Instead of responding to numerous emails I’m reducing my quick and dirty thoughts to this post… so please excuse the mortgage speak without detailed explanations and definitions…

Move created a mortgage ‘decision engine’ that effectively processes relative financial, credit and other risk based factors to generate mortgage rates, their costs, as well as subsequent pre-qualifications and approvals for consumers.  They simply tweaked a different loan qualification system and turned it into a mortgage specific version.   They’re a big technology company that employs smart people, so I’m sure they’re doing a good job with that.  Move then passes this neatly wrapped exclusive lead to Cornerstone Mortgage, the licensed mortgage banker who processes the rest of the required paperwork and closes the mortgage with the borrower.

I’m sure they’re are all sorts of reality TV worthy details to air, but I don’t know nor do I care about Move and Cornerstone’s internal business relationship or how their offering screws with a given real estate brokerages internal lenders (since Move is integrating this mortgage tool with listings provided from real estate brokers & their MLS’s).

Automated mortgage qualification/decision/approval engines have been around for over 10 years, initially only used internally by those in the mortgage industry.  This class of technology has increased in efficiency and ease of use to the point where a slightly tech savvy consumers can now effectively ‘qualify’ themselves for a mortgage.  As such, mortgage lead curators like Google (Comparison Ads), Zillow & Lending Tree as well as bankers like DiTech and Quicken Loans have used variations of what Move is providing for quite some time… all in the name of capturing the Internet mortgage consumer.

The main degree of differentiation in Move’s offer to the general consumer is the exclusive relationship with a single mortgage banker, Cornerstone, allowing the pairing to monitor and control the consumer experience much more efficiently.  I suppose their user interface is real nice and fresh too.  Otherwise you’re not likely to find anything new or novel about MortgageMatch.

Let me explain in terms that are easier to understand, in dollars and sense.

Below are the rates & costs for a given scenario (highest credit quality, provable income and assets, low risk loan & property factors) on Mortgage Match:

MortgageMarket Rate and Program Quote

Points to note:

• 309,000 Loan Amount
• 4.5% interest rate
• Fee for 0.750 point = $2317.50
• Lender Fees & Closing Costs = $6060.20

Next are two examples of what was available directly from the wholesale market using the exact same given scenario- High quality borrower and property qualification factors, in the same zip code for the same 30 year fixed interest rate within minutes of pulling MortgageMatch’s quote.  (I can’t tell you who’s providing the info so as not to compromise my sources, however, table B references what was available from Citibanks wholesale division earlier today… do not call Citibank and ask for their wholesale department, they don’t deal with consumers directly):

A. Large Mortgage Banker Direct Pricing

B. Direct Wholesale Rate Mortgage Pricing

Please draw your attention to the 4.500% interest rate in each table.

In table A. the price next to the rate is 100.706.  In table B. it is -0.721%.  Two different formats but similar results that state this 30 year fixed 4.5% interest rate will yield or pay .706% and .721% (respectively) of the loan amount to the borrower.

Let me make this even clearer.

The price in Table A  yields or pays $2181.54 to lock this 30 Yr-Fixed 4.5% interest rate.   Borrower must still pay 3rd party closing costs.

The price in Table B yields or pays the borrower $2227.89 to lock this 30 Yr-Fixed 4.5% interest rate.  Borrower must still pay 3rd party closing costs.

In MortgageMarkets offer, they are charging the borrower .750% of the loan amount or $2317.50 for their 30 Yr-Fixed 4.5% interest rate.  Borrower must still pay 3rd party closing costs and additional Lender Fees.

So, MortgageMatch is really making ~$4500.00 plus additional Lender Fees, not 2317.50 plus additional Lender Fees (and 3rd party closing costs).

That’s expensive.

For me, its always been about unfiltered access to wholesale mortgage rates, directly from the source, subject to no manipulation by any 3rd party… pure information of the highest integrity… radically transparent.  Good customer service is expected, I want to know exactly what rates I qualify for and at what cost.  I want to pay a fair, clear fee for value received from a mortgage professional.

Show me what I truly qualify for and set the fee to process my mortgage in simple dollars rather than ambiguous ‘points’ that have nothing to do with the interest rate.  If Joe Mortgage charges $2000 and John Mortgage charges $4000, John has to justify his larger fee with a tangible explanation and he’s gotta back it up with references.

