Interview with The Mortgage Professor: “I would not buy for speculative purposes”

Coincidentally, I recently received a letter from a “Reader B” whose experience appeared to be directly relevant to this question:

“While comparing two lenders, the first lender sent me the GFE and TIL and locked us immediately upon receiving the memorandum of terms of the house purchase. The second lender gave us a rate quote via e-mail that was 1/8% less than that of the first lender for the same lender fees, so we cancelled our lock with the first lender. But then the second lender told me he needed the signed purchase contract before he could lock, which took one day. Then he told me he needed additional verification of my income, which took two more days. Next he told me that he needed an appraisal, which took two more days. By the time he was prepared to lock, the market had changed and both the rate and fees were higher than those offered by the first lender. We had no choice except to close with the second lender”

Reader B thus followed your suggestion by locking  immediately, but then B walked away from the lock because he thought he could do better, only to learn (at considerable cost) the difference between a price quote and a price lock. Does his experience confirm your observation that the best policy is to lock ASAP?

I think it does, but for a different reason. You suggest you lock ASAP because of a concern that market rates have nowhere to go but up. Reader B’s experience suggests that lenders who will lock quickly, say within 24 hours, are more reliable than those who stretch out the process.

The lender who won’t lock until he has all the data is positioned to cheat. He can “low-ball” when he first quotes a price to which he cannot be held, where the intent is to snare the borrower. He can then raise the price when the borrower is committed and it is too late to back out. In all probability, reader B was ripped off in that way.

This view that reliable lenders will lock quickly was confirmed by my locking guru, Jack Pritchard. In most cases, he says, the borrower’s credit and a computerized estimate of property value can be obtained within a few minutes, while the borrower’s income can be verified or at least checked for reasonableness within the day. These are the critical factors involved in a lock.

Because locking imposes a cost on the lender, however, no lender wants to lock a loan that is unlikely to close. If something does not check out, therefore, even a reliable lender won’t lock. Further, occasionally a lock is nullified when new information received by the lender invalidates the information on which the lock is based. The most common such occurrence is an appraisal that comes in so low that the borrower can only keep the lock alive by reducing the loan amount.

Borrowers working with mortgage brokers who want to lock should make sure they receive a lock confirmation notice from the lender. Some mortgage brokers offer their own locks, usually oral, but these are worth very little. Even if the broker honestly intends to bear the risk of a rate increase himself, he will do it only for a small rate increase that can be covered by a reduction in the broker’s fee. If the market rate takes a significant jump, which is the hazard the borrower needs to protect himself against, the broker will disappear, figuratively if not literally.

Bottom line, “lock ASAP” is a good rule in today’s market, and always make sure you have a written lock statement from the lender.

Mortgage Calculator: I read an interesting report that essentially blamed the housing bubble (and subsequent collapse) on cash-out home equity loans, because such borrowers were infinitely more likely to default. What’s your take?

If it made any sense to blame the crisis on an instrument that performed badly, you would have to include stated income loans NINA loans, option ARMs, 80/20 loans, all sub-prime loans, and on and on. The real issue is why these loans were made.

When there is a choice, the  conventional is usually cheaper because the MI premium is higher. FHA volume has expanded because the underwriting requirements on conventional loans have tightened to the point where large numbers of borrowers no longer qualify for conventionals, only for FHAs.

I’m not sure how sweeping a recommendation I have given, when its one on one, I tell borrowers that retaining an ARM is a bet, and some bets are OK to make if you can affords to lose. Delaying the refi to milk the ARM for as long as rates remain low is a bet that should be made only by those who can afford to lose. When rates increase, it may well happen very fast, so it will be too late  to switch at that point.

I am opposed to  the interest rate deduction because it is a regressive subsidy —  the larger the loan, the larger the subsidy. Subsidies should be scaled by ability to pay. But so long as the subsidy exists, borrowers should take advantage of them.

The reverse mortgage is the only way to draw on the equity in your home to supplement income, and still retain the right to live in your house until you die. There is no other way to do that.

I don’t advise on this issue, it is between  the borrower and his own values and conscience.

I would buy now if they need a house, but I would not buy for speculative purposes. Prices may be soft for awhile longer, but further substantial declines are very unlikely. If they occur, we are all in trouble.