As Home Prices Fall, Costs of Financing Continue to Rise
Can we talk about risk based pricing?
In the simplest of terms, risk based pricing is a system where the interest rate and/or fees paid for a mortgage vary based on the characteristics of both the borrower and the loan itself.
Some borrowers are more likely to default. Some loan types, such as those with lower down payments, cost the lender more when they go bad. It really is a straightforward system designed to equitably align the costs and rewards for banks and borrowers by assigning a rate that, as accurately as possible, reflects the risk of default.
It's a nearly universal practice in mortgage lending, and whether you know it or not, the rate you are carrying right now probably included at least one adjustment to the rate or fees you were charged.
There are, quite literally, dozens of variables that can impact the price, or rate on a given mortgage, but the two most important are loan-to-value (equity in the home), and credit score. Generally speaking, the higher the credit score, and the lower the loan-to-value, the better your rate.
I bring all this up because with defaults and losses on the rise (Freddie Mac lost $821 Million dollars last quarter) Fannie Mae is changing their risk based pricing fees, or "hits." At Fannie, these are known as LLPA's or Loan Level Price Adjustments, and this is actually the third such adjustment since November of last year. Take a look at this graphic (click to biggify), straight from a document called Updated Adverse Market Delivery Charge and Flow Business Pricing Requirements, which was released on Monday, right here. I can think of no better way to illustrate how down payment and credit score interplay to drive the rate you actually get.
I've marked this up to illustrate what has changed since the last adjustment by Fannie. Some are for the worse (in red.) Some were for the better (green). The negative numbers are credits, positive numbers are fees. It's important to understand that the items in the chart are not adjustments to the rate, but to the price of a loan at any given rate. Adjustments can be paid (OR credited) in a lump sum, up front, as part of your closing costs, or as a slightly higher (or lower) rate.
Here's a prime example of how the specific characteristics of the loan, AND the borrower can impact the cost of financing. For example, if someone with a credit score of 685 puts 15% down on a purchase, there is a .5% price adjustment. This means you can pay .5% of your loan amount up front, or take a rate that is .125% higher. If that same person had a credit score of 675, the adjustment balloons to 1.5% of the loan amount, or .375% higher in rate. On a $200,000 loan, that's a difference of $2000 up front, or $38.00 per month over a 30 year term.
The moral of the story: Even as home prices fall, the cost of financing those homes will steadily rise, especially if you have imperfect credit and lack a big down payment.
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October 17th- October 31st
*Rate Ranges not intended for contract writing purposes or for customer use. Existing Home Sales: (Earth to NAR) Tighter Lending Standards are Not the Problem Another ugly print from the National Association of Realtors, who've today released the August existing home sales numbers:
Despite the ugliness, the contraction does seem to be decelerating a bit, so there is a sliver of good news here. Predictably, tighter lending standards are held out as the culprit (emphasis ours):
This is, excuse my French, utter bunk. The idea that "obtaining a mortgage right now is all but impossible" seems to be seeping into the national consciousness, aided and abetted by mainstream media and press releases like this, so let's push back on this notion a little. I would argue that mortgage lending standards remain very reasonable, and that the problem is not "overly tight" standards, but that we are reaping the whirlwind caused by lending standards that were far too loose for far too long. Stay with me on this. The loose lending era stimulated a lot of artificial, unsustainable demand, which drove prices way out of line with any reasonable market fundamentals. It is the aftermath of this era - too much supply and not enough legitimate demand - that's driving prices down and putting many homeowners upside down on their mortgage, not tighter lending. No amount of yearning for the ridiculous-redefined-as-reasonable lending standards of three years ago will fix that. Those days are thankfully gone, they aren't coming back, and we'll be lucky if we escape the whole mess with an intact financial system. [quick aside: It is also amusing that an organization so quick to blame the Media for "talking down" the real estate market is essentially trying to convince the public that mortgages are so hard to get you shouldn't even bother to try, when that really is not the case. I'd argue this hurts demand, and does not help their cause.] Now, lending standards have tightened, for sure, and the cost of borrowing for some (still creditworthy) borrowers has increased, but just as a for instance: Here's a snapshot of what a typical (average credit, has a job, with a non-excessive amount of consumer debt) owner occupant borrower can do to finance a home in the Triangle: She can purchase a home, using conventional 30 year fixed rate financing, for 5% down.
If she happens to be a first time buyer, she can get a reduced interest rate and up to $10,000 in targeted down payment/closing cost assistance. With the exception of Jumbo financing, in any of the above cases, even assuming the very worst (but still acceptable) credit profile, our borrower would be hard pressed to pay more than 6.75% for a 30 year fixed rate, and if she had good to very good credit, a rate of 6% or less is in play. Hell, with an FHA, the down payment does not even need to be hers - it can be a gift from a relative. Now I ask you, in reading the above, does this strike you as an "overly tight" lending environment? And to the Realtors in the audience: Don't be afraid to let your clients know that getting a mortgage is not as tough as they may have been led to believe. Come on in, the water is fine. Features for the month of November! 1. Any realtor that purchases or refinance their personal residence with Alera Financial in the month of November will have the commitment fee and appraisal fee waived saving you an additional $850.00 of closing cost! 2. Alera Financial will provide a free one year AHS Warranty for all 1st Time Home Buyer that closes a home with Alera Financial! 3. First Time Home Buyer Seminar held at the Durham County Library call for dates and times with Alera Financial. Get your buyers PRE-APPROVED Have your best week ever! Brian
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Alera Financial 7011 Fayetteville Street Durham NC 27713
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