Rates Are Getting Worse (No, For Real)

Mortgage and Lending with Mason-McDuffie Mortgage, Conventional Loans, Jumbo Loans, FHA, 203(k), USDA, VA, NMLS #138061 MMCD #1141

Rates Are Getting Worse (warning, this is a rant, albeit an informational one, I hope)


     Back in April Fannie Mae & Freddie Mac, the nation's 2 mortgage giants, announced that changes would be forthcoming to LLPA (loan level pricing adjustment) charges, better known as "risk based pricing", and those "changes" aka "things getting more expensive", are finally here.  When risk based pricing came into existence, it made quite a bit of sense - investors should receive a higher return for riskier investments, right?


Mortgage Rates Rising

     For example, prior to risk based pricing on conventional loans, a borrower with a 620 FICO and a 5% down payment was getting similar rates and pricing to a borrower with a 720 FICO and a 25% down payment.  Risk based pricing changed all that with Fannie & Freddie applying pricing adjustments, or LLPAs incrementally to each new risk "basket" that they came up with - most of these baskets were on a sliding scale based on FICO scores and LTV's.  With this action, low FICO/low down payment mortgages were still offered, but at significantly higher rates than high FICO/high down payment loans.



Makes sense, right?



     Well now Fannie & Freddie are piling on with increased adjustments across the board.  Low FICO, high FICO, low down payment, a little more down, it doesn't matter, everyone's getting screwed.  Except of course Fannie, Freddie, and the US Treasury, who combined are pulling in billions.  That's BILLIONS, with a "B".



     Let's take a closer look at this and break things down.  How does the mortgage industry make billions?  Well, first off, there has to be volume.  There has to be a pretty wide profit margin.  There also has to be negligible loss.  With current underwriting standards and loan packaging processes, risk on conventional mortgage loans is lower than it's been in well over a decade, yet the product continues to get more & more expensive, always in the name of "risk".  Over the years we've had "G Fee" costs created out of thin air by Freddie & Fannie.  These costs were passed on to the consumer in interest rates.  LLPA costs are also passed onto the consumer through interest rates.  It's safe to say rates are at least .5% higher than they should be (that is, .5% higher than they would be if they weren't stuffed with LLPA costs and G fees).



     Are you understanding this yet?  For all intents and purposes, the US Treasury is running the show at Fannie Mae & Freddie Mac.  It's safe to say that most home buyers are also taxpayers.  So you're telling me the taxpayers bailed out Fannie Mae & Freddie Mac when the meltdown occurred & they were hemorrhaging money - and now that the companies are back to beyond profitable, the taxpayer will continue stuffing their coffers through higher interest rates for each & every loan, regardless of how great or low a borrower's risk is?  



      How much can taxpayers take before their backs break?  How many costs can be stuffed into home buying (there are already thousands of dollars included in G fees and LLPAs for each transaction - this isn't even scratching the surface of real estate taxes, transfer taxes for buyers and sellers, and increased mortgage costs, which are also a result of over-regulation) before buying a home is simply no longer a good investment?



     These costs are the kind of thing that are killing the American dream.  This type of theft is EXACTLY why both the left and the right side of politics are wrong- big government is obviously robbing the American people, but cutting out government completely creates an atmosphere similar to that of pre-meltdown, which was simple private enterprise robbing the American people.  What we're left with is government supervised big business profiting from "investments" that carry nearly no risk thanks to suffocating over-regulation, and priced at a premium in the name of "risk".



     What's sad is that most people have no idea any of this is going on - they just see daily rates posted and advertised.  They have no idea that rates, in reality, should be about .5% or more lower than they are today.  They have no idea they're being taxed under the table through their interest rate.  If they did, I wonder if they would be angry?  I wonder if this would be a talking point in the next election cycle?



