(This is Part 2 of a two-part series. Read Part 1, “Wholesale mortgage prices uncover true costs.”)
Wholesale mortgage prices are “inside” prices, available to mortgage brokers and lenders but not to borrowers — until now. Through a special arrangement with Amerisave, I now provide wholesale interest rates on my Web site.
Last week, I discussed why wholesale prices were the most accurate indicator of day-to-day changes in the market. I also explained how borrowers could use this information to combat the widespread practice of inflating the mortgage price on the day the price is locked, beyond anything justified by market changes during the days prior to the lock.
A second purpose I had in developing the data was to provide accurate measures of how, at any one time, mortgage prices vary with different features of the loan transaction. These features include loan size, FICO score of borrower, down payment, type of documentation provided, and loan purpose.
This is designed as a general education tool for potential borrowers. For example, borrowers considering how much of a down payment they are going to make ought to know how much more costly a low-down-payment loan is. Similarly, if you want to avoid the hassle of fully documenting your income, it is a good idea to know how much the convenience of merely “stating” your income will cost you.
The tables that show how the interest rate varies with other features of the loan ordinarily don’t change much from day to day, so I compile them weekly rather than daily. However, over a long period they will capture the occasional changes that occur in how the market appraises risk.
Such a change, in fact, occurred while these tables were being developed. A trial run was done on May 4, 2007, which was before the full eruption of the subprime crisis. While the May 4 data covered California rather than the United States, the differences between California and the U.S. average are very small.
A marked increase in risk premiums occurred between May 4 and Sept. 21. The difference in rate between a $417,000 loan and a $418,000 loan rose from 0.278 percent to 0.745 percent. The $417,000 loan is saleable to Fannie Mae and Freddie Mac, while the $418,000 loan is not. The larger loan has to be sold in the private sector, which has been badly shaken by the subprime crisis.
In a similar vein, the difference in rate between a full-documentation and a no-documentation loan rose from 0.525 percent to 1.022 percent. The rate difference between a 740 FICO score and a 620 score rose from 0.3 percent on May 4 to 1.37 percent on Sept. 14. A week later, there were no price quotes on the 620.
A third purpose of developing the wholesale price data was to provide a shopping tool that borrowers could use to help them find the best deal. This means obtaining the best retail deal; you can’t borrow from a wholesale lender, though some borrowers try.
Mortgage brokers often conceal the identity of the wholesale lender whose product has been selected for a potential borrower because they fear the borrower will go directly to the wholesale lender. The borrower may, indeed, find a lender with the same name, but it will be the retail arm of the same firm, and the borrower will be charged retail prices. All the larger lenders have both retail and wholesale divisions.
The brokers and lenders receiving wholesale prices add a markup before quoting retail prices to borrowers. The markup covers the cost of the various retail functions, including marketing to borrowers, counseling and advising them, taking their applications, verifying credit, employment and other information provided by applicants, pulling together all the documents required for the loan to be executed (called “processing”), and arranging for all the third-party services required for the loan including insurance (title, mortgage, flood, homeowner) and closing services.
Wholesale lenders don’t have the infrastructure to do any of these things, so forget about the possibility of “getting it wholesale.” That occasionally works in men’s suits, but never in mortgages.
If borrowers know the wholesale price of their loans, however, they also know the retail markup. That is very useful information to have in shopping for a loan.
Not many borrowers can use my tables for this purpose because the details of the borrower’s transaction have to match those underlying a table. However, I am working on a feature called “Find Your Wholesale Price,” which will tailor the price to the specifics of the transaction. It should be available by Christmas.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
