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LoansbyJW
Posts: 3,207
Registered: ‎04-30-2009

Why are mortgage rates rising?

The short answer: to "pay" for the extension of the Payroll Tax reduction. When the deal was struck, one of the components was to increase some of the fees Agency loans are required to charge. You can pay the higher fee - running on average .50 in fee - but most borrowers will sooner accept the higher rate - running on average .125% - to cover the fee.  Excerpted from Rob Chrisman's daily email to subscribers:

 

(it's free !!! and strongly suggested for any mortgage professional. Available by signing up at RobChrisman.com )

 

"USA Direct Funding told brokers, "There will be a gradual effect to these changes that will start taking place effective immediately and apply only to conforming fixed programs, including high balance. They do not apply to conforming ARM's, jumbo, or government programs. Effective immediately, 58 day locks will be priced .625 worse than 43 day locks. Effective on Wednesday, January 18th, 43 day locks will be priced .625 worse than 28 day locks....

 
Franklin American Mortgage will "implement increases to rate lock extension fees for all conforming and high balance conventional loans that fall under the specific extension timeless. ......All loans that meet the criteria described immediately above will incur a -0.500 pricing adjustment in addition to the standard extension fee."
 
Home Savings of America spread the word that, "An additional .50pt cost will be added to locks as follows: 30 day and 45 day locks: effective on Tuesday, January 17, 2012,...... Extensions on existing locks expiring January 31 or later will be charged the standard extension fee plus .50 pt. ...."
 
Wells Fargo's wholesale told brokers, "In order for a loan to meet the April settlements, it must fund by Feb. 29, 2012. The G-fee increase will worsen prices by up to 80 bps depending on note rate. Wells Fargo Wholesale Lending is staggering the impacts of that increase by Rate Lock Period in an effort to offer lower rates to consumers in the market for as long as possible....

 
A Citi wholesale AE told brokers that the increased g-fee has already impacted the 60-day and 45-day pricing by being built into the rate sheet. "The g-fee will be implemented on 30 day pricing on January 26, 2012 and will be implemented on 15 day pricing on February 10, 2012.  These dates are important as you will see a pricing deterioration of approximately .50% (50 basis points) 

 
A MSI AE told brokers, "Effective Friday, January 13th our pricing will have the cost of the Temporary Payroll Tax Cut Continuation Act built into it.  Extensions done for loans locked prior to January 13 that will have a new expiration date of February 14th and/or after will be subject to a 50 bps price adjustment in addition to the regular extension cost of .020 per day. There will not be any exceptions to this policy as our investors are all implementing similar practices."
 
Pinnacle Capital told brokers, "Any Conforming loan product locked before January 11 that requires an extension or relock beyond February 17 will have a fee of 40 basis points applied in addition to the current extension/relock fee noted in the PCM Pricing Policies and Procedures document."
 
GMAC correspondents learned that, "Any FNMA or FHLMC product loan commitments locked before January 9 that require an extension beyond February 21 to fund will have a fee of 40 basis points applied in addition to the current extension fee as noted on the daily rate sheet. 

 
At Bay Equity in San Francisco, "This fee is applicable to all Conforming Agency and Orange Label Product 25 and 40 day locks which occurred on or before Friday, January 13th:   All lock extensions or relocks that result in a February expiration date will be subject to an additional charge of 0.50 points on top of the standard extension fees. 

 
Mountain West Financial told brokers, "Effective immediately, any lock period equal to 45 days or 60 days will be worse by a .50 in price, effective on or after January 16 any lock period equal to 30 days will be worse by a .50 in price, effective on or after January 30 any lock period equal to 15 days will be worse by a .50 in price....."
 
A PennyMac AE told clients that, "On Tuesday, January 17th, the rates on the 19 day lock will increase.  If you have any loans that you KNOW will close by 2/10, I would recommend locking today.  This new Guaranty Fee is resulting in an increase in the fee associated with each rate and the re-lock and extension fees will also be negatively impacted....