This dynamic still does not exist in the marketplace and until it does all these ‘new’ offerings are doing nothing but increasing the velocity of the same old convoluted, untrusted mortgage model.

I really look forward to the day when the greater mortgage industry implements technology and practices that comply with true full disclosure policies rather than financial charades.  In the meantime, if you need a reference to a mortgage professional who discloses things as I’ve described, hit me up.

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Move Launches MortgageMatch- Same Cat, Similar Spin

We need to blame someone, so I ask the echo chamber: Who were the architects and engineers that created and enabled all of ‘this’? Before I answer, lets use the drug trade for my first analogy.

First loan is for free...

Who are the real criminals in the illicit drug trade? The users, the street level pushers, or the cartels who manufacture and make the drugs available aka The Enablers? One could make legitimate arguments that all are to fault for varying degrees. If users didn’t use, pushers couldn’t push and manufacturers would be out of business cause there is no demand for the product…yet that’s more tail wagging the dog. IMHO thou who enables is at the root of fault.

In theory, if the enablers didn’t produce the illicit product in the first place, there would be no pusher or user. The banks and other institutions who engineered the easy to acquire, downright addictive financial products framed an environment where unchecked growth dominated, deceit was rewarded and ethical business practitioners were punished.

Unchecked Growth is Bad, mmkay?

Follow me into more analogymnastics…What is uncontrolled growth called in the human body? Cancer. Without an internal system of checks and balances and proper detection techniques cancer manifests silently, usually until its too late when the organism has been consumed, ravaged to (near) death. You picking up what I’m putting down? Mortgage industry hell bent on growth until it consumed itself and imploded *pffft*

How is cancer treated? Traditionally with chemotherapy- an indiscriminate, very thoughtless killer of all things living. Wipe everything out and hopefully the body regenerates enough good cells to recuperate. This is effectively what’s happening to the mortgage industry- important aspects have been or are being primed for indiscriminate eradication. As nonsensical as mortgage qualification standards were just over a year ago, so are the proposed ‘fixes’ being introduced via legislation.

Self-medication is a bad idea, thus charging the same people who architected the demise of entire institutions with implementing a cure is a bad idea, mmmkay?  Medicine has evolved by studying and understanding what makes organisms tick on very (very) micro levels- further, how small thoughtful changes in the right places can cause substantial improvements. Business, industry as a whole, needs to adopt similar methodologies of implementing micro-evolutionary change rather than blow it all away, Bruce Willis-Die Hard style.

We will protect you, promise.

What is currently being proposed by law makers as solutions to the mortgage mess is incestuous at best. These changes are couched as ‘protective measures for the consumer’, which is a bunch of bullshit, seeing that the new Home Value Code of Conduct (HVCC) and H.R. 1728’s proposal to ban Yield Spread Premiums serve to do nothing of the sort. Instead they will (try to) eliminate the mortgage broker, compromise the real estate professional and ultimately harm the consumer…all for the banks gain.

Think that our policy makers in Washington wouldn’t let such things happen?  Think again…after all, they’ve invested heavily in these institutions that are ‘too big to fail’.

Next:  Review of the Home Value Code of Conduct (HVCC), H.R. 1728 and why they’re bullets designed to kill off the mortgage broker.

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Drug Cartels, Cancerous Growth and The F*cked Mortgage Industry

-

The Pitch:

Part A.  Talk about the nefarious ways mortgage professionals can, have and will dupe consumers.

Part B.  Enlighten consumers on how to avoid such practices and give advice on how to find and align with honest, ethical and transparent mortgage professionals.

The Reality:

Throw yourself under the bus and come across as a former deceptive con artist (decepticon?)…Shock and Awe, Bombs over Baghdad…

I was supposed to have ample time to cover these issues but instead got crammed into 3 minutes of self-vilification.

For example, question 1:  Whats the worst thing you’ve ever done?-  Ehhhh…

‘Talk about forging documents’-  Ummmm…

The Aftermath:

I received more than a few emails from mortgage professionals calling me names I haven’t heard since grammar school…including an uncomfortable call from my mom.

Nice.