     Let me be clear - something had to be done post-meltdown by the government.  Instead of fixing the problem, though, they're simply profiting from it.  Now rates will increase again because of "risk" that's not really there.  In the end, who's getting screwed? Mortgages getting more expensive






Re-Blogged 6 times:

Re-Blogged By Re-Blogged At
  1. Lyn Sims 06/23/2015 12:10 AM
  2. Jill Watts 06/23/2015 01:36 AM
  3. Brenda J. Andrew 06/23/2015 02:17 AM
  4. Jirius Isaac 06/23/2015 03:14 AM
  5. Carolyn Roland-Historic Homes For Sale In Delaware and S. Chester County PA 06/23/2015 03:33 AM
  6. Ginger Harper 06/29/2015 09:39 AM
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Chris and Dick Dovorany
Homes for Sale in Naples, Bonita Springs and Estero, Florida - Naples, FL
Broker/Associate at Premiere Plus Realty

Well I guess we've been on the good train for some time now and it's time for a change, unfortunately.

Jun 23, 2015 08:52 AM #66
John Meussner
Mason-McDuffie Mortgage, Conventional Loans, Jumbo Loans, FHA, 203(k), USDA, VA, - Walnut Creek, CA
#MortgageMadeEasy Walnut Creek, CA 484-680-4852

Tom Waite unfortunately, we can't go that route - property values have been grossly inflated by years of easily available money.  If property values were still in the same place (adjusted only for inflation) they were when 20% was required, then by all means, let's cut out the low down payment loans.  Low down payment loans are only available thanks to insurance funds - yes, more collectivism, but without those funds & based on current home values there would be ZERO entry level buyers.


The easy answer is to change the norm to 15-20% down and 15 year mortgage terms - that change would plummet homes values worse than the market meltdown of a few years ago did, bring about an even greater number of foreclosures, and decimate our entire economy (along with every other economy on the planet)


There are really no easy answers, and in the end it boils down to consumerism and our (Americans as a whole) very bad habit of maxing ourselves out for 'bigger & better'.  It's happened for far too long, and at this point there's no easy answer or exit strategy.


Fannie & Freddie, for better or worse, are the lifeblood of the marketplace and as it stands now, are very profitable companies (with or without all the extra junk fees they've piled on). 


I also agree that risk based pricing should be in place - but what is 'risk'?  20% down, 740 FICO shouldn't be burdened with additional charges, IMO.  An investment property isn't a high risk with a certain % down.  Just because someone has a 2nd lien doesn't make them a high risk, either - but with these adjustments, all of these scenarios will be charged a premium.  It strays from "risk based pricing" and becomes price gouging at some point, no?


Thank you for the great comment and food for thought.


Thanks again to everyone else, too - I really wish we could respond individually to comments - no time today to address them all but many are worthy of dialogue.

Jun 23, 2015 09:54 AM #67
Doyle Lee Austin Davison Iv
Surf City Realty 714-968-6767 - Huntington Beach, CA
28+ years serving Investors Banks Buyers-sellers

Big government is a huge player these days that's for sure, government has made it so companies are rewarded if they fail.  Our government has become so corrupt like so many other countries. No God - no morals and accountability. Just lie after lie....

Jun 23, 2015 12:40 PM #68
Stacey Brown
ILM Realty - Colchester, CT


Boy, it is really amazing to see how many "professionals" in our industry need an education on how the system really works.

Mortgage rates are totally market driven. Freddy and Fannie just package mortgages into securities which large institutional investors buy as bonds. It's the bond market that drives mortgage rates. The way bonds work is that as bonds drop in asset value, their interest rate goes up. So if investors are leaving the bond market, it’s because they have something better to do with their money. This in turn drives down the asset value of bonds (kinda how home prices drop if there are no buyers in the market and spikes when there are more buyers). Therefore, for lenders to be profitable, they need to sell bonds at the rate that investors are willing to buy, and that effects the interest rate they must charge on a loan. That market force is why the price of loans fluctuates throughout the day.

Here's a good place to start understanding the process: http://www.bankrate.com/finance/mortgages/how-lenders-set-rates.aspx

The government is not taking money out of our pockets here. Everything in this article is anecdotal and you all should research how prices are set on mortgages. It is totally risk and reward.

Now if you really want to be critical of government, watch their spending, not their taking. The spending is what is hurting us long term. Who is supposed to pay back $18 trillion? That's about $60,000 per person in the US, or $150,000 per household. That's the price of a house in some places! Remember this the next time you think to vote for a Democratic president...

