Just got off the phone with Patrick Collins of First Savings Mortgage Corporation. We discussed the new FHA and Fannie conforming loan limit of 729,500, how the federal funds rate affects mortgage rates, and other topics.Here's the 20 minute phone interview. A written transcript of this interview will be posted here when available.
Here is the transcript of that discussion:
DRODIO: Hello and welcome back! This is Daniel. I'm on the phone with Patrick Collins of First Savings. Patrick are you there?
PC: I am here Daniel.
DRODIO: Okay, great. So Patrick you're definitely one of our most preferred lenders and one of the reasons is for that is you can close a loan amazingly quickly and it might not be something that you actually want me to publicize, because I'm sure you don't enjoy doing it, but you're basically the only lender I've ever met that can do a loan in one business day. What is it about you guys that makes you so different that you can do this kind of thing?
PC: It's being privately owned and being local. When I say privately owned we're not a publicly traded company we're small. We have a hundred and twenty employees. We're based out of Tyson's Corner area, so right here in Northern Virginia and we don't send the loans anywhere for underwriting. We're not brokering the loans, because it's our money and we're in control of it, so we fund our own money, we lend in our name and we are the ultimate decision makers. So when I get a loan and if it has to be turned around quickly my underwriter sits next to me. So I get it in the morning put it together, she can get it, get through it. We work with quite a few appraisers that have done a lot of business with us and thus jump right on it and can get us appraisals, you know, turned around right away and we can make the funding decision right there.
DRODIO: I have to say it's really, really impressive and for people who have never purchased a house before that are listening, the average time to close a loan is usually about 30 days and if a lender can do it in a week that's considered extremely fast. Patrick I remember that we ratified a contract and I think it was on the 23rd or the 24th of December and then you closed it on the 26th or the 27th. It was like on business day and it was Christmas.
PC: I do remember that file, yes. You know, when you're small and when you're local most of our employees have been with us an average of six years, so to be honest with you, you know, it's not a call center. When they're working on my file they put a face to the name and we all put in the effort even after hours or as you saw on holidays and we can get it done.
DRODIO: And by the way for everybody we're doing this at 7:00 P.M. on a Friday so that after hours is definitely true. You should be out enjoying Friday night, but instead you're on the phone with me, so that's great. So we're in March of 2008 right now and there's just been some craziness in the market. What's been going on Fannie and FHA have been raising their limits and just all sorts of things? What's going on these days?
PC: There is a lot going on and it's a lot going on thrown at us in a very small time frame. The two biggest things obviously are the loan limit changes and I'll get into that in a second. The other big piece that, not your typical news isn't picking up, your Wall Street Journals and CNBC certainly are and that's really all they've been talking about is what's been going on in the mortgage back securities markets and in the bond markets. So in the past, the past seventy-two hours have literally shown us the biggest swings in the mortgage back securities markets as far as yields go and that's what directly impacts interest rates. The biggest swings we've had on record in a three day period and that's both up and back. We've just had enormous price changes and that's just because of the uncertainty of this market with all the changes going through the industry both the real estate and the mortgage industry. So we've had Go ahead Daniel.
DRODIO: Well the average buyer doesn't know what a mortgage back security is I don't think. So what does all of it mean?
PC: Most loans today other than the ones that are, you know, if you go to your local brick and mortar federal credit union or local credit union and you get a loan, they're probably going to hold that loan, not necessarily, but they'll probably hold that loan and service that loan. Almost all other institutions sell either the loan or sell the servicing of the loan are what we call the secondary mortgage market. This even goes for your Banc of America's, Wells Fargo's. A lot of them portfolio, they have their own portfolios, but they sell the servicing to a lot of those loans we well. So all those loans get put into big pools and what happens is these pools of loans that are similar type loans, similar sizes, similar credit profiles, similar income brackets will get put together and they'll get sold as an entire package and it's a security is what it's called when it's put together. And those packages are traded on Wall Street almost like bonds are. So they're secured instruments and the levels at which those packages are bought and sold on the open market and its international bidders on Wall Street is really what drives mortgage interest rates. It used to be that the ten year T bill, you know, that's what people are used to tracking it for, the 30 year fixed, just watching the T bill and you can really figure out what's going on with the 30 year fixed rate, that's really not the case anymore. What really drives it is the Fannie Mae 5.5 and 6% mortgage back securities. And the spread between the T bill and those securities they typically follow each other. So there's very small spread, maybe a hundred basis points, yearly less than that between, so 1% between those. Right now the spread is very large and they're not following each other, while one goes up while the other one goes down and that's what's making rates so high. Even though the ten year looks great and even though, you know, the federal funds rate and prime are all low.