Well it is TV, so the sensational story angle should’ve been expected.  It just felt like ‘Inside Edition’ more than ‘Help The Consumer’.

Anyone who knows me or has read this blog for even a modicum of time knows I am one the most outspoken advocates for industry reform to restore consumer confidence.  I’ve dedicated the last 18 months of my life to developing a product, service and ultimately a community of mortgage professionals who can restore said confidence to a shaken and disjointed industry.

I’m also of the mindset that (almost) any publicity is good publicity if it adds to your Brand.  Too many businesses and individuals fail to recognize how important Branding is, which is highly thoughtful and concentrated marketing.

Controversial, compelling and hard hitting has always been, and always will be, part of The XBroker Brand…Dirty ex-mortgage broker looking for forgiveness for past sins?..no so much.

The spot was extra ironic since two days prior I met Dan Green in Chicago, where over a fantabulous Greek dinner we discussed how important it was to rally the messaging back towards the positive in and around the mortgage industry.  Those who can differentiate themselves under this context will become this down markets shake-out winners.

There are myriad of outstanding mortgage professionals still in the industry and a ton of opportunity for those willing to adopt, adapt and integrate the ways of New Social Media (aka Web 2.0.) into their businesses.  Social media is a potent yet still evolving marketing strategy for the mortgage industry, its early in the game and many traditionalists don’t (can’t) understand it…Do not let that dissuade you!…Create, focus and grow your brand…reinvent, improve yourself and your business continuously.  Create the conversation and move the market.

Who else in and around the mortgage industry is executing a stellar New Media and branding startegy?

Dan Green and his Bring The Blog product and service.

Todd Carpenter, proprietor of Lenderama and pioneer of REBlogWorld

Daniel Martin of Mad Mortgage World

Do you know of any others?  Let me know!

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Mortgage Industry Shock and Awe

Continuing on down the road of how mortgage rates and their underlying price are determined considering common Risk Based Pricing (RBP) factors, our next stop is the Loan Amount and the directly related Loan to Value (LTV).

Loan Amounts, or the actual dollar amount being financed, have become more of a focal point when determining what program and rates a borrower qualifies for…and a moving target.

Recent changes in underwriting guidelines issued by Fannie Mae & Freddie Mac (Conforming) and FHA mortgages have increased minimum Loan Amount limits, in part to absorb the business left behind by the closing (or substantial downsizing) of major portfolio lenders.  Fannie, Freddie & FHA Loan Amount limits are now determined by individual Metropolitan Statistical Areas (MSA’s) median home values, with accepted limits up to 125% of said median value at a cap of $729,750.

If 125% of the average median home value for a given MSA is less than Loan Amount limits in place, the current limits shall remain in place.

For example:

• The Los Angeles California MSA median home price is ~$588,000.  $125% of $588,000 = $735,000…So the FHA and Freddie Mac Loan Amount limit cap of $729,750 takes effect, which is still well above prior conforming Loan Amount limits of $417,000 and FHA Loan Amount limits of $271,050.
• The Buffalo-Niagara Falls MSA has a median home price is $104,000.  125% of 104,000 = $130,000…So existing Conforming ($417k) and FHA ($217k) Loan Amount limits remain in effect for this area.  

The method behind the madness resides in the fact property values are substantially different depending on where that property is located.  $400,000 will buy you a really nice house in Erie County New York, while you’d be lucky to find a starter home for that price in L.A…so Loan Amount limits are set to accomodate these hyper-local conditions.

Under older guidelines people who today live in these ‘high value’ areas would’ve been precluded from getting a better interest rate or qualifying at all, due to the mass attrition of lenders in the mortgage market

In any case, if a borrower needs a mortgage with a Loan Amount that is above the Conforming or FHA limit for their specific MSA, there is a RBP for the worse.

On the contrary, there are also typically RBP’s for the worse for Loan Amounts below certain values.  For example, Loan Amounts from $0 – $99,999 will RBP for the worse.  Typically the lower the Loan Amount the worse the negative adjustment.

