In the game of golf, “par” is a number that indicates the number of strokes – the number of times a player will hit the golf ball – that a very good player is likely to need to go from the tee to the hole.  A par three hole ought to take three strokes, a par five hole, five strokes, etc.  These numbers are targets and rarely met by you or me but Tiger Woods hits them nearly every time and frequently uses even fewer strokes, going “under par,” which is good in golf where the lowest score wins.  The word “par” appears also in mortgages but it has a somewhat different meaning – the lowest possible interest rate on a loan from that lender on that day. 

You’d think a lot of people could get par mortgages, but no.  Almost nobody does.  You can have the best credit, the biggest down payment, and the highest reserves imaginable and in most cases STILL not get a par mortgage.  Why is that?  Mainly we should blame mortgage brokers, somewhat blame the banks, but we should also blame ourselves a bit for that one.

Almost by definition you’ll NEVER get a par mortgage from a mortgage broker — that is unless that broker is your husband or wife, son or daughter.  This is because par is the rate the broker pays – the best wholesale rate – and if he gave it to you he’d be giving-up much of his profit.

Mortgage brokers make their living in part through charging us a higher rate than they are getting from the bank, part by adding points to the closing cost of the loan, and finally by adding various fees like document preparation and handling.  The median mortgage in the U.S. today is for $141,000 and has $3,500 in points and fees and the rate is often driven-up, too, by a point or more, which goes to the broker.  In the business this added interest is called the “yield spread premium.” And hidden under all that sits the actual transaction, a par mortgage.

The teaser rate you’ll see on LowerMyBills or LendingTree or even BankRate.com is the so-called “National Average.”  Think about what that means.  It is the average rate THAT WELL QUALIFIED BORROWERS ARE ACTUALLY PAYING THAT DAY — NOT THE LOWEST RATE.  The National Average rate INCLUDES some yield spread premium.  So while the numbers change sometimes more than once a day, as I am writing this the National Average rate listed by BankRate.com is 5.53 percent while the true par rate is 4.875 percent for a conforming 30-year fixed-rate mortgage.  Over the projected life of that $141,000 loan the difference in interest payments is $20,385 and the difference between the monthly payments is $57.

Now $57 per month may not seem like much and $20,385 over 30 years looks puny, too.  But if you could get the par rate for that loan yet use the $57 per month saved to pay down the principal rather than buying coffee, then the interest savings grows to $41,628 (almost double) and you’d own your house outright four years sooner.  

You’d think the way to get a par rate would be by avoiding mortgage brokers and borrowing straight from the bank, but that’s not so.  Banks like to charge such fees, too, and they love to drive-up the rate if they can because they, too, have overhead to pay for and profit lust to satisfy.  The cost of brick-and-mortar loan offices is such that banks generally make more money selling through brokers, which is why so many loans are done that way.  Or were before the current mortgage crisis that is killing the brokers (Yeah!).  But in this era of retrenchment the big lenders will still tend to cut their wholesale business through brokers in favor of their less profitable retail business through local offices just because that’s part of how they define themselves as banks.

It is very rare for ANY retail customer to get a true par rate loan from any lender.  Take a lender like Ditech, for example, which is a division of GMAC that claims to offer very low mortgage rates.  Forgetting the points and fees for a moment, if you look at Ditech’s best rate for today it is generally about a point above true par.

You’d think that in a competitive mortgage market some customers would get par loans, but they generally don’t.  You’d also think that in a non-competitive mortgage market par loans – loans legitimately a point or more lower than the norm – simply wouldn’t exist.  Yet they do exist.

The fact that most customers with good credit, big down payments and large cash reserves can’t get par loans comes down to the fact that the banks don’t really have to give them.  Ultimately we go for the best loan we can get and if that’s above par we usually don’t know it.  The bank comes out more ahead by keeping the whole issue of rates as murky as possible and losing the odd customer as a result.

So there are really only two ways to reliably get mortgage rates at par.  First is by having some power or sway over the lender.  Say you are a huge depositor in the bank, you are the mayor of the town where the bank is headquartered, or you are having an affair with a bank vice-president: You get a par loan.  The other way is by finding a broker who will forgo the extra revenue that boosting the rate will allow.  In historical terms that broker would be labeled as insane. So don’t expect to find one. 

Most of us will never see a par loan rate, but it is important to know that they exist because they give us one tiny weapon to use in our mortgage negotiation.  So when your broker or banker tells you that you qualify for a 5.875 percent mortgage and that’s a “great rate,” ask him or her what’s today’s “par rate.”  Under the Truth-in-Lending statute they have to tell you.  If they won’t then they are crooks so call up the state bank regulator and send them to jail.  If they do tell you the par rate, as they should, then ask them to explain why it is that you don’t qualify? Ask, too, for statistics on how many customers DO qualify. what would it take for you to get from here to there?  Make them squirm, but do it as late in the process as possible, then they can actually TASTE the loan adn might be more willing to give oup some or all of that yield spread premium.

Many mortgage applicants actually DO qualify for par, they just aren’t offered that lowest rate.  Knowing it exists and asking the right way at the right point in the negotiation just might get you a better loan.

Or not.

