

CEL: 650-766-8500

NMLS # 282715
mike@mikeervin.com