Loan to Value, or LTV, is the ratio by the loan amount divided by to the value of the property (or purchase price, whichever is less), i.e.:

Loan Amount(= $400,000)  Property Value(= $500,00)…$400,000/$500,000 = 80% Loan to Value (LTV)

LTV measures leverage.  According to definition the more you leverage an asset the riskier the transaction becomes, thus higher LTV %’s yield RBP adjustments for the worse.  How much worse typically also depends on credit score.  This was demonstrated in detail in my last post.

Click image to enlarge…

Tangible evidence of ‘the credit crunch’ may be found in the table above.  Negative pricing adjustments typically didn’t find their way into LTV’s below 80%, now they begin at = >60% LTV’s.  This change is likely due to lenders predicting a relative degree of depreciation throughout much of the country, although IMHO the 20% shift seems to be too aggressive.  20% declines in value aren’t likely anywhere, with the exception of areas that experienced ridiculous growth and/or appreciation, such as coastal California, Las Vegas, and southeastern Florida and a few other hyper-local markets where the economy is particularly bad.

Looking closer, the real pinch where LTV pricing adjustments for the worse occur when credit scores fall below 680, causing a RBP for the worse to the tune of .750%, which can cause an interest rate to rise as much as a full 1%.

There is no way to escape a RBP for the worse related to LTV unless one has a middle credit score equal to or above a 720.

While the days of free and/or easy money should have come to an end a long time ago, it seems that lenders may be overcorrected a bit.  Eliminating mortgage programs that allowed 100% financing with stated income or 580 credit scores, ’stated wage earner’ documentation types and other logically flawed underwriting guidelines was an easy call, but choking out what had been sound lending practices for decades may be doing more harm than good.

Sound borrowers are having trouble finding financing as banks have reversed their qualification methods from ‘find a way to do the deal’ to ‘find a reason to turn it down.

At the end of the day the result is that unless you have a substantial down payment (or equity), a very good credit score and a Loan Amount limit within established guidelines, mortgage rates are getting to be rather expensive.  The rates often advertised on TV and a plethora of online websites commonly reflect ‘best case’ qualification data, considering credit scores above 720, Loan Amounts within GSE guidelines and LTV’s at or below 80% (amongst other factors).  If your real estate financing qualification criteria fall below (or above) any one of these threasholds, the interest rates you see advertised  aren’t the interest rates you’re likely to qualify for.

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Risk Based Pricing How Mortgage Rates are Determined Loan Amount and Loan to Value

The following material isn’t all that easy to follow, there are many moving parts.  It’s the equivalent of college level mortgage economics, I’ll try to be a succinct as possible.

First, IT IS VITAL that you understand exactly what your credit scores are and why, as they are the single most influential driver behind the risk based pricing of mortgage rates.   Further, many people are unaware that they can improve their scores enough to yield better risk pricing and lower rates in a relatively short amount of time by employing sound strategies with the help of qualified mortgage professionals and some 3rd party services.  A one (1) point difference in credit score can have large financial repercussions when qualifying for a mortgage.  Accessing, understanding and pro-actively addressing whats on your credit bureau before you apply for a mortgage is absolutely imperative.

Credit scoring is a complex algorithm that considers many different factors, all weighted differently.  Since these factors typically change every month the overall score does too.  Some factors include:

• Number of total (open and closed) accounts…aka ‘trade lines’
• Type of account
  Revolving (typically credit cards), Installment (automobile loans, student loans, and/or bank loans) and Mortgage.
• High-credit limits vs. current balances
  Example:  Credit card has a $10,000 limit and a $3000 balance owed.
• Length of time accounts are open
• Payment history

Utility bills, cell phone etc don’t count towards credit scores unless you don’t pay them (ever), then they may appear as a judgment on your bureau, which will lower a credit score substantially.

The mortgage industry uses a very succinct and comprehensive credit bureau which is far different than the ‘get your free credit bureau’ and other like offers.  Most consumers don’t know that there are different credit report types.  MyFICO provides a ‘mortgage quality’ Tri-Merge (an aggregate of all three, Experian, Equifax and Trans-Union) credit reports as well as ancillary services that can assist you in improving and maintaining your credit files.  Mortgage professionals have access to similar tools and service.