 
Plaza Home Mortgage noted, "Effective Wednesday, January 11 with all new locks, Plaza will increase 45 and 60 day lock fees on all Agency loans by .50 to offset the additional cost associated with Fannie and Freddie's increased g-fees.  "

 

Note that the fee increase does not apply to Government insured loans. Why? Because the Mortgage Insurance Premiums (MIP) are going to increase, but not until April (as things stand today...)

 

When shopping around for a new loan, you might have gotten a nice quote last week, but are now seeing .125% to .25% increases in rate. Blame it on the Payroll Tax extension, not your mortgage loan officer.

 

Thanks for reading,

 

 

John Wheaton NMLS 653018 | Redfin Open Book Recommended Lender
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WinaltHome2011
Posts: 107
Registered: ‎12-27-2011
0

Re: Why are mortgage rates rising?

Thanks for sharing this sir. I personally liked what you have shared in here. But, I had read about in other contents that this year, they expect more lower mortgage rates at all. Why is there such contradiction? Or is it just me?

Only if you are committed to your work will you definitely succeed.
Self-Discipline will also be the standing point.
Regular Contributor
BrianT
Posts: 50
Registered: ‎11-21-2008
0

Re: Why are mortgage rates rising?

The "dreaded" G-Fee increase

Here is some additional detail excerpted from Mortgage Market Guide

 

Fee Increase to Impact Home Loans

January 19, 2012

By Mortgage Market Guide

In December 2011, Congress reached a last-minute deal to fund the payroll tax cut extension. The payroll tax cut provides a 2% tax reduction for individuals earning up to $106,800, so the tax extension will be very helpful for many Americans who are struggling during these tough economic times. But like so many things in our tangled economy, there's a flip side. In this case, the tax cut deal has a rippling effect that will impact the mortgage world via an increase in "g-fee's."

Here's what's happening and what it means to home loan rates:

First, what exactly is the "g-fee"?

The guarantee fee or "g-fee" is an amount charged by mortgage-backed securities (MBS) providers, like Freddie Mac and Fannie Mae, to help protect against credit-related losses in the overall mortgage portfolio. In other words, it acts a lot like insurance and helps lower the overall risk...which means that home loans can be offered at terrific interest rates to borrowers that have good - but not perfect - credit.

What is happening and why? To put it bluntly, the passage of the payroll tax cut extension is being funded via a mandate to Fannie Mae and Freddie Mac to increase their guarantee fees or "g-fee's" by at least 10 basis points on the rate. So rather than giving a par rate of 4.00%, for example, the par rate is now increased by at least 10 basis points, or approximately 4.10%. But since home loan rates are priced and offered in .125% increments, this will most likely impact the consumer by .125% in rate. The political logic behind passing on the cost of the payroll tax cut extension in this way is sketchy at best, and the Congressional Budget Office recently estimated that the increase will ultimately pay for about $35.7 Billion of the cost of the payroll tax extension - on the backs of homebuyers and refinancers.

Why is there confusion about the 10bps? Two reasons: First, the wording states that g-fees must be increased by at least 10 basis points...which means that's the minimum, not the maximum...so it's not impossible that g-fees could be increased by more than 10 basis points. Second, the way they described the 10bp increase is somewhat confusing, as both rates and points are described in basis points. The 10bp hit is to the rate side, not the point side...so let's break it down simply and think about it.

A good rule of thumb used to be (and sometimes still is) that in order to buy down a par rate by .125% in rate, it would generally cost about 50 basis points in points (or $500 on a $100,000 loan). So it stands to reason that buying down the rate by .10% might cost 40 basis points...so the 10bp g-fee hit translates into about 40 bps that we'd see on our rate sheet. But as we all know far too well...the amount required to cover .10% in rate will most certainly vary by the investor, the day or the hour, and let's face it...perhaps by which way the wind is blowing. That makes the hit a little unpredictable at best, which leads some people to worry about wild variations or worst-case scenarios.

What exactly is the impact of the rate increase? For example, for a $200,000 home loan, the increased g-fee (assuming an approximate rate hit of .125% in rate) would equate to $250 more per year in interest, or $7,500 more over 30 years. Someone buying or refinancing a home can certainly choose to buy down the cost with cash up front - but most folks will not do this.

