Archive for June, 2006

the Feds raise rates by 0.25%; mortgage rates go down?

June 29, 2006

Today the Federal Reserve raised the Federal Funding rate by 0.25% — raising the short-term benchmark for the 17th time in a row and the second time in a row for new Fed Chief, Ben Bernanke.  The Federal Funding rate now stands at 5.25%. 

ben bernanke

In the statement released by the Feds today, they left the door open for additional rate hikes, largely dependent on economic data released from now until their next policy meeting on August 8th.  

Most consumers will hear the news that the “Feds have raised rates again” and think about the interest rate on their mortgage.  Interestingly, the Federal Funding rate is the rate at which banks lend money to each other in order to meet their mandated reserve requirement.  When the Feds raise this rate, it increases the cost of doing business for banks, and that additional cost is passed onto consumers in the form of higher interest rates on auto loans, consumer loans, business loans, credit cards and second mortgages.  Most banks lend money in these categories based on a standard “prime rate” (generally 3% above the Federal Funds rate).  So, tomorrow morning’s 2nd mortgage and home equity rates are likely to increase by 0.25% across the board.

So what about long-term mortgage rates?   

Well, a rate-hike by the Feds is mostly good news for mortgages.  A rate-hike by the Feds is a signal that the Feds are fighting inflation, and inflation is the arch-enemy of mortgage-backed-securities and mortgage bonds.  If investors are overly concerned about future inflation, then their return on investment (for a long term mortgage loan, for example) will have to be more in order to compensate for the deterioration of value.  It is actually the fear of inflation that helps to drive mortgage rates higher.  Today’s move by the Feds (and even more so, their comments) are a good signal to the market that the Feds are committed to fighting inflation and ultimately protecting the value of long term investments.  The comments from the Feds — confirming the recent “moderating of economic growth” and the fact that “inflation expectations remained contained” — were met by a late-day rally in the mortgage market, likely to result in an improvement in interest rates for tomorrow. 

While the Fed’s actions aren’t likely to change the course of mortgage rates drastically, if you (or someone you love) are in the process of purchasing a home, tomorrow might be a great day to take advantage of locking-in your rate . . . and if you currently have an adjustable rate mortgage (especially one that is due for adjustment in the next 1 to 24 months), then you are well past-due to consider your options. 

More on adjustable rate mortgages (ARMs) and interest only ARMs next time.  A great tool to manage your cash-flow?  or “exotic” and “dangerous”? (you laugh, but I read them described that way)


“I can’t be beat . . . I won’t be beat!”

June 7, 2006


Although this phrase was originally said by a hyped-up Clubber Lang (aka Mr. T) after he punished “the Italian Stallion” in Rocky III and probably said by me once or twice (in my pre-teens) directed at my older brother after punishing him with a brutal reverse-spin-pillow-fight, fight-ending, shot to the face . . . I think that it is a fitting phrase for a mortgage broker.

In 2002, as a loan officer working for a large national mortgage company (and having worked for one of the largest mortgage banks in the country), I realized  an important lesson.

Rate matters.  No matter how many times sales managers or sales “coaches” or sales books or seminars say, “Let’s’ take the price-game out of the equation,” it’s just simply not true.  They are either lying to the audience, lying to themselves, out-of-touch with reality, or they simply aren’t allowed to say what they are really thinking, which is this: “Yes, I know our rates/prices/fees are slightly out of the market and I know that we are not competitive, but it’s the best we can do . . . well, I take that back, it’s not really the best we can do, but it’s the best you’re getting for sure.”  One of my recent customers (and friends) said it to me best as we were finalizing locking-in the rate for his mortgage.  He had done some comparison shopping and when I told him I thought that comparison shopping was a wise move and if anything it gives him confidence that he is getting a great rate at a great price, he commented, “Jeffrey, I shop around for deodorant, you better bet I am going to shop around for a $200,000 mortgage!”  Trust me . . . rate matters.

At the end of 2002, I decided that I would fight to never lose another loan to the, “Jeffrey we really appreciate everything you have done and we would love to use you, BUT . . . ”  I would never wince or flinch before quoting a rate to a customer and I would create a business-model to offer clients the absolute best combination of rate, cost and customer service.  With the wild-fire growth of the internet, I could see that things were forever to be even more competitive; and after one too many corporate conference calls promising that, “We are looking into the secondary marketing department to determine our pricing strategy and our overall effectiveness in the market” I decided to make a change. 

I started Hillside Lending at the end of 2002 and became a mortgage broker.  Although I had sold against mortgage brokers for years (claiming things like the loss of control of loans as a broker, inconsistency in underwriting, unpredictable closing schedules), I quickly realized these were just sales objections with little to zero basis.  And as technology became more useful in the mortgage industry and automated underwriting became the standard, I realized a major difference between being a mortgage broker and working for a mega-mortgage firm, a mortgage bank, or a mortgage “banc” if you prefer:

One — mortgage bankers, because they have one source of funds, do not shop for the best deal they can find.  The rate they have is the best deal they can find.  Mortgage brokers, like myself, may shop 5-10 sources for even something as straight forward as a 30 year fixed rate loan to help clients find the best rate.  And with access to many different investors, most brokers offer a wider range of programs.

Two — corporate structure, however useful and necessary, is expensive.  That cost is passed on to the consumer in the form of additional closing costs (fees) and/or higher interest rates.  Higher interest rates are more profitable in the secondary market and so the company earns more money.  To go back to my early conference call managerial remarks, what they really meant to say was   “Yes, I know our rates/prices/fees are slightly out of the market and I know that we are not competitive, but it’s the best we can do considering the massive amount of office expenses, manager salaries, personnel salaries and executive benefits, etc.”  In fact, mortgage wholesale lenders usually offer better interest rate to their brokers than they do to their employees.  For example, large national company XYZ Mortgage retail division (mortgage bankers/employees) may be quoting a rate of 6.5%.  XYZ Mortgage wholesale division (available to mortgage brokers) may be quoting a rate of 6.375% or even 6.25%.  Bottom line, mortgage brokers have access to better interest rates. 

So my hope and advice?

Give me a shot at your business.  Let me duke it out with the competition and I’m confident that I will come out better than did Clubber Lang (that is, in his rematch with the newly invigorated, “eye-of-the-tiger” Italian Stallion).