Re: NPNC - reply

From: Randy Barnes <rbarnes@mindspring.com>
Subject: Re: NPNC - reply
Date: Fri, 23 Oct 1998 17:13:08 -0400
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Date: Mon, 19 Oct 1998 21:07:37 -0400
  From: owner-persfin@lists.xmission.com
  Subject: Re: NPNC - reply


  I'm just not sure where you're making out by dropping 1/2 a point -
where
  are you finding absolutely no cost mortgages?  Typically you can do
that if
  the bank/mortgage co. throws all your costs back into the mortgage,
which
  translates into a higher mortgage. 

I don't know about where you live but around here (and most places)  you
most certainly CAN get a no cost mortgage. As I used to be a mortgage
loan officer until the business got too sleazy for me, I can try to
explain how it really works. 

OK, you borrow 100k. Your lender makes the loan and sells it. THe amount
it's worth is determined by the interest rate. Say the "market", or "par
rate", is at  6.625% The chart will show you how much your bank or
broker can get when they sell your loan.  ( I have no idea what the
current market is, but it somewher between 6.5 and 7.0%. Also the
relationship is typically 1/4% in rate for each "point" but that can
easily be as much as 1.5 points, which is too much.)  


6.250% -  98,500 
6.375% -  99,000
6.500% -  99,500 
6.625% - 100,000
6.750% - 100,500 
6.875% - 101,000
7.000% - 101,500
7.125% - 102,000

You see, the lender gets more money at higher rates, less at lower
rates. If you want a loan at 6.25% then they simply charge you 1 1/2
"points, or 1.5%, or $1,500, and they are back even collecting a total
of 100k for the 100k loan. 

A "no closing costs" loan works the same, but in reverse. You simply
select a higher rate, and let the lender's premium, or "overage" pay the
closing costs.  There's no reason any legit lender won't go for this. If
you can't find someone in your area you can try emailing me, and if I
can point you  to a source I will. mailto:rbarnes@mindspring.com

A mortgage lender (bank/broker) makes a loan for $100,000.  Now, almost
no institution in America wants to (or can) carry the loan for 30 years,
so they sell the loan on the secondary market. Most loans are
"securitized" buy the lender, or the lenders source, and are bundled
with other loans in a nice little package. Let's say our bundle is a
total of 10 million dollars in 30 year loans each at 6.625%.  Now the
bundle gets the FannieMae stamp of approval providing all the loans are
underwritten (approved) according to FNMA guidelines. THis bundle is now
nearly the same as a bond, and the original lender has their money back
and can make another 100k loan with the same money. 

The lenders out there in the real world also receive another form of
compensation when they sell the loan which is call a Service Release
Premium, or SRP.  THis can be BIG. THe bigger the loan the bigger the
SRP.  THis is paid to the lender when they give up the rights to
collecting your monthly payment.  WHoever gets your monthly payment gets
to skim a little off the top before sending in down the line to whoever
"owns" the security that includes your loan. With SRP, and origination
fees, and points, the lender needs to net about 1.5% to stay in
business. 

Now the big trick is in finding a loan officer that (1) has access and
authority to their companies pricing structure, and (2) will configure a
package that meets your needs without screwing you in the process.  You
see the loan officer and the bank/broker are going to split the profit
on your deal. This is ususally 50/50 and the lenders will take less from
a top producer.  If the loan officer can "make" and extra 3/8'ths off
you, that's an EXTRA $375.00 (on a 100k) that the company and the LO
split. This is called "overage" and I know a lot of lenders that make a
killing this way.   I've seen 3-4 point in overage charged at cloasing. 
(Pigs!)

You'll never totally figure all this out, and you'll never get to see
all the lender's cards, but by shopping and asking around you should get
to someone you'll be able to trust to make a fair deal for you. 

If you hear a lender quoting a rate more that 1/8th % below most lenders
quotes, you're talking to a liar. THey all sell their loans at the same
place, and they all have overhead.  I worked at a broker that usually
had the lowest rate in the newspaper, and in the finance magazines, and
guess what? Lie Lie Lie!

Another popular trick, especially in a down market like this,  is to
"lock" the loan with you, and then "float" the loan on their books.  If
todays par rate is 6.75% and you lock it for 30 days, your loan officer
can tell you it's locked, but in reality can be floating your rate
hoping to catch it on the next dip, and pocket the difference. 

This is really dangerous and most institutions don't alow it, but it
happens a lot around here.  I've seen major players get bankrupted by
this little play. Imagine having $5 million in the pipeline that you
were committed to at 6.75 and the market goes wacko and rises to 7.125%
tomorrow. Now the lender has to say sorry, we can't make that loan at
6.75%, or they have to fork over about 1 1/2 points to buy the rate back
down. On $5 million that's $75,000 CASH!  Ugly huh? 

Here's what I'm doing. We are filling out a 1003 (ten-oh-three: a
standard FNMA mortgage loan application), this weekend. Our bal. is
118k. We bought the place about 5 years ago with a 7/23 at 6.875%, and
it looks like we'll stay around here for a while, so we are going to
take the opportunity to lock the rate for 30 years, and get some extra
cheap money for other purposes.  When the appraisal comes back (200k?)
we will set our loan amount at 80% of value and take the difference in
cash.  I am not locking in any rate before the loan is approved!  The
trend is your friend and the trend is DOWN. Also you can get the best
rate on a 10 day lock, and you can't get that 'till you're approved. So
I'm applying, floating, and closing when the market is about 6.5% or
less. 

My best advice is to refi any loan over 7.5% no mater what the term or
ballance, unless you're selling. Do not pay for anything other than a
credit report and appraisal (around $250-400), and pull the trigger when
it's too good to resist.  The lenders'pipelines are bulging at the seams
right now, and further dips will make it crazy. Get in line and take it
at a slow pace. I expect rates to move lower and

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