Mortgage rates are low…but what are the drawbacks?

Whether you live right here in Georgetown, Texas or 1000 miles from here, the mortgage industry has certainly been a dominant news story for the past year.  To date in 2009, that has continued with the biggest mortgage related news being the incredibly low interest rates that we have been seeing since the beginning of the year.  In fact, mortgage rates are as low as they have been since 1963. These extraordinarily low rates can be attributed to the Federal government’s intervention in the Mortgage Backed Securities (MBS) market.  While interest rates are currently low (just below 5% on a conventional loan today), there is speculation that the Fed could push rates even lower if they threw enough money at the right target.  The FED however does not set mortgage rates, but they can buy the securities that dictate rate levels and that’s how they’re keeping rates low.  They could make a concerted effort to push the rates lower but I believe the rates are in a territory where they want them and will continue their efforts to keep them there for awhile.

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This historically low rate environment, coupled with the recently unveiled $8000 First Time Home Buyer tax credit, has certainly spurred some increased activity in the offices of many mortgage lenders.  And now, we are entering into the high selling season for the year.  This should be a great recipe for putting the skids on the reported housing slump!  However, if you are planning to either purchase or refinance a home this summer, there are a couple of trends of which you should be aware.

1.  The unreported story of the mortgage market today is that the government’s interest rate intervention has created a refi boom in an industry whose workforce has been shrinking for the past three years.  While the number of mortgage applications may not be unprecedented, these loans are being funneled to a smaller number of lenders.  Basically, the same number of loan applications are being forced through a pipeline that is probably 25% of its previous 2006 size.  This has led to a huge backlog of loans awaiting processing and underwriting and extended turn times at some banks to 2 months – double the normal time.  In fact, a loan officer colleague of mine told me that he has been waiting for 22 days for one particular lender to even look at his file for the initial underwrite!   If you are in the process of submitting a loan application, ask your loan officer for some straight talk about expected turn times for underwriting, processing, and closing your loan!

2.  In addition, the second under-reported story of the mortgage and credit crisis is that, as demand for mortgages increase, many lenders are finding that they are unable to fund loans or are extremely slow in funding as their warehouse line capacity is shrinking or disappearing altogether.  (A warehouse line is revolving line of credit in which a mortgage banker arranges for a loan using the funds from this line of credit.  After closing that loan, the mortgage banker looks to sell the loan to an investor, thus freeing up the funds on that revolving line for the next loan.)  Through this credit crunch, many banks have begun pulling back the warehouse line capacity from their mortgage partners and thus making it difficult for them to operate.  In addition, many of these investors who buy these loans are bogged down with a lack of available personnel to process and complete the purchase of these loans (see the comment above regarding shrinking employee pools) and this keeps that warehouse line money tied up and unavailable for the next loan.  This means that as the economy struggles to recover, homeowners that have the biggest need to refinance are finding their loans are not funding or are funding significantly later than they had expected with these delays leading to increased fees for consumers as lenders must extend their locks and many times requires borrowers to resign loan docs when their loans do not fund on time.  Again, to ensure that you do not become a victim of this market phenomena, ask your loan officer if he or she has been experiencing any of these issues in the past few months and how will they help you from getting caught up in it. (Editor’s Note:  Your favorite homeboy, Edward, experienced this on the refi of his own home!)

fri2jpgThere are tremendous opportunities to take advantage of today’s real estate market offerings and secure a great rate on a mortgage loan.  But just remember, like Circuit City on a Black Friday, where people are scrambling to get the best deals, it can get crowded at the “checkout line” when getting your loan.

Mark Hanley is a mortgage consultant with United Lending and guest blogger with GeorgetownCustomHomes.com. Check him out at www.HanleyMortgage.com

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