15 Comments » Posted by cringely / Mortgage Language

How do you turn a supertanker?  According to justanswer.com, the technique for turning a loaded supertanker involves shutting down the main engines 25 kilometers (about 15 miles) before reaching the actual turning point.  This is because the huge vehicle has so much momentum that it takes that long just to slow down to turning speed.  Of course it also takes 25 kilometers or more to get up to cruising speed.  But what if the various parts of the supertanker are travelling at different speeds or – shudder – even in different directions?  Well then you’d be looking at the U.S. economic bureaucracy at work.  Because when it comes to efficiently running this economy, we are often our own worst enemy.

 Look at Fannie Mae and Freddie Mac, the two federally chartered purchasers of home mortgages taken under government conservatorship last summer.  The reason Fannie and Freddie were taken over by the government is that they were suspected of having too little capital to cover the potential demands made on the two companies as hundreds of thousands of mortgages failed or might fail.  The worry was that lax lending policies n the part of mortgage lenders and equally lax oversight on the part of Fannie and Freddie had placed the organizations in peril.  And then there’s the mark-to-market rule that forced the companies to write down billions in mortgages that weren’t in arrears but MIGHT HAVE BECOME SO.  Mark-to-market, which has since been conveniently suspended, was the neutron bomb of home finance regulation, intended solely to destroy the value of mortgages and lenders without any other impact or, frankly, without even logical reason.

 So Fannie and Freddie made some mistakes, the rules were changed under them, they went from fat to flat almost overnight, and the feds in their infinite wisdom took over.

 Now the game changes again.  Under federal conservatorship Fannie and Freddie suddenly had unlimited borrowing power with the Fed.  They could buy mortgages like crazy with little thought to whether or not doing so would be profitable.  Heck, their common shareholders were already figuring to have lost 100 percent of their investment.  At this point Fannie and Freddie were simply tools for government management of the economy, their goal being to make more and easier lending.  Yes, this is the exact opposite of what the government might have demanded six months earlier, but in the new reality it is what Fannie and Freddie were supposed to do.

 But of course they didn’t.

 When mark-to-market came on the horizon both companies started to cut back on purchasing loans and securitizing them, trying to reduce their exposure.  And even though it was the government’s policy that these activities expand, they contracted and continued to contract, instead.

 Why?  Because that’s how it is turning a supertanker.

 Where one might have expected the good men and women of Fannie and Freddie would go in the very next day after being put under conservatorship and start buying mortgages right and left they did just the opposite.  And as of December 1^st they raised their requirements for mortgages both companies would buy making sure that they’d buy fewer and fewer, rejecting especially the most troubled loans that in the current climate probably most need to be purchased.

 This is, of course, insane.  But it is also the way bureaucracies work.  The new Fannie/Freddie qualification guidelines were announced in August to be applied December 1.  To have been announced in August they had to have been written in March – eight months before going into effect.  THAT’S how long it takes to turn THIS supertanker even a little.

 The new qualifi9cation guidelines went into effect December 1 even though everyone at Fannie and Freddie knew three months before that the new guidelines were contrary to the new policy of both organizations. 

 So they’ll get reversed, right, just like mark-to-market was? Maybe.  Mark-to-market was a hypersonic reversal in terms of financial regulations.  Don’t expect Fannie or Freddie to be nearly so nimble.  Right now it is suddenly becoming clear to the incoming Obama administration that these new rules don’t make any sense.  So they’ll move to change them absolutely as soon as possible.

 Eight months from now.

4 Comments » Posted by cringely / Semi-coherent Rambling

You found me.

This is my mortgage blog.  I’ve been working on it quietly for three months now.  It represents the unhealthy fascination I have for home ownership and my deterination to keep my house, which you can see here.

I know enough to feel very strongly that the mortgage business is a mess and needs reform.  But the way we do reform in this cutlure is by asking generally the same people to simply behave better.  That doesn’t work.  People don’t change.  It takes citizen involvement to make change really happen.  But you need the right kind of citizens — citizens like me, frankly.  I’m curious, skeptical, and talk out of turn.  And I tell you I am determined to make some waves.

Look around please and let me know what you think of the place.

18 Comments » Posted by cringely / Mortgage Horror Stories

A Jumbo mortgage is any loan with a balance more than $729,750, which puts it beyond Fannie Mae, Freddie Mac, and Ginnie Mae funding guidelines.  Jumbo loans are for big houses owned by people who are well-to-do, think they are well-to-do, want you to think they are well-to-do, or were once well-to-do.  And jumbo loans are close to dead.

Of the big U.S. mortgage lenders only ING Direct is really pushing its jumbo mortgages.  Most of the big banks still list jumbos on their product list (Chase doesn’t, however, nor do several other national lenders) but hardly any of them are actually funding jumbos.  They almost don’t exist anymore.

Which is very interesting since a heck of a lot of jumbo-sized houses DO exist.  The the owners of those houses are worried.  What happens if their mortgages reset making the house no longer affordable?  What if they need to refinance and can’t?  And here’s the really big one: how can these people afford to sell their houses if no buyers can get jumbo mortgages to own them?  The houses (and their owners) are effectively frozen.

Lucky me, I’m planning to move nowhere, my 5/1 jumbo ARM from WAMU is about to reset, but drops in the LIBOR index and the stronger dollar are actually causing my ARM rate to go DOWN.

That’s for now.  What happens if LIBOR goes the other direction?  Deleveraging.  If the only loan I can get is for $729,750 then I guess that’s the new value of my old house.

Dammit.

8 Comments » Posted by cringely / Mortgage Horror Stories