Here's a good place to see the debt ceiling problem: http://www.usgovernmentdebt.us/spending_chart_1999_2019USr_16s2li111lcn_H0f

Jun 23, 2015 02:18 PM #69
John Meussner
Mason-McDuffie Mortgage, Conventional Loans, Jumbo Loans, FHA, 203(k), USDA, VA, - Walnut Creek, CA
#MortgageMadeEasy Walnut Creek, CA 484-680-4852

Well Stacey Brown before criticizing the "professionals" here, perhaps you should dive beyond the first chapter of mortgage101, and you'd see that mortgage rates are driven by many factors.  In a perfect world, and your economics textbook, your explanation is correct, but only on a macro level that's not entirely indicative of the current marketplace.  It completely ignores things on a micro scale (which, for the first time in a long time, perhaps ever, are driving factors), and completely (how, I'm not sure, your textbook must be dated pre-meltdown) ignores the fact that currently, Fannie & Freddie, for all intents and purposes ARE the government, and Fannie & Freddie have added fees, making loans more expensive over the past couple of years.  G fees, risk level pricing adjustments, etc.  Fannie & Freddie are bringing in billions of dollars, and those funds are not going to investors (like they would in the mortgage101 or economics 101 textbook), but are going direct to the US Treasury, even though bailout funds have been repaid.  That means the additional fees being charged to homeowners (that in turn, result in profits for Fannie & Freddie, so in turn, result in profits for the US Treasury) are at least partly contributing to a gigantic burden for homebuyers (Taxpayers).


If things were truly risk and reward, the 740 FICO, 20%+ down payment borrower would not be getting hit with a pricing penalty.  In reality, they are.  In reality, that penalty is about to get steeper even though the risk on that type of invesment product is perhaps lower than ever.  If things were risk & reward, a seasoned investment buyer with perfect credit putting 80% down payment into an investment property wouldn't be financing a higher rate than a first time home buyer with 5% down.


Much of this "risk based pricing" has nothing to do with risk.  But there is plenty of reward being had - at the US Treasury, and at the expense of homebuyers, aka taxpayers.


This article has absolutely nothing to do with how the market works in a supply & demand model, and everything to do with the "extras" tacked onto the cost of obtaining a mortgage by Fannie, Freddie, and in turn the US Treasury, that consumers are completely unaware of in most cases.  All of the other "professionals" that commented seemed to get that, and commented accordingly.

Jun 23, 2015 05:47 PM #70
Lise Howe
Keller Williams Capital Properties - Washington, DC
Assoc. Broker and Attorney Licensed in DC, MD, VA,

John - I had not read as many of your blogs as I should have- glad I am following you now. Plus I like your writing style. 

Jun 23, 2015 08:41 PM #71
Doug Rogers
Bayou Properties - Alexandria, LA
Your Alexandria Louisiana Agent

Why should the government have anything to do with the mortgage game? Let the lenders write (and stand behind) all these zero down, 3.5% down, etc... loans. If they earn a profit, great. If they go under, great.

 I wonder how much "help" all of this government involvement really is?

Jun 23, 2015 10:42 PM #72
Dora Griffin
D A Griffin Financial.LLC - Fort Thomas, KY
NMLS 6380

Wow, Stacey kind of covered all the bases. LOL including politics on that post! One subject that professionals know to not discuss. We professionals in the mortgage world fully understand where interest rate pricing comes from, and we understand the behind the scenes fannie/freddie activities.

Jun 24, 2015 03:10 AM #73
John Meussner
Mason-McDuffie Mortgage, Conventional Loans, Jumbo Loans, FHA, 203(k), USDA, VA, - Walnut Creek, CA
#MortgageMadeEasy Walnut Creek, CA 484-680-4852

@Lisa Howe - I appreciate that very kind comment, thank you for reading!


Doug Rogers unfortunately when it was mostly in the hands of private enterprise, we had the meltdown and some very abusive lending practices,  there has to be a happy middle ground somewhere.