Despite common perception, credit scores alone are not the single driving factor for proper mortgage qualification, the depth of a score is just as important.  Credit depth means having accounts open for extended periods of time (2+ years),  ‘high balance limits’ on accounts that exceed ~$5000, automobile or other installment loans as well as previous and current mortgage loans…

For the purpose of this post, we’ll assume that the scores and scenarios used below have enough depth behind them to qualify for a mortgage.

Below is chart pulled from a conforming lenders rate sheet demonstrating Risk Based Pricing (RBP) adjustments for credit scores with their Loan to Value (LTV) corollaries:

-Credit Score and LTV Risk Pased Pricing Chart

First thing you should note is the relative increases in price when comparing credit score to LTV.  As LTV’s rise, price (and rate) become more expensive.  Lower credit scores in relation to LTV cause further RBP’s for the worse.  (Click the image to enlarge)

Notice that credit scores above 720 cause no RBP adjustment for the worse, this shows unequivocally how important good credit is for obtaining the best price (and rate) possible.  Few other notes:

• LTV’s <60% have either no adjustment to price (or price for the better if the credit score is above 700), reason being that high equity properties are considered far less risky due to the blunt point that if the bank had to foreclose on the property they would likely get their money back and then some.
• LTV’s from 60.01% to 70% begin to trigger RBP adjustments for the worse, to the tune of 0.500(%) – 0.750(%) (higher cost and rate) depending on credit score.
• LTV’s >70.01% further a RBP adjustment for the worse, ranging from 0% to 2.75% depending on credit score.
• 1 point, the difference between a 679 and a 680, can effect the price of an interest rate up to .750%

This a real life example of the ‘Credit Crunch’; RBP adjustments for LTV’s and correlating credit scores are far more ‘expensive’ than they used to be.  Today a borrower needs higher credit scores and lower LTV’s to acquire favorable rates and prices compared to what was available less than a year ago.

How do RBP adjustments actually effect interest rates?

<–What you see here is a daily pricing chart for a Conforming 30 Yr Fixed program.

Any price below 100.00 costs money to obtain, any price above 100.00 pays money (YSP) to obtain.

If there are no RBP adjustments, a 6.125% rate (25 day lock period) is the best available that doesn’t cost money to obtain, it actually pays 100.139 or 0.139% of the loan amount (YSP).   If the loan amount is $300,000 then a 6.125% rate would pay $417.00 in YSP to the borrower ($300,000 x .139% = $417.00).

At 6.500% with no RBP adjustments and a $300,000 loan amount, the YSP rebate to the borrower would be $5004.00 ($300,000 x 1.668% = $5004.00)

25 days and 60 days are the ‘lock periods’.  Once you lock a loan you have either 25 or 60 days to close it (with this lender), depending on which price you choose. When a loan is locked the bank ‘holds’ that money to fund the loan (which costs them money along the lines of the Federal Reserve Overnight Rate), the shorter the lock period the better the price.

To demonstrate how credit score RBP can effect a rate and cost, lets compare a borrower who has a 660 credit score and needs 90% LTV financing to a borrower that has a 720 score (same 90% LTV) under the ‘25 days’ lock period.

Looking at the credit score and LTV chart above, a 660 score at 90% LTV yields a RBP for the worse in the amount of 1.250(%).

Now look at the 30 Yr Fixed chart:  If a 660 credit score borrower wanted the 6.125% rate you must subtract 1.250 from the price next to the rate, or 100.139 – 1.250 = 98.889.  The difference between 100.00 and 98.889 is 1.111(%).  If the loan amount is $300,000 and the cost is 1.111(%), it would cost $3333.00 ($300,000 x 1.11%) to obtain the 6.125% rate for the 660 borrower at 90% LTV.

In the alternative, a 720 score at 90% LTV has no RBP adjustment and therefore could acquire the 6.125% rate for the 0.139% price, rebating $417.00 in YSP to the borrower.

So, to acquire the 6.125% rate, a 660 credit score borrower needing a 90% LTV mortgage will have to pay $3750.00 more than a borrower with a 720 credit score.  Assuming all other RBP factors are equal.

Lets say the 660 credit score borrower wanted a rate that didn’t cost money to acquire.  To do so you must find the price and corresponding rate that meets or exceeds 101.250 to account for the 1.250(%) RBP adjustment.  In this example, 6.500% has a price of 101.668.  Adjusting for the RBP of 1.250 yields a net price of 100.418 (101.668 – 1.250 = 100.418) or 0.418%.  At a $300,000 loan amount, a 6.500% rate after the RBP adjustment would rebate $1254.00 ($300,000 x .418% = $1254.00) to the borrower in YSP.

