June 15th, 2020 10:40 AM by Gregg Mower
If you have been looking to refinance your home loan now might not be the time to do it. Ok, I know this is contrary to the mainstream narrative when it comes to refinancing. Most people are hearing that now is the time to act as rates are at historic lows, if you have heard this you are hearing the narrative. It is true that interest rates are low, however, rates still should be lower. There are many reasons why I say this, and I will get into it in this blog. The biggest problem with lending today is not interest rates it is turn times and bottle necks in the industry.
It is true that interest rates are low, however, there are still parts of the rates that are not figured into the price of the interest rate. What I am telling you is that for most all Government loans, FHA and VA loans, there is a piece of the puzzle missing in the price of the rate. The price in the rate refers to the discount points. Before it was announced that you could take a pause or defer your mortgage payments during the pandemic the pricing on Government loans was considerably better. The best way to explain why is to show you behind the mortgage curtain, if you will. You see when lenders sell a mortgage in the secondary mortgage market to Fannie Mae, Freddie Mac, or Ginnie Mae (the Agencies) lenders will retain the servicing of the loan. What that means is that a lender will need to re-capitalize their money reserves by securing the mortgage with one of the above agencies by selling a portion of the yield to one of the Agencies. In other words let’s say you have a 3.5% interest rate on a loan (to make it simple) the lender may sell the loan to one of the agencies guaranteeing them a 3% yield. They then will keep the .5% to collect the payments from the borrowers and send the 3% to the agency they sold the loan to. What happens when borrowers stop making their payments? Well the lender still has to make those payments to the agency they sold the loan to. Thus, lenders will lose money on servicing loans during the pandemic. So, to offset this a lender will have to raise their rates to offset the losses in their servicing departments. It is more complicated than that but for simplicity that’s what’s going on with rates and pricing.
Thus, when people start making their payments again, on a regular basis, lenders will then be able to adjust their pricing on their interest rates back down. Interest rates are still artificially high although they are still low, if that makes sense. I am not saying when the pandemic is over that rates will automatically go down, however, in a normal world they should. Lenders might like the increased profits they are receiving from the higher upfront interest rates and fees. This is all new territory for everyone so to say this is the “new normal” and that it will be this way is confusing as I have done pricing before with a Mortgage Banker so I know how it was done. It may never go back to they way it was but competition is the key to lower rates and without it lenders could set interest rates and profit margins like OPEC with oil prices. This activity is illegal in the United States, however, everything has changed and that too might be a “New Normal”.
To add insult to injury, turn times on loans have slowed to a nauseating pace. If you are in the middle of trying to get a home loan whether it is a purchase loan or a refinance you are experiencing this. I have talked about this before in prior blogs but is has gotten worse with the increases in loan volume. You see the large lenders have not been able to get back to their work spaces yet and some are working from home and others from the office, so we are seeing that the right hand often doesn’t know what the left hand is doing so the time to do simple tasks like sign off conditions are taking 2-3 times longer than before the shutdown. This has impacted refinances and purchase transactions by adding an additional week or two or more, in some cases, to the process. We have also seen signing agents (Title companies and Escrow companies and Lawyers on the East Coast) taking longer to do their jobs as their offices have not opened to full capacity yet either. All this change has hampered the whole process of getting a home loan. It is frustrating to clients but to us that have always strived to hit our target closing dates on time it has been a real challenge. This will change in time; I can’t tell when as we seem to all be at the mercy of our local and state governments as to what can open and when and more importantly how they can open. Until the world figures out how to fight this pandemic and how to govern during this time we will continue to see change in the Home Loan industry. We are always here to assist you and give you the honest truth to what is going on in the industry. Please call us at 916-672-6130 we are here to help.