DRODIO: Alright. So these are all some very, you know, complex terms and acronyms you're throwing out there. But what it all comes down is that there's a lot of volatility
DRODIO: because people are basically freaked out from the all sub prime mortgage mess that was happening last summer, I guess.
PC: Really from July It had been building up, it really came to a head in July, August and since August we've seen Wall Street in a panic and that's what's been effecting this. You hit the nail on the head Daniel. You know, putting it in true laymen's terms, it is fear based on, you know, mortgages that's driving interest rates and driving the volatility.
DRODIO: Alright. So how is that effecting the borrower down the street that youtalk to on a regular basis in terms of what the rates might be for them?
PC: It just means that there's a lot of fluctuation and that they, you know, if they're out looking at a home they're really not going to know what their rate You know, they come to us let's say and rates are 5.5% and then they go out and they look and they look four weeks later they find a house and they go back to get an updated good faith estimate and now the rate is 6. So I think it's serving to, I don't want to say un-nerve, but it's a little rattling, the swings. So what we're saying is keep in touch with your lender, let's talk a couple of times a week so you know exactly when you're going out and looking at properties where the rates are. You know precisely where your payments are going to be and keep in close contact when you're making an offer. Say hey, I put an offer I think it's going to get accepted let's lock in now.
DRODIO: And so when the rate's locked in how long do you guarantee that rate for usually?
PC: We will try to lock it in, you know, going in and saying look, are you guys going to go for a 30 day close, are you looking for a 45, 60 days. So your typical loan lock in this market and this is pretty standard for most mortgage banks is going to be 30 days. Most people go 30 days from close. We certainly can go longer if we know that we need to and say, you know what, this is going to take longer, let's do 60 days. This might even take longer than that let's doonce you start getting up by 60 days you typically have to pay for the extended lock.
PC: But there are longer term options.
DRODIO: Now Fannie Mae, FHA just raised their conforming loan limit recently just the other day. Can you tell everybody what that means and what the difference between FHA and Fannie is and how if effects them.
PC: Absolutely. And these are two of the biggest changes that are going to effect our marketplace and especially our marketplace here in the Metro D.C area. Let's deal first with what most people are familiar with is Fannie Mae and Freddy Mac. What they are commonly referred to as the GSE's, the Government Sponsored Entities. So Fannie Mae and Freddy Mac set the conforming loan limit and right now that limit is $417,000 or we can say was. What that means is if a loan conforms to Fannie Mae and Freddy Mac's guidelines and it is underneath that limit $417,000 or less they'll buy that loan or instead of buy it they were guarantee its performance in the secondary mortgage market. If another company buys it and pays a premium for them to guarantee it. What that translates to is a very unified interest rate system and mortgage system in the U.S. and it gives buyers power, because they're going to have better rates, they are going to have more uniform lending practices in the U.S., because Fannie and Freddy literally pretty much control and set the market. What
DRODIO: Just to clarify for people out there who don't do this everyday. What you're saying is if a loan was $417,000 or less you as a lender can offer better interest rates.
DRODIO: Fannie on the back end is going to buy that loan from you and so you have a purchaser for it at a certain rate.
PC: Exactly. And you can, and what makes it so easy going back to you can track where their securities are, rate and security, the price of the security plays into the rate. So you can price and you can know what they will pay on a given day for a loan of this type. So they set a better price for the home buyer. So if a home buyer's loan qualifies for Fannie Mae that means that it doesn't have to go to a private, to a Wall Street bank and you're going to typically get a better interest rate, almost always.
