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

Time For a Long Term Strategy

So how do you make resolutions for the New Year when we are in the midst of such a challenging economic environment? Should we just make the usual commitments that are abandoned by Presidents Day? Or perhaps we should take a longer-term view at the present time.

First, we should begin by deciding what is important to us. Day-by-day we seem to get lost in the challenges of daily life. It is hard to think of the long term when we are stuck in traffic and we can't get to our next appointment. It is hard to think of saving for retirement when we are trying to make the next mortgage payment. Isnt this an opportune time to ask at what juncture we will address the significant things in life?

So what is important?
Health. There is nothing more important than one's health. Today, medical advances have made a longer life possible for the average citizen. For those who do not take advantage of today's advanced medical techniques and knowledge, a longer and healthier life is not assured. What can you do to be healthier? The rules are easy stop smoking, exercise regularly, eat sensibly and see your Doctor on a regular basis. As easy as these rules are, how many make resolutions each year to do one or more of these things and then never follow through?
Lower Stress Levels. Doesn't it seem as though each year we have more and more time-saving devices, yet less time? More significantly, each device which allows us to be in constant contact with the business world, from cell phones to wireless modems, makes it harder and harder for us to just get away from it all. Many of us return from long weekends without piles of phone messages. That is the good news. The bad news is that we are answering e-mail while we are away and supposed to be relaxing. So how do we reduce stress? Take some time every day to refresh and recharge our batteries. It does not have to be hours it can be minutes. Clear away the thousands of thoughts and just think about being relaxed. Get a massage or just go for a walk. And here is the good news less stress means a healthier life!
Move Towards Financial Security. Want less stress in your life? Have a financial plan, that helps you move towards your long-term financial goals. It is never too late to begin a savings plan. Take advantage of your company's 401K program. If you have children, are you putting money away for their college education? If you have an investment portfolio, is it being reviewed for long term objectives such as diversification and protection against inflation?
Make Your Career More Rewarding. Before you deter-mine your annual goals, determine what will make you a success in your eyes. Is it earning enough income to provide a secure future for your family? Is it advancing within your company? Is it starting your own company and being your own boss? Nothing is more stressful than working hard every year and feeling that you never get ahead. First, you must determine what getting ahead means to you. Then you must take the steps necessary that will move you in the right direction. Perhaps it is adding skills such as computer programming or perhaps it is additional sales training.

There is no better time than now to make progress towards determining long term strategies. If you did not spend some time during the holiday season, sequester yourself away and think about what your long-term strategies should be. Your strategies must be your own. Though input from family, friends and even employers may help guide you, this is a road you will travel by yourself.

Mike Ervin

Senior Mortgage Banker

NMLS # 282715

Office: 650-735-5261

Cell: 650-766-8500

What is a Credit Bureau Score, and how is it calculated?

Credit bureau scoring is a statistical means of assessing how likely a borrower is to pay back a loan.  A Credit Bureau Score is based on the data available in the borrower’s credit report.  The score measures the relative degree of risk a potential borrower represents to the lender or investor.  It is not a measure of a borrower’s income, assets, or bank account, although those and other factors are still considered by lenders and investors, independent of the score.  A Credit Bureau Score does not include any of the following in the score calculation as this would be discrimination by FCRA guidelines: gender, race, age, or Zip Code. 

Fair, Isaac Credit Bureau Scores range from approximately 300 to 850 points, and are available through the three national credit data repositories:  

Equifax            (800) 685-1111

Trans Union    (800) 888-4213

Experian         (800) 397-3742 

Each bureau calculates its own score, based solely on data within its individual credit file.

 

A Fair, Isaac Credit Bureau Score, sometimes referred to as a FICO^SM  score, is calculated by a system of scorecards.  In developing these scorecards, Fair, Isaac uses actual credit data on millions of consumers, and applies complex mathematical methods to perform extensive research into credit patterns that forecast credit performance.  Each pattern corresponds to a likelihood that a consumer will make his or her loan payments as agreed in the future.  The score is based on all the credit-related data in the credit bureau report – not just negative data such as missed mortgage payments or bankruptcies.                       