Dora Griffin politics? check.  Leaving links in someone else's blog?  check.  Insulting the intelligence of the 70+ others who've commented?  check.  Yep, all the wrong bases got covered there!  Thanks for stopping by : )

Jun 24, 2015 03:31 AM #74
Nancy Laswick
United Real Estate - Phoenix, AZ
Your REALTOR® For The Valley Of The Sun

Great post John Meussner!  I've read your posts before but this one caused me to click the follow button.  Too bad a few people thought your post was about interest rates and their relationship to Mortgage Backed Securities. I don't have a degree in economics and I'm not a mortgage professional but I do know the difference between G Fees, LLPA's and MBS's.

Perhaps you can could do a few blog posts to educate us agents on some of the issues you're facing that we as a group should be addressing with our elected officials and the trade association that most of us belong to.  We will all benefit by keeping the American dream of home ownership alive and well and a good investment.

Certainly deserving of a Feature!

Jun 24, 2015 12:58 PM #75
Ted Osmundson
Century 21 Wright Temecula, CA

Good insight into the abyss of government policy John.  The lost equity of the last bubble crash is still reverberating through the housing market as many people pick themselves up and regroup.  It appears the break we were getting with  relatively low rates will begin its rise by price gouging with fees and a lending  philosophy with fairy tale examples for now.  

Jun 24, 2015 01:49 PM #76
Sharon Parisi
United Real Estate Dallas - Dallas, TX
Dallas Homes

John, as always, thank you for educating us on an extremely relevant topic!

Jun 24, 2015 04:19 PM #77
Sam Shueh
(408) 425-1601 - San Jose, CA
mba, cdpe, reopro, pe

Those who are used to 3-4% is a fluke in the dust..... The anemic economy will not get better than these rates.... Looking forward to a higher interest rates......


Jun 25, 2015 12:19 AM #78
John Meussner
Mason-McDuffie Mortgage, Conventional Loans, Jumbo Loans, FHA, 203(k), USDA, VA, - Walnut Creek, CA
#MortgageMadeEasy Walnut Creek, CA 484-680-4852

Nancy Laswick thank you so much for your kind comment, and for the great idea - it's a shame we don't have a strong lobbying body on the finance side, but I'd be happy to write about things NAR should be supporting us on to help the industry.


Ted - thank you for the comment....many people are still in recovery mode, hope the rise in prices continues for home owners sake, but slows down in some market so as not to price out new buyers.


Sharon - sure thing!  Thank you for reading : )


Sam - we'll see where rates head, I don't think they're in a rush to return to the 5's, but it's a very uncertain market.  Thanks for stopping by.

Jun 25, 2015 05:43 AM #79
Kathleen Daniels
KD Realty - 408.972.1822 - San Jose, CA
San Jose Homes for Sale-Probate & Trust Specialist

The same people who always get screwed John!  Those darn crooks!

Jun 26, 2015 10:40 AM #80
Ed & Tracy Oliva
West USA Realty - Arizona - Fountain Hills, AZ
The Oliva Team Arizona Agents

Good Morning and wow!! how true this is,   keep up the good work and good luck with your business,  E

Jun 27, 2015 06:42 PM #81
Gary L. Waters Broker Associate, Bucci Realty
Bucci Realty, Inc. - Melbourne, FL
Fifteen Years Experience in Brevard County

Like most things government related there is more it it than meets the eye.  Good explanation as well as dialogue on the post.  Thanks!

Jun 29, 2015 01:19 AM #82
Debbie Reynolds
Platinum Properties - Clarksville, TN
Your Dedicated Clarksville TN Real Estate Agent

Of course we know who is getting screwed. Thanks for being brave enough to say it like it is. 

Jun 30, 2015 11:04 PM #84
Jan Green
Value Added Service, 602-620-2699 - Scottsdale, AZ
HomeSmart Elite Group, REALTOR®, EcoBroker, GREEN

All I can say is I feel badly for my kids and grandkids.  The idea of homeownership is much more of a reach for one of my girls.  Thankfully she's switching careers and that will enable her to one day buy a house, but after she pays her student loans.  As for my grandkids, Wow!

Jul 07, 2015 03:39 AM #85
Winston Heverly
Winston Realty, Inc. - Atlantis, FL

Hi, what a great post, I'm glad I came across it during my search.

Aug 31, 2015 12:59 PM #86
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