DRODIO: And that still is called a jumbo when it's over the conforming limit of $417,000.
DRODIO: And then that jumbo rate is typically higher, because don't have as big of a market to purchase the loan on the back end.
PC: You don't. And the reason that the conforming and the Fannie Mae loans are better prices, that you get better interest rates is because they're considered triple A bonds. And I know I'm getting technical here, but what I mean is just Yes. They're safe because Wall Street and investors, foreign investors, you have pension funds in California buying them, because they're triple A rated bonds and they have a better yield than treasury bills. So that's why there is such a market for them is because they are considered safe investments. And jumbo loans not being backed by Fannie and Freddy they don't have that triple A rating.
DRODIO: And in fact you were just telling me earlier today that a jumbo loan provider, a jumbo loan bank or investor may be go out of business.
PC: Yes, it's sad, but true and the investor that we're speaking of is one of the cleanest and does some of the cleanest jumbo loans in the U.S. It's just the volatility of this market. It's, you know, a fear driven market. A lot of Wall Street creditors who would lend them money called their loans due and they don't have enough cash even though their portfolio was performing. So it's a volatile market.
DRODIO: So that's very bad news, but then there's some good news that somewhat offsets that which is that the conforming $417,000 limit is being raised.
PC: Exactly. And so what Fannie and Freddy have done through HUD and through HR 51 40 is, house bill, they're raising the limits for loans that they will buy. And while they're not keeping everything exactly the same it's certainly going to help. What they're calling above $417,000 now and in our metro area up to 729, 750. They're calling it jumbo-conforming, jumbo-conforming. Fannie Mae and Freddy Mac will purchase loans between 417 and 729, 750 that meet a slightly different set than their traditional guidelines, but still not nearly as stringent as a lot of the true jumbo private banks.
PC: Do you want me to get into what those new rules are?
DRODIO: Yeah, sure.
DRODIO: I think the main questions that I'm getting and the main things that people want to know about is what does all this I'm just hearing so much
PC: What does it mean?
DRODIO: What does all this mean to me? Yeah, exactly.
PC: It means and that's obviously the most important question, it means that buyers and frankly sellers in this market, because if their home is in that price range they are going to have more buyers who have more options. Buyers are going to be completely at the behest of these much higher interest rates of jumbo loans. I mean that's really what's going on. If you were getting a loan and it had to be over $417,000 in this market with our turbulence since last August the rates are very high. Right now a Fannie Mae 30 fixed is about 6.25% at zero points, but a comparable 30 year fixed jumbo right now is going to be close to 7.5% at zero points, and seven and a quarter.
DRODIO: That's before the conforming raise.
PC: Exactly, yes. Not speaking to the new jumbo conforming, the new limits, but a traditional jumbo loan. Now that this new increase is in play if this loan meets the standards for Fannie Mae and Freddy Mac to buy, you know a 729, 750 loan amount you're talking regular conforming rates 6.25 which is I mean it's a huge difference in buying power, it's a huge difference in monthly payment. It makes a lot more homes on the market affordable to a lot more buyers and it's going to help out sellers and it's going to help our inventory, because now a lot of that inventory becomes affordable.
DRODIO: Now for people that are listening to this that aren't in the D.C. area, because this is going to be pod cast, it's readily accessible by anybody. You know, the limits are different in other areas, correct? So is there anywhere that they can find it?
PC: There is and the best place to go is HUD.gov, H-U-D . G-O-V. If you go to HUD's website there's a link and forgive me I'm not in front of my computer, but it's easily accessible from their front page, I believe it's on the upper right. Where they can click on there, put in their city and state or put in their zip code and it will tell you exactly what the limits are for the Fannie, Freddy, for the new increase in their county and will also tell them what the FHA, that's standard, but it will break it down by metropolitan area by county so they can see exactly what their options are.
DRODIO: Okay. So briefly touching on FHA. FHA loans were never very popular in our business practice in terms of people asking for them. But recently they've gotten a lot more popular. What's the reason for that? And you just mentioned that the FAA limit was raised, but it's the same across the U.S. or not?