The types of credit information used in the credit bureau scorecards are typically the same items an underwriter would use to make a credit decision.  The final score is based on the following factors: 

Payment History (35%)

·        Public record and collection items

·        Frequency: indicator of 90 day later

·        Severity: accounts over 30 and 60 days past due

o   0-6 months: Major effect

o   7-12 months: significant effect

o   13-24 months: lesser effect 

Outstanding debt (30%)

·        Number of balances recently reported

·        Average balance across all trade lines

·        Current Balance versus Credit Line Limit:

o   Over 75%: Major effect

o   Over 75%: significant effect

     Note: Accounts with small balances score better than zero balances. 

Credit History (15%)

·        Age of oldest trade line

·        Number of new trade lines 

Pursuit of New Credit (10%)

·        Number of inquiries and new account openings in the last year

·        Amount of time since most recent inquiry

·        Multiple inquiries for mortgages and auto loans within 30 days

are lumped as one single inquiry.           

Type of Credit (10%)

            The credit engine looks for a good mix of the following types:

·        Bankcard

·        Gas, travel and entertainment cards

·        Department store cards

·        Installment Loans

·        Finance Companies:  these often are given a negative score, since they are

Commonly provided to people with substandard credit. 

Fair, Isaac observes a very large number of credit report histories of mortgage borrowers to determine which credit report items or combination of items are the most predictive of future risk:  this data indicates the amount of each item contributes to an accurate assessment of credit risk. Fair, Isaac does not use race, color, religion, national origin, sex, marital status, or age as predictive characteristics.  Occupation and length of time in present residence are also not used in the Credit Bureau Score.  Also, any information that is not present in a repository credit file is not used in creating a Credit Bureau Score.

What Will Lower Your Score?

- Consumers who consistently mess up
- Spending near the limit of your total available credit
- 90 days late and you have other delinquent accounts
- Being an authorized user on someone else's account with good credit will no longer help your score

What Will Not Lower Your Score? 

+ Mess up every so often

+ Won't get dinged as hard when you apply for credit from multiple sources

+ Having a mix of credit types, like having a credit card, mortgage, and auto loan at the same time

+ If you're 90 days late on payments on one account and your other credit accounts are in good standing

The Lower Your Score, The Higher Your Costs of Borrowing

 

Fannie Mae and Freddie Mac, for example, charge higher up-front fees to borrowers with credit scores below 740. For a buyer with a credit score between 680 and 700, the fee comes to 1.5% of the mortgage principal. On a $400,000 mortgage, that adds up to $6,000. Someone with a 740 score pays nothing. Lower-score borrowers also get saddled with higher interest rates, about a 0.4 percentage point more for the below 700 borrower. That costs an extra $124 a month — $1,488 a year — on a $400,000, 30-year, fixed rate loan.

 

Mike Ervin

Senior Mortgage Banker

PH: 650-735-5261

NMLS # 282715
mike@mikeervin.com

 

Frequently Asked Questions Regarding the Home Buying Process

I have always strived to make the process easier for my clients. Purchasing a home is the most important financial investment you will make in a lifetime. Achieving the American Dream of Homeownership should be one in which we carefully guide you through the process so that it is a positive experience that you will remember. Here are a few questions that first-time buyers typically have…

1. At what point in the process should I apply for a mortgage? The best time to apply is before you purchase a home. Getting an actual pre-approval will give you more negotiating power with the seller as well as make the process smoother because you will know within what price range to be shopping.

2. How long will it take for our loan to be approved? After you have submitted your application, loan approval typically takes just a few days if the documentation we ask to be provided (see form attached) is complete. The more complete the information, the more quickly we can act.

3. What is the process after the loan is approved? Assuming you have a sales contract signed for a new home, the next step is to make sure all conditions are clear. Many of these conditions are standard and are provided by third parties, such as obtaining an appraisal and clear title. The quicker these conditions are received, the smoother the settlement process.

4. What is the difference between a pre-approval and pre-qualification? A pre-qualification is an opinion on whether you are qualified for the mortgage and does not mean that the information provided has been verified or the file has been underwritten. A pre-approval means that the relevant information has been verified and the file has been underwritten and approved. The file typically would be approved subject to writing and submitting a sales contract, satisfactory appraisal on the property selected and locking in a rate and loan program. We are one of the few lenders that provide actual underwritten pre-approvals.

5. When can I lock in a rate on the loan? Typically you can lock in the rate after the application is complete and after a sales contract is ratified. Rates change daily and sometimes more than one time per day and we can keep you informed as to how the markets are changing.

