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Interview with Dan Green: “You can plan for risk if you know it exists”

Published on 08/02/10 12:47 PM

Today, we’re proud to bring you an interview with Dan Green, a loan officer with Waterstone Mortgage in Cincinnati and the author of The Mortgage Reports.

Mortgage Calculator: I’d like to begin by asking you about your background. I understand that you are a mortgage broker, which makes you more than just a talking head, like the rest of us bloggers. Given that you are already knee deep in the mortgage market thanks to your day job, what made you decide to join the ranks of housing bloggers? How would you summarize your approach to analyzing the housing market, and how has your background/profession informed this approach?

I’ve been blogging since 2004 as a way to stay close with my clients. Everything I write is directed at my clients in some form or another. The mortgage world is complicated and that complexity drove some of the bad decisions from last decade.  And we can’t escape the complexity — it’s the world in which we live.  BUT.  If we can breakdown those complex ideas and make them simple for people to understand, they can make better financial choices.  And they do.  Nearly every time.  This is why I blog — to help people make better, smarter choices for their personal economies.

Mortgage Calculator: In a recent post, you observed that while a correlation exists between the Federal Funds Rate and mortgage rates, it is loose and inconstant. That being the case, how much attention should prospective borrowers/refinancers to the Federal Funds Rate, especially in the context of the rate increases that are being mulled?

The Fed Funds Rate only matters to mortgage rates in so much as it’s a signal from the Fed about the economy. When the Fed starts raising the Fed Funds Rate, it will be in response toward inflation.  Inflation is bad for mortgage rates so mortgage rates should rise on the news.

Mortgage Calculator: In another interview and on your website, you have offered both short-term and long-term predictions on the direction of mortgage rates. Can you outline your predictions as they currently are, for the benefit of my readers?

Predicting mortgage rates is an exercise in futility. The market will trend toward chaos so pick a rate that works for you, and stick to the plan.  That said, in the near-term and long-term, I expect that mortgage rates will be higher than their early-2010 levels.

Mortgage Calculator: I recently reported on how mortgage rates quoted by lenders are often much higher than those that are quoted in the media. I see that you have also posted on this subject, and explain the discrepancy in terms of a little-understood phenomenon known as Loan-Level Pricing Adjustments (LLPAs). Can you elaborate?

LLPAs are changes to your mortgage pricing tied to your individual risk profile. It’s like auto insurance, somewhat —  the riskier you are, the more you pay.  But that’s not the reason why quotes from lenders seem higher than the rates shown by the media.  The difference is that the media talks about Freddie Mac rates, for example, but fails to highlight the fact that those rates come with points.  For example, Freddie Mac’s weekly rate survey clearly shows that the “market rate” requires 0.7 points but when the story shows up in the papers, the 0.7 points is often an after-thought.  Rates are just half the story — it’s rates *and* fees that make up pricing.

Mortgage Calculator: New FHA mortgage guidelines will go into effect in April. Do you think that FHA loans will become less popular for all borrowers at that time? Do borrowers with lower credit scores and/or diminished financial capacity have other options, or will they be largely shut out from the mortgage market?

Good credit and good income is a buyer’s entree into market.  Without it, not only is an FHA-backed mortgage not an option, but neither is any other program.

Mortgage Calculator: Strategic default is an issue that is receiving a great deal of attention in the media these days. Since you sit on the opposite side of the table from borrowers, I would imagine that you are less supportive of borrowers deliberately choosing to stop paying their mortgages when they have the capacity to do so?

This is a discussion of human nature for which lenders and credit agencies were ill-prepared.  You can plan for risk if you know it exists.  The banks never saw this coming. It’ll be interesting to see if, and how, creditors  adjust.

Mortgage Calculator: In light of what you have written here, how would you reconcile government and seller incentives and low interest rates with the possibility that home prices could fall further, when advising someone thinking about buying their first home? Would you advise them to buy, wait for a while, or wait forever?

The good part about “buying now” is that at least you have a lay of the land.  Beyond two or three months, there’s very little visibility into mortgage rates, home prices, underwriting guidelines, tax policy, or market sentiment.  You may find a home at a terrific price, but may not be able to get it financed.  That’s a risk with which I’m uncomfortable.

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