All this may seem pretty complex until you begin to figure in other RBP factors like Loan Type and Property Use, not to mention the ambiguous rules of credit depth property location…then the fun (and mistakes) really start to fly.  It’s no wonder many consumers are either honestly misquoted, bait and switched (or worse) with great frequency.  There are almost more moving parts than can be counted. Fortunately there are competent mortgage professionals (and slick technologies) that can quickly disseminate through all this information, calculating mortgage rates and their respective prices accurately and transparently for the borrower.

If I lost anyone here feel free to hit my email or comment thread…chances are if one person has a question many more have the same question.  If you made it all the way through this post and have a greater understanding for how mortgage rates are determined, give yourself a well deserved pat on the back…it’s not easy material to follow.

Next up:  Loan Amounts and Loan to Value. 

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Risk Based Pricing How Mortgage Rates are Determined. Credit Scores and History

In the world of residential mortgage Risk Based Pricing (RBP), Property Location and Property Use are two factors that have nothing to do with the actual borrower, whereas the same borrower would receive two different sets of program and interest rate quotes depending on where the subject property is located and what the property is used for.

Property Location has become much more prominent in RBP scenarios with the recent uptick in popularity of FHA mortgages.  Loan limits for FHA loans have become very localized, right down to the County level.  It’s possible that one County may have a loan limit of ~$417k with an adjacent County at ~$700k+, via FHA.  Loan amounts above local limits will cause a pricing for the worse, so location in relation to loan amount can be a substantial factor as to what interest rate any given borrower qualifies for.

Even without considering FHA loan limit guidelines, there are state level and regional rate and pricing guidelines…you wont get the same programs, rates and pricing in Kanosh, UT and Manhattan.  Property in locations deemed high risk (depreciating, bubble/volatile prone, high foreclosure, poor economy) are likely to see a pricing for the worse (higher interest rate) compared to ‘more stable’ locations.   There are even locations like the inner city of Cleveland, Ohio where many banks won’t lend, period, due to the depth of mortgage fraud that ripped through the city during the refi-boom.

Property based RBP changes can range from 0% to 2% (or pts) which may have a corollary  effect of increasing the interest rate 1+%.

Property Use is broken down into three subsets:

• Primary Residence
• Second Home
• Non-Owner Occupied or Investment

A Primary Residence is a property you plan to personally live in.  The bank thinks you’re likely to highly value and treat the house you live in with love and respect so properties that are used for primary residences have no RBP adjustment for the worse.

RBP adjustments for Second Homes are getting pretty lender specific, depending on secondary factors like credit score and Loan to Value (LTV).  Second Homes with LTV’s <80% generally have no RBP adjustment while an LTV >80% will require higher credit scores and RBP for the worse.    In order for a property to qualify as a Second Home, you can’t (claim to) make money by renting it out (this would make it an investment property), and you must represent that you stay at the property a certain amount of time each year.

Non-Owner Occupied or Investment Property will have a substantial RBP adjustment for the worse, typically between 1.5%-2.5% which may correlate to 1%+ increase in interest rate, compared to a primary residence or second home, regardless of  any secondary factors.  Secondary factors like loan amount and LTV play a heavy role in how big the adjustment is.

Where there is up to 2.5% (or points) on the table there are likely to be people trying to game the system.  Misrepresenting property use is a very common type of mortgage fraud since it’s heavily based on the honor system.  Yes, stating that a property you are buying will be your primary residence when you really intend to rent it out is mortgage fraud.  There are certain measures the bank and broker (should) go through to make sure the stated property use is in fact true.

Next up is Credit Scores and History…

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Risk Based Pricing. How Mortgage Rates are Determined Property Type and Property Use

Risk Based Pricing is quite simply, a pretty complex topic…so over a series of posts (I was going to throw up one long post but could hear heads hitting keyboards after trying to read the first 5 pages) I’m going to break down how each of these general factors and subsets effect program, interest rate and pricing for potential borrowers.