6. How much money will I need at closing? You will need money to cover the down payment and closing costs and escrows. The closing costs are itemized on the Good Faith Estimate of Closing Costs, a government required form we will provide. From this number, you can subtract your deposit that is being held by the Realtors and any closing cost credit paid for by the seller.

7. Can I borrow the money I need for closing, for example, place a charge on my credit card? We advise you not to borrow any money until you close on your home, at least not without talking to us first. A car or furniture purchase could change your qualification status.

8. What is included in my mortgage payment? We refer to the payment as the “PITI.” This stands for Principal, Interest, Taxes and Insurance. Principal and interest refers to the payment on the loan and taxes and insurance is payment for bills that will be due each year. We refer to these as escrows, or money you put aside (or escrow) for bills to pay due. Insurance is typically for a “homeowner’s policy” to protect your house but there may also be monthly mortgage insurance charged by FHA or conventional lenders. Also many homes have homeowner association fees that cover charges for common areas such as pools and tennis courts.

9. Will I get a copy of the appraisal of the property? Yes, you will be provided with a copy. If there is a “problem” with the appraisal, for example, if the value is less than the sales prices, you will be notified promptly.

10. Will I get a copy of my credit report? Yes, we will be able to provide you with a copy of your credit report. The Fair Credit Reporting Act requires that this information cannot be shared with other parties to the transaction and therefore it must be provided to you directly.

11. If I have a question, how do I contact you? While most of our correspondence would be by e-mail. It is important that you get all your questions answered, so please to do hesitate to give me a call.

Our mission is your satisfaction!

Mike Ervin

Senior Mortgage Banker

PH: 650-735-5261

NMLS # 282715
mike@mikeervin.com

Are You An Employee, Or…The CEO Of Your Company?

Do you view yourself as a salesperson? Or do you view yourself as the CEO of your own business? If you really want to lead the industry, you must view this as your company. This is true whether you work as a sole-proprietor out of your car or whether you work for a national company. That also means you must invest significant amounts of your money, time and energy in your business. And you must make this investment up front, not some time in the future.

For example, I can’t tell you how many sales people contact training companies and say—I know I need this training but I need to close a few transactions first. Then they go months or years without the training they need. They are running businesses that are always going to struggle. And most of them will eventually fail because companies that are under funded do not do well. If you have worked for such a company, you know what we mean in this regard. Those who are on “pay as you go” status never seem to reach the top. So here is the basic question:

Are you investing what you need to in your business?

Imagine if you were opening a retail store or restaurant. You would invest many thousands of dollars and hours before you rang up the first sale. This would include hundreds of hours of research and setting up the location. You would purchase equipment and inventory. You may pay a multi-thousand dollar franchise fee. And when it was opened, the hours needed to run the business would increase substantially. In the end, you would still be in a situation that poses a major risk because start-up businesses tend to have a high rate of failure in the first few years. Obviously the research and investment should help mitigate some of these risks.

Sales personnel don’t necessarily have to invest as many hours or as many dollars as one might starting a restaurant. But the concept is much the same. What do you need to invest in? Marketing, education, technology and more. Perhaps it is a laptop. Or it is the time to learn how to use a software program you have purchased for your laptop. Have you ever purchased a software program and not learned how to use it? In this case you have invested the money but not the time. You must make an investment of all available resources. Imagine running a store without the technology you need. Imagine running a doctor’s office without the knowledge you need!

The investment needed would vary for each person. For example, an insurance veteran of eight years moving into the real estate industry would not need to learn about available insurance coverage. On the other hand, someone moving from government should spend the time to learn this aspect of the industry. After all, if you are serving homeowners and prospective homeowners, you will need to become an expert in all aspects of the real estate process so that you can deliver maximum value to your clientele.

Some will need a home office. Others will need a marketing assistant. It is this needs analysis that is an all-important research step. For example, within the education category some may need to learn how to better utilize a computer. Others may need help learning how to communicate verbally or in writing. Still others may need public speaking training. Note—we have not even touched upon training specific to your particular industry.

Those who wait for their employers to give them the resources to be successful will typically have a long wait—forever. Success comes from within. And the key to this success is finding the right elements of investment that are needed for each individual. These elements include time, money and energy. You can’t make it with just two out of three. Our question is…have you made the investment that is necessary to sustain and grow your business as the reigning CEO? There certainly is a big difference between an employee and a CEO!

 

Mike Ervin

Mortgage Banker

NMLS # 282715
(650) 735-5261

mike@mikeervin.com