February 18, 2009

The Great Rate Update: What’s The Point Of A Point?

A rate update from Julian Hebron at RPM Mortgage:

Zero-points rates on conforming loans up to $417k and super-conforming loans up to $625,500 have improved to start this week as stocks have sold off and mortgage bonds have rallied—when bond prices rise in a rally, yields (or rates) drop. With the government participating in mortgage bond markets, lenders are pricing more conservatively than market levels might suggest because it’s harder than ever to predict which way markets will move. So we continue to see favorable terms on points: one point gets .625% to .875% lower in rate, so borrowers break even on a one-point buydown in 12-18 months.

And rough 30-year rates with said single point:

Conforming - 4.875% (5.09% APR)
Super-Conforming - 5.375% (5.52% APR)
Jumbo - 6.625 % (6.83% APR)

First Published: February 18, 2009 12:00 PM

Comments from "Plugged In" Readers

Would be great to hear from someone with financial insight on this one. Seems like a nice premium to give to borrowers with cash. Are they using this as an additional filter against credit risk - or does this help their capital position?

With an 18 month breakeven I'd buy as many points as they're willing to give me :)

Posted by: Po Hill Jeff at February 18, 2009 2:00 PM

In a credit contraction cash is king. The banks are desperate for cash up front.

Posted by: diemos at February 18, 2009 2:02 PM

I thought I heard that the 625k limit was going to be increased by the Obamites back to last years 729k (or thereabouts)?

Posted by: Jake at February 18, 2009 3:04 PM

I just finished my refi last week. I locked in late January 4.625 w/ 2 points. This was for $585k w/ 25% equity.

Posted by: ottoman at February 18, 2009 4:16 PM

Alright so are you willing to share who the gave you the cash at such a fine super-conforming rate?

Got the standard crappy BofA rate two weeks ago with a walk in test for the behind the counter clerk for 20% and $565K outstanding.

Posted by: Sunnysider at February 18, 2009 5:11 PM

We used American Mortgage Network recently.
Got a similar rate to ottoman - 2 points, 4.875% - a two unit building so slightly higher I guess.
was for 800k (there is a higher limit for these - so super conforming also).

Posted by: REpornaddict at February 18, 2009 6:18 PM

Julian - I noticed there are no I/O rates for conforming high balance loans on your web site. Has that product disappeared altogether?

Posted by: Willow at February 18, 2009 6:46 PM

It's not about credit risk or their capital position. The capital position is being taken care of by huge margins that the banks and Fannie Mae are getting in the current market.

Current mortgage bond prices should mean rates at 4.0% with ZERO POINTS, yet we aren't seeing that passed through. Instead, retail pricing is approximately 5% with no points, and no-cost financing is more difficult because lenders want borrowers to have more "skin-in-the-game" to prevent recently originated loans from paying off if rates drop a little. Add-in some additional large adjustments for condos, cash-out/debt-consoldation loans, below 720 credit scores, etc., and the GSEs and banks are doing quite well in this market.

It doesn't matter where "ottoman" obtained his loan. His luck was based on being in the right place at the right time and making a quick decision. This is without a doubt the most difficult mortgage market to price compare in my 12 years in the business. Anyone that tells you otherwise isn't originating mortgage loans. 2 points could still buy you 4.75% today for high-balance loans. Tomorrow could be a different story.

The average consumer still doesn't understand why "high-balance" or "jumbo-conforming" loans are higher than 417k conforming loans. Only 10% of total loan volume for lenders can contain these mortgages at regular conforming rates, since demand for "high-balance" loans is currently higher, rates are set to keep that 10% balance.

@Willow - Interest only is still available on high-balance, but at 5.75% with approximately 2 points and fees.

Posted by: theloanphd at February 18, 2009 7:54 PM

Julian, I hate to bust chops. But please let us know what loan to values, credit scores, and property types qualify for those rates.

Posted by: TheBanker at February 18, 2009 9:26 PM

Maybe I should clarify my comment... I'm interested in this line from the quote above:

one point gets .625% to .875% lower in rate, so borrowers break even on a one-point buydown in 12-18 months.

If these new terms are (as described) "favorable", and they thus represent an unusually beneficial tradeoff of points for rate from the perspective of the borrower, what is the lender's motivation?

I could imagine:

1) getting that 1% back means more reserves per dollar of loan, OR

2) These terms will attract borrowers of a lower credit risk

or maybe a little of both.

In summary I'm interested, not in why rates are higher or lower overall, but in why the tradeoff between points and rate might have shifted.

Posted by: Po Hill Jeff at February 19, 2009 12:35 AM

It was Provident in Santa Rosa, I got it through a broker friend of mine in SF. My credit score was 790, our payment was below 30% gross income. They checked everything, we had to sign a release for them to make sure our tax records matched w/ the IRS (first time I ever had to do that).

Posted by: ottoman at February 19, 2009 9:16 AM

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