Chief Economist Cameron Findlay on why borrowers should negotiate in a low-rate environment
June 30, 2010
The graph below shows the spread between rates paid by borrowers on a typical 30-year mortgage and a proxy for the coupon into which those loans will be delivered and ultimately securitized by one of the agencies shown as the FNMA [Fannie Mae] Current Coupon. That spread today has widened out to 0.94%. On a $200,000 loan the spread is costing borrowers $109 per month in additional mortgage payments, it’s been slowly getting larger as more volume hits a smaller population of lenders.
As the industry has consolidated and funding has become harder to find, costs to consumers relative to the rate being earned by investors has increased. It is traditionally a spread designed to cover the cost of the Agency guarantee (10-25bps) and associated servicing of the loan (25bps). With rates declining as rapidly as they have over the past month and refinance / purchase applications continuing to be strong, lenders are faced with crowded pipelines. This results in higher front-end costs to borrowers, despite being lower in aggregate mortgage rates. These rates remain higher than they traditionally have been relative to the coupon into which they will be delivered.
LendingTree to the Rescue!
This is not aimed at a being a marketing piece, I’m a Capital Markets guy but LendingTree honestly holds the best proven method to reduce this spread. The concept behind a competitive rate offered on the LendingTree.com <http://www.lendingtree.com/> web site is to weed out those charging more than the competition and to ensure quality and timely service.
The graph shows that today Mortgage Originators / Lenders have a lot of room to negotiate on price (in the form of rate) given what the agencies (FNMA/FHLMC/GNMA) will pay. The difference would be approximately 0.94%. If you are considering a refinance or purchase transaction this is clearly proof in black and white of why competition provided by LendingTree is important, even in a low rate environment. You may be getting a low rate, but is it really the most competitive rate – the results indicate a lot of people are paying more than they should be.
In March 2009 we experienced the largest one day move in Treasuries since 1962 during the course of the next few months this volatility created larger than normal profits for mortgage originators, notice on the graph that this is when spreads ballooned out to 1.66%. This drop in rates sparked a huge refinance wave. It is at times like the March ’09 period and again now that LendingTree provide a valuable service of making it competitive between lenders. The variance between lenders when spreads are this wide is more than 0.76% in APR, so despite low rates are you really getting the most competitive rate and a processing / underwriting service you deserve to ensure your loan closes on time.
Definitions:
The “coupon” is simply interest on the debt, so 5.00% coupon and a $100 face value will pay $5 per year (usually in monthly installments like your mortgage payment).
Bps = Basis Points // 25bps = 0.25%
