Rates Down With Job Losses Up, Why Different Lenders Price Same Loans Differently
The trouble with some women is that they get all excited about nothing, and then they marry him. Obviously Ms. McCain is not saying that. They have finished up the conventions for the presidential election. We have representatives from Alaska (state motto: “11,623 Eskimos Can’t Be Wrong!”), Arizona (“But It’s A Dry Heat”), Illinois (“Please Don’t Pronounce the ‘S’”), and Delaware (“We Really Do Like The Chemicals In Our Water”). These folks are all employed, unlike many who were counted in this morning’s unemployment data.
The Market
Yesterday’s stock market sell off puts the DOW down 15% year-to-date, and today Merrill Lynch is not going to be helping things. Goldman Sachs cut Merrill to a “sell” and said it will likely incur additional write-downs on their mortgage investments. Stocks around the world were down overnight as yesterday’s drop in New York had a ripple effect. Fortunately this helped yields & rates, which dropped, and dropped again this morning. Prior to the 5:30AM PST unemployment data, the 10-yr was down to a yield of 3.60%. Then news hit of the Unemployment Rate increasing to 6.1%, much higher than the 5.8% that was expected, and sure to make headlines around the country. It is at a 4 ½ year high. Payroll employment (Nonfarm Payroll) shrank by 84k, more than expected, and the 8th straight month of declining! In addition, there were back-month revisions. Manufacturing lost 61k jobs, construction 8k, professional & business services lost 53k. The average hours of work remained unchanged from July at 33.7 but employers cut overtime to an average 3.7 hours per week. The 10-yr dropped to about 3.56%, and 30-yr mortgage prices… did very little.
Rates have been dropping significantly in recent weeks, and although the mortgage business is still grappling with tight underwriting and total lack of investor interest in non-government backed mortgages, rates are good! There is no more scheduled news for today, or for Monday. In fact, the only news prior to Thursday are Tuesday, with some trade numbers and pending home sales, so this morning’s numbers could set the tone for almost a week.
How are loans priced?
How is it that some lenders might see better pricing from Citi, Chase, and other parties that sell to Fannie, than they see from Fannie Mae directly? It is important to remember that the price of a loan is basically composed of two pieces: the value of the monthly income stream, and the value to the servicer for handling that monthly income stream. The former, known as the base price, is well established in the industry, and is based on expectations on how long the loan will be on the books, possible delinquency or foreclosure expectations, the revenue requirements of the company originating the loan, etc. The later, also known as the servicing released premium (SRP), is based on the same items, but to a smaller degree since the servicer collects 25 basis points, typically, for servicing the loan every month, and sometimes relies on the reliability and history of the company originating the loan. The length of time that they will be collecting these fees is very important, which is another reason that in a declining rate environment few companies want to pay much of a premium for a loan that they don’t believe will be around more than a few months. (Or they increase their premium recapture period.) The value of this servicing is very company and accounting-rule specific, and varies between firms. So the next time someone asks…
Daily humor
A drunk was proudly showing off his new apartment to a couple of his friends late one night. He led the way to his bedroom where there was a big brass gong and a mallet.
“What’s that big brass gong?” one of the guests asked.
“It’s not a gong. It’s a talking clock,” the drunk replied.
“A talking clock? Seriously?” asked his astonished friend.
”Yup,” replied the drunk.
“How’s it work?” the friend asked, squinting at it.
“Watch,” the drunk replied. He picked up the mallet, gave the gong an ear-shattering pound, and stepped back.
The three stood looking at one another for a moment…….
Suddenly, someone on the other side of the wall screamed, “You ——! It’s 3:15 in the morning!”