Wow it's mid-January already...Time seems to fly as I try to get caught up on all the things I've been meaning to do and seem to always put off around Christmas!
Before I get into credit score and pricing issues, I've been looking back at 2007 over the last couple weeks and how the real estate and mortgage industry has changed and affected us all. Of course, the media has been painting that picture for the world and has turned the word "subprime" into an albatross on the industry. I looked up the definition of albatross: besides being a large web-footed sea bird it is defined also as being "something burdensome that impedes action or progress". How true this description is!
Is the economy looking a little down? sure...Are foreclosures higher than normal? sure... but the albatross here as we begin 2008 is the fear instilled by the media that further impedes the action and progress of home-buying beyond the natural economic factors we are facing in the US today. The domino effect equity crunch starts with all the buyers who owe more than their house is worth right now. Homeowners looking to upgrade may not have the equity to do so. And, Prospective buyers are trying to figure out where the bottom is for their area....and that sure varies considerably depending on where you live!
OK, now on to my thoughts on the Fannie Mae and Freddie Mac Conventional pricing adjustments for 2008:
First off: This is going to make programs like FHA and USDA Rural Development a better choice for many buyers entering the market this year....Why? Credit Score Due to the losses Fannie Mae and Freddie Mac are facing, they are trying to find new ways to offset risk and build capital. While Conventional rate offerings for some will be down from just a short time ago, Conventional rate offerings for many will be higher despite market conditions that dictates falling rates.
First, keep this in mind: A rate reduction by the Fed does NOT automatically been an immediate decline in fixed mortgage rates. (google Kevin Weaver along with the words interest rates and you'll probably find my comment referenced by bankrate.com's Holden Lewis about this)
For borrowers with credit scores greater than 680, there is no pricing penalty adjustment. The next 3 tiers are 660-679. 640-659 and 620-639. For borrowers under 620, Conventional simply is not the way to go unless there is considerable equity or are making >20% down payment. From the top of the range to the bottom, 30 year Fixed rates which were really almost equal for all these prospective borrowers before may and likely will vary as much as 1 full percent.
Why you may ask?
Fannie Mae and Freddie Mac are now charging the banks and mortgage lenders securitizing to them fees ranging up to 2.00% of the loan amount. Naturally, to remain profitable they have no choice but to pass these fees along. For a bank that sets their rates to make a profit margin of 2% they have to price the loan's rate up to 4.00% gross now to net out 2.00% for scores under 620, up to 3.75% gross for 620-639, up to 3.25% gross for 640-659 and up to 2.75% gross for 660-679. Each tier means anywhere from .25 to .375% per score tier to the borrower depending on market fluctuations with most lenders.
Why does this bother me?
This leaves even more room for bait-and-switch tactics. Frequently, we get calls asking, "What is your current 30-year Fixed rate?"
Then think about this:
If you called a Ford or Chevy dealer and asked, "How much is a truck?" The price sure can vary there can't it? There are many different websites promising competing rate quotes from banks and lenders. Most borrowers are not aware how, why, or when these changes occured. Honest loan officers can easily lose a potential client who doesnt take the time to ask the right questions, listen, and understand the how and why and merely shops blindly for the "best" rate. I've had real estate agents try to tell their buyer what rate they should get...Now, that can confuse things even further. (I do not tell the buyer what price they should get the house for, how much commision the real estate agent should get, so please leave the rate quotes to me).
Knowledge TRULY is power!
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