Who will this impact? The change will impact all new borrowers of Fannie Mae and Freddie Mac loans. The bill will also impact Federal Housing Administration (FHA) loans by increasing the annual mortgage insurance premium that borrowers pay by one-tenth of a percent.

When will it start? Officially, the increase to guarantee fees will begin on April 1, 2012. However, the increase is already starting to be seen in rate sheets right now, since home loans being originated now will likely not be closed, pooled and securitized until April... and therefore will need the increased g-fee priced in earlier.

How long will this be in effect? The increase will be effective through October 1, 2021.

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jbunniii
Posts: 12
Registered: ‎03-06-2010
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Re: Why are mortgage rates rising?

I got pre-approved on Tuesday at a rate of 3.875%, but I couldn't lock as I haven't chosen a house yet. I see that today the rate is already up to 4%.  I think the payroll tax extension was only for 2 months, right? Are rates likely to come back down after it expires? I'd hate to lock into a rate whereby I would effectively spend the next 30 years paying for the rest of America's 2-month tax break.

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LoansbyJW
Posts: 3,207
Registered: ‎04-30-2009
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Re: Why are mortgage rates rising?

The tax extension is for 2 months (so far...) but the FNMA / FHLMC rate Guarantee Fee increases are practically forever, expiring in 2021.

 

Rates are rising in the short run for other reasons.

 

Thanks for reading,

John Wheaton NMLS 653018 | Redfin Open Book Recommended Lender
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jimi
Posts: 108
Registered: ‎08-19-2009
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Re: Why are mortgage rates rising?

JW wrote, "Rates are rising in the short run for other reasons".

 

Would you please expand on that?

I'm guessing that one factor is that volume pipelines are full, so lenders are boosting their margins to temper demand.

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LoansbyJW
Posts: 3,207
Registered: ‎04-30-2009
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Re: Why are mortgage rates rising?

On the short run, there isn't much demand from investors (not banks) to onboard a 3.5% rate of return for 30 years. That's been a pretty hard floor with most lenders. Borrowers keep hearing about "low rates", but those "low rates" come with high fees because it's not profitable relative to other investment choices.


As better economic news comes out, some kind of European debt resolution arrives, and a stronger stock market continues, money will flow out of mortgage backed securities and into other investment options. These factors are pushing up rates, along with the higher Agency Guarantee fees.

 

Thanks for reading,

John Wheaton NMLS 653018 | Redfin Open Book Recommended Lender
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MyCousinVinny
Posts: 495
Registered: ‎06-13-2011
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Re: Why are mortgage rates rising?


LoansbyJW wrote:

On the short run, there isn't much demand from investors (not banks) to onboard a 3.5% rate of return for 30 years. That's been a pretty hard floor with most lenders. Borrowers keep hearing about "low rates", but those "low rates" come with high fees because it's not profitable relative to other investment choices.


As better economic news comes out, some kind of European debt resolution arrives, and a stronger stock market continues, money will flow out of mortgage backed securities and into other investment options. These factors are pushing up rates, along with the higher Agency Guarantee fees.

 

Thanks for reading,



This is what my thinking is. The rates have been going up in the past couple of weeks. The conundrum I face is that I'm clsing first week of March and I need to lock my rate anytime now. Should I wait for 4.0% or lock now at 4.132%? What does your crystal ball say? :smileywink:

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LoansbyJW
Posts: 3,207
Registered: ‎04-30-2009
0

Re: Why are mortgage rates rising?

I use a Magic 8 Ball.

 

Sorry, can't give any guidance here. It's a gut call. Lock and don't look back, or chance it for better terms.

 

Thanks for reading,

John Wheaton NMLS 653018 | Redfin Open Book Recommended Lender
See all my reviews
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WinaltHome2011
Posts: 107
Registered: ‎12-27-2011
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Re: Why are mortgage rates rising?

Thanks for the heads - up sir. This could be a good reason that many people continues to ask about why is mortgage rates continue to rise - with the current housing market not actually improving.

Only if you are committed to your work will you definitely succeed.
Self-Discipline will also be the standing point.