Mortgage Rate & Loan Process Updates

Lending is in an evolutionary phase as I type this; the way in which loans are done is evolving into a process of approval first, rate lock last, which is the opposite of how it used to be.

In the past, we locked rates, even if we were not sure the loan could even be done, and then just tried to make the loan happen before the lock cut-off. In the past, loans took 24 to 72 hours to Underwrite (that is, to have the lender’s approval department, called underwriting, review the file in detail and either approve the file as submitted, or approve the file but with further documentation required, or deny the file as submitted).

In the past, standards were looser, underwriters were plentiful, and approvals took hours. A whole loan process could be done in 15 days–faster still in some cases. It was easy to lock, doc, and close a loan.

Today, it’s hard to recognize the lending industry anymore. The emphasis on credit quality is simply intense (it seems the pendulum has swung to the other extreme, from the days when credit was too easy), documentation requirements are rigorous and often excessive as lenders work to combat loan fraud, and underwriting staff are a fraction of what they used to be. Loans now take as many as four weeks to underwrite, and many lenders are still working on files they received over one month ago.

Now it is common for underwriting to request twice the documentation as in the past, and take four times as long to approve a loan.

Now, most every lender with below-market rates requires the whole loan package be submitted and approved BEFORE a rate can be locked. In this case, it is not uncommon to have mortgage rates change while the loan is in underwriting, waiting for the needed approval to lock a rate. Further, many banks no longer offer rate locks for more than 15 days, so the loan must be pretty close to done by the time the loan is locked to ensure the loan closes before the lock expires 15 days after it is locked.

The reason for this is cost: when a bank locks a rate for a borrower, the money for the loan is set aside and the interest rate attached to the money is locked in. Banks don’t gamble with their rate of return–when a loan rate is locked in, the bank goes out and purchases a form of insurance to protect their investment from depreciation. This is called hedging and is the bank’s efforts to make sure that when the loan is ready, the bank has the money to lend and at the rate that money was locked. If rates change while the loan is incomplete, the bank’s insurance protects the bank against loss.
Insurance costs money, and when locked loans don’t actually become closed loans, the bank loses the money paid for the insurance.

Lately, it’s been much more difficult to approve mortgages, and consequently MANY of the loans that are locked never become closed loans. To combat the losses, most lenders with below market rates now require a full approval before they allow the rate to be locked, thus reducing the bank’s losses from purchasing insurance on loans that will never close.

These changes were implemented almost at once by nearly every lender as they reacted to the avalanche of refinance requests, and in most cases, no apologies are offered to those whose loans were set back by weeks as these lenders repositioned themselves and rewrote the rules of the loan submission process.

So, what can we do?
We have changed the way we do business, and we now require a full package from our borrowers before we offer to lock rates. We now require all documentation for income and assets, as well as an appraisal, as early in the process as possible. The appraisal is the biggest concern of course, as it must be paid for even if the loan doesn’t close.
Alternatively, we can lock in a rate at market (instead of below market) rates, before obtaining any of the above-mentioned documentation, and before doing an appraisal. Expect the rate to be higher than that which is available form below-market wholesale mortgage investors (where we normally shop). For example, today (9 Feb, 2009) I can get wholesale money at 4.875% 30 fixed, while retail is about 5.375% today.

On Friday, February 6th, 2009 I was in my local branch of Bank of America, and in the lobby they Mortgage Center displayed a 30 Yr Fixed rate of 5.75% with 1.3% Points for their No Fee Mortgage. This is what a retail rate looks like.
On the same day (I’ll provide the sheets to prove it) I was offering 4.875% with the same, or nearly the same costs. This is what a wholesale rate looks like.

Wholesale money is harder to get now, but normally carries a much lower rate than retail money, to be sure. The requirements are now tighter, and the workload on us is greater than ever to get these wholesale mortgage rates.
We will continue to operate in this manner until the mortgage market becomes stabilized and allows forward locks on below-market money once again. I can still get rates in the 4% range, as of this writing (9 Feb, 2009), but the cost for these rates is up from the beginning of January. Expect to pay 1 to 2 points for a rate in the 4% range.

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