PC: I believe that it is the same across the U.S. right now. It is 729, 750. It was announced the day before the new conforming loan limits were announced. And what you touched on it typically was not a very popular loan, because the secondary market and Fannie and Freddy loans were such you just didn't need FHA very much. We had sub prime, the sub prime market which really is nonexistent at this point. FHA is much more lenient on credit score. And a lot of the reasons that a lot of realtors didn't like it previously and lenders was because it was also very strict on home inspection issues. So when you have multiple offers on a house and one of them was FHA it typically didn't get much attention.
PC: That has changed. They've really, really cut back on the inspection requirements, on the appraisal requirements and so they're making FHA easier to work with. And the biggest change is that they've increased the limit of FHA to 729, 750 as well. That change is really going to open up a lot, because FHA has much better, much more lenient down payment requirements. FHA only requires a 3% down payment. So now you got say a seven hundred thirty thousand dollar home, you only have to put 3% down and that 3% can be a gift. That's not the case with Fannie and Freddy. Down payments can be gifted with Fannie and Freddy, but 5% of the down payment typically has to come from your own funds Go ahead Daniel.
DRODIO: Oh no, please go ahead.
PC: If you have 5% of your own money you then can get additional gift funds with Fannie Mae and Freddy Mac. With FHA the entire down payment can be a gift so that really helps people out.
DRODIO: Can that be a seller credit where the seller is paying that 3% or does it have to be a gift from the buyer's side?
PC: That's a fantastic question and the answer is kind of. And I say kind of, because the seller can't on the HUD give the buyer credit with which to purchase the home. What we can do is use a program like Nema<ph><ph> and I don't know if you're familiar with the Nema<ph><ph> Program, but that certainly is a way to go. Nema<ph><ph> will take a 3% donation from the seller and then the Nema<ph><ph> will gift the money to the buyer to buy the sellers home.
DRODIO: So kind of a third party that's stepping in to
PC: That's exactly what it is. It's a third party that's stepping in and now that the FHA limits are going to start being increased you're going to see a lot more of that.
DRODIO: Okay. So this is great. And so I've got one last thing to ask you about, which is whenever the Fed, Ben Fernaky<ph> lowers the federal
PC: Fund rate.
DRODIO: rate people always think that mortgage rates have gone down, but they don't necessarily. So can you explain why?
PC: Sure, absolutely. When the federal funds rate it's really the rate at which banks borrow money from each other and from the federal funds window to meet their overnight requirements, the reserve requirements. Banks that lend money, any bank, any lending institution that is also a deposit holding institution has to have a certain amount of reserves on hand to meet the amount that it's lending out and banks just simply, most banks don't have that kind of cash. So they borrow money to meet this overnight reserve requirements and the Fed sets that rate and that's the federal funds rate is. So any time the federal funds rate is lower banks typically can borrow money at a lower cost and the logic then follows that well if they're borrowing money at a lower cost that it's going to lower interest rates and that's definitely not always the case. It's especially not the case in this market, because what's driving this market right now since August is really fear. With, I hate to use the word, the collapse if you will of the sub prime mortgage market, fear is driving Wall Street investors when they look to buy mortgages. So they're the ones who are bidding and selling and buying mortgages and they're the ones that are effecting the Fannie Mae securities and that's what's effecting interest rates. So the federal funds rate really is having almost no impact on long term mortgages. It is impacting home equity lines directly.
DRODIO: Those home equity lines are based directly on what the federal funds rate is.
PC: They are. Home equity rates are based on prime, which is 3% over the federal funds rate.
DRODIO: Right, gotcha. Well Patrick thank you very, very much for this info. I'm sure we will be having these conversations again. Why don't you just give everybody your contact info so anyone can call or email you with more questions.
PC: Sure. Absolutely and please do. If you have any questions, have any comments please let me know. Patrick Collins and again I work at First Saving Mortgage Corporation. My email address is Pcollins@firstsavings.com and my phone number is 703-564-1756.
DRODIO: Great. Thank you Patrick. Have a great evening. Thank you for spending your Friday evening with us. I really appreciate it.
PC: No problem Daniel. Thank you.
DRODIO: Alright. Take care. Bye, bye.