The opening cited** content below is paraphrased from Wikipedia.  The driving reason for using this source is that I personally submitted much of the relative content to the online encyclopedia over a period of time.

Risk-based pricing is a methodology adopted by most lenders in the mortgage industry to mitigate the perceived risk of lending money to a given set of financial, credit and property factors.

Lenders effectively ‘price’ loans according to these individual factors and their multiple derivatives. Each derivative either positively or negatively affects the price/cost of an interest rate. For example, lower credit scores will yield higher interest rates (higher price) and vice-versa, a non-owner occupied (or investment) property will yield a higher price than a primary residence; providing less verifiable income documentation (due to self-employment or otherwise) will qualify for worse pricing (higher interest rate) than someone who fully documents all income appropriately.

RBP gets even more complex when you consider that one factor may depend on another factor to determine how price may or may not be adjusted.  For example, ’stated’ or reduced income documentation will typically cause a pricing for the worse (higher rate), but if the credit score is high enough some lenders will offset the pricing hit with a correlating improvement in price.

A criticism amongst consumers and other groups has been that RBP can make ’shopping’ for the best interest rates very difficult and opens the door to potentially deceptive practices due to the relatively low education material available to exactly how RBP works.  Further, program guidelines change often and the base price/cost of interest rates change daily (up to three times in some cases), so what may be available today may not be available tomorrow.  It is almost impossible to tell at first glance if one is qualified to get an advertised rate or exactly what interest rate they qualify for at all.  Risk-based pricing can be manipulated to wield deceptive marketing practices, such as the bait and switch.

Consumer-rights advocates also believe that risk-based pricing in the extreme hurts financially disadvantaged and vulnerable consumers by cutting them off from reasonably affordable capital and exposing them unwittingly to soaring interest rates and unsustainable financing schemes that erode equity and may lead to default.  The fairness of these lending practices, more specifically the proper disclosure of such within the mortgage industry is being investigated by Congress.**

The primary risk based factors (and their subsets) considered by lenders that dictate what mortgage programs and interest rates a given borrower qualifies for include:

• Loan Type
• Property Type
• Property Use
• Property Location
• Credit Score and History
• Debt to Income Ratio (Gross Income vs Monthly debt obligations disclosed by the three main credit bureaus.)
• Loan Amount
• Appraised Value/Purchase Price
• Loan to Value/Purchase Price
• Documentation Type

In this post, I’ll cover common Loan Type/Purpose and Property Type factors.

Loan Type/Purpose

Subsets:

• Purchase
• Rate/Term Refinance
• Cash-Out Refinance

Purchase loans are deemed to contain the least amount of risk and thus ‘price’ purchase loans most favorably, yielding lower interest rates.

Rate/term refinances are priced similar, usually identical to purchase loans, with no price increase. The purpose of a rate/term refinance, as the name implies, is to reduce the interest rate, payment, and/or overall term of the mortgage.  To qualify as a rate/term refinance the cash received by the borrower at closing may typically not exceed $2000.

Cash-out refinances are deemed to have a higher risk factor than either rate/term refinances or purchases due to the resulting increase in loan amount relative to the value of the property, thus risk-based pricing typically mandates a pricing increase (higher interest rate) for this loan purpose.

Property Type

Subsets

• Single Family Residence
• Condo/Townhome
• 2-Unit (Duplex)
• 3-4 Unit
• Modular

Single Family Residence (SFR) is considered the lowest risk of property types, so no increase in risk pricing (and rate) is implemented.
Condo/Townhomes are often risk priced the same as a SFR especially if the Property Use is a Primary residence.  Price exceptions for the worse are common if the property is above 4 floors tall, reasons include disparity in construction quality, as many ‘hi-rise’ properties were converted from hotels or other mixed-use purposes.  This is a very lender specific risk-price adjustment and can vary widely.

2-Unit properties or a Duplex will typically risk price for the worse, resulting in a higher interest rate.

3-4 Unit properties typically risk-price slightly worse than a 2-Unit duplex.

Modular built properties have evolved substantially in overall quality over the past 5 years to the point they rival and can even exceed the quality of a stick built SFR. For this reason most modular homes have no risk price increase.  Modular homes are pre-manufactured off site, usually in a large warehouse and delivered in pieces to the home-site where construction is completed.  Recently built modular homes are almost impossible to identify vs traditional ‘stick-built’ construction.

