At the end of October there are HUGE changes coming again to the way loans are priced. Below is a more technical anaylsis of what will happen and why but in a nutshell the change are as follows.
If your loan is locked BEFORE the end of October and closes within its projected timeframe there will be no change to the rate and pricing. The danger will be if loans are locked and have to be extended after October 31st it will be VERY expensive, almost impossible to honor the lock pricing as currently structured. So just to clarify if you lock now and close within the time frame the lock says you are good. If ANYTHING goes wrong, no matter what it is going to be a HUGE problem for all parties. It will mean higher rates, points to be charged or in the case of tight DTI ratios it will kill the deal at the last minute. Short sales and foreclosures are particularly vulnerable.
You might get a GREAT RATE but you better start asking how long the lock is for or you are going to find out in Nov it will be a different story. There will be a lot of blame passed around but there is nothing the loan officer or even the lender can do. Fannie and Freddie are run by Congress so we all know what that can mean.
Last thing and very important. FHA/VA would not be affected by the G-Fee increases because FHA collects MIP and insures the loan. VA collects a VA Funding Fee and guarantees the loan.
I hope this was helpful and please let me know if there are any questions.
Senior Loan Officer
1ST Mariner Mortgage
Lending in all 50 states
Congress mandated the FNMA and Freddie Mac properly measure their risk of insuring mortgage securities, therefore, later this month, both GSE’s will be adding 10 bps to their “G-Fee” (Guaranty Fee). The financial impact of this is an increased cost within the transaction of approximately 40 – 80 bps.
- The G-Fee is an annual insurance payment made to the GSE’s for guarantying the flow of monthly P&I payments to the investors in the MBS’s.
- Since mortgages are assumed to have a life-span of 4 – 8 years (varies by bank and owner of MBS’s), the financial impact is 10 bps x 4 – 8 times = 40 – 80 bps.
Earlier this year, the US Congress made FNMA and Freddie Mac absorb the cost of the Payroll Tax Holiday by adding to the G-Fee in March. This was also a 10 bps increase to the G-Fee.
The financial impact of the G-Fee increases are significant:
- Prior to 2007, a large bank would have paid 12 – 15 bps in total G-Fee.
- By November 1, this will have increased for three reasons:
o The GSE’s no longer show significant favoritism to large lenders, therefore, the base G-Fee rose to 25 bps to most companies from 2008 – 2011.
o The Payroll Tax Holiday expense: +10 bps
o Added G-Fee risk adjustment: +10 bps.
- Therefore, today’s rates have the following additional expense paid to the GSE’s in the pricing:
o 13 + 10 + 10 = 33 bps x 6 year life = 198 bps.
o This equates to roughly an increase of 50 bps of additional INTEREST RATE from 2007 – 2012..