The term ‘manufactured home’ is often mistakenly interchanged with ‘modular’ homes.  Manufactured homes typically encompass the definition of a mobile home, which are risk-priced substantially worse than any other property type and/or do not qualify for conventional financing.  Talk with a licensed mortgage professional to determine how a specific ‘pre-manufactured’ or other property type is risk-priced.

Next I’ll cover Property Use and Property Location…

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Risk Based Pricing. How Mortgage Rates are Determined

I was pulling strings, cashing in favors, bending over backwards. But what they didn’t see was me driving to the office every day in a car worth more than some of their houses. What they didn’t know was the truth about how much my services were costing them at the time, or what they continue to cost them to this day.

We made sure my clients were comfortable in thinking they’d gotten the best deal possible. We all want to believe that, and all it takes is someone to feed the illusion. They assumed I had their interests at heart, but the fact was I worked for me. All brokers do.

Maybe you think you’re pretty sharp, that you know when you’re getting taken. Well, think again. I don’t care if you’ve got a finance degree from Harvard and a 180 IQ, you’re no match for an individual trained in the art of what you don‘t know, and you have NO IDEA.

I’ve trained more than one cerebrally-challenged college drop-out saddled with student loans and a bar tab, and within a week he’s taking $10,000 scalps off people smarter than you or me. ‘He’ is employed at every real estate and mortgage brokerage in the industry. If that doesn’t scare you, I don’t know what will!

OK, The Messaging above officially stops here…

I’m a firm believer that if your message isn’t different, it’s dead. Now, if I was actually ‘doing’ business in line with the ‘Attention Marketing’ piece above, I would be castrated and have the results shoved down my throat.

The methodical marketing madness read above caters to the public perception of the industries I serve. You can’t tell me that after reading the above piece, it didn’t make you slightly mad or illicit some emotion… It may have validated alot of your preconceived beliefs about mortgage brokers, whether really correct or not.

Putting out that type of message resonates with consumers, not because of the words on the page but rather the experiences they have likely had or heard about. The piece above caused ‘click through’ and conversions at a substantially higher rate than:

Low Rates, Great Service, Fast Closings, Low Fess, 200 years combined experience, “I Really Care About You, Mr and Mrs Borrower”, approved with 50,000 lenders, “Were a Direct Lender!”

Not to mention the deceptive stuff.

Now, there is a very distinct onus I am placing on myself by marketing the message above. We must be at the ethically progressive forefront of mortgage industry business practices. To not be, would be suicidal.

Trust me, I get the 3rd and 4th degree regarding my ‘actual’ business practices, everyone wants to punch a hole in them….which is wonderful for business!

Part of our business approach is to comprehensively demonstrate how they will be working with the antithesis of The Rock Star so eloquently described above. We start by educating our clients on:

1) How this industry works.

2) The most practical options for their individual circumstances.

We give our clients a gun, bullets, and a license to kill, if we stray from our contracted promises.

They are empowered, not just mortgaged.

Our relationship is based on straight up communication and blunt honesty (or Transparency), the lack of, are the two problems consumers frequently cite when defining ‘Below Average Service’.

In reality we’re not doing anything revolutionary, assisting consumers to find sound mortgage services at a fair cost…it’s our marketing thats ‘remarkable’. Not that our service lags, but you just cant market service alone, it sounds like white noise.

Industry peers have said our marketing strategies ‘harm’ or ‘defame’ others in the industry.

If that’s the case, then I’m killing myself too, right? Any forthcoming broker can benefit from identifying the good from the bad and ugly and identifying up-front where they stand. So I disagree

How many eyeballs are looking at you longer than the next guy or gal? If they see you, what are they looking at? Are you desirable or interesting at the point of first impression?

Or do you standout about as much as the invisible man?

Identify and research a niche. Market specifically to them and their needs, be different, ‘talk’ to them, surprise them, treat them with respect…and you’ll get as much ‘Attention’ as you can handle. And if your peers start talking about you, then you know you’ve got alot of eyeballs….

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Crooked Mortgage Broker Tells All