Effective October 1, 2008, Fannie Mae is adjusting the cost of mortgages from 0.25% to 0.50%.  Freddie Mac will follow on November 7, 2008 with an add of 0.50%.  Consumers will most likely not see this from their end–it will all ready be factored into the pricing of their rate. 

Some lenders will begin pricing in the fees before Fannie and Freddie (conventional financing) as the dates are for when loan files are delivered to them–not originated or locked.  A lender does not want to get caught with a rate where they’ll owe Fannie or Freddie 0.5% more in fees per file come October…in fact, I’ve noticed that a few lenders have all ready started incorporating these fees into rates this week.

A half point in fee (or 50 bps) typically equals about 0.125-0.25% to rate depending on what pricing is when the mortgage interest rate is locked.  The amount of the fee (referred to as LLPA or Adverse Market Fee) varies depending on credit score, loan to value and program.   Fannie Mae has added loan to value brackets from the previous guide over 70%.   The new LLPA (loan level price adjustment) matrix is more complicated than the earlier one as well.

This is one reason to work with a Mortgage Professional who has the ability to shop various banks and lenders during a transitional period such as this.  For example, assuming a lowest mid-credit score of 679 (two borrowers) at an 80% loan to value for a purchase, the difference between lenders who are all ready factoring the "adverse market fee" is 0.75% to fee.  Based on a loan amount of $400,000, this would cost an extra $3,000 for the same rate or about 0.25% more in rate!

The closer we near October, the more lenders will start pricing in Fannie’s adverse market fees.

If so, you may want to check in with the person you co-signed for just to make sure every thing’s okay.   In the event they’re not able to meet their mortgage payments,  you certainly don’t want the "foreclosure man" to show up at your door.   The quote below is about a foreclosure in Kirkland where someone co-signed for a friend and the foreclosure man is knocking, as reported by Erik Lacitis of the Seattle Times:

"I just thought I was doing a friend a favor by co-signing," she said. "And then he was going to refinance and get my name off the loan. I can’t afford for this to happen."

No one ever expects to go into foreclosure and much like the person above, intentions are to refinance the co-signer off the mortgage.   However when things go wrong and someone is not able to make the payments, the co-signer is on the hook.  Unfortunately, the co-signer may not have the same lead time as the borrower in dealing with a foreclosure situation as many who are dealing with this type of situation are living in denial.

Nearly five months can elapse while the various legal steps are taken, and right up until the morning of the auction, the foreclosure can be stopped if an arrangement is made with the lender. Only about 20 percent to 30 percent of foreclosed homes in the Puget Sound area actually are sold at auction, based on statistics from the counties.

Foreclosures are on the rise in the Puget Sound area so if you have done a friend or family member a huge favor by co-signing on a mortgage, you may want to give them a friendly call to see how they’re doing.

Hat Tip to Marlow Harris of 360Digest.

A lock confirmation is a written document that your Mortgage Professional should provide you once your interest rate is locked.   In fact, if you don’t receive a Lock Confirmation once you have instructed your loan originator to lock, demand one.  No skirting from the Loan Originator allowed!

Your Lock-In Agreement/Confirmation should include the following information:

• Date the loan was locked
• Borrowers Names
• Property Address
• Loan Amount
• Lock Expiration Date
• Interest Rate
• Origination Fee
• Discount Point
• Whether or not there’s a Prepayment Penalty
• ARM information (Margin, Index, Adjustment Caps, Life Cap and if it features a Conversion Option)
• Any lock in fees (including non-refundable) if any.  This generally applies towards locks with longer lock periods.
• Terms of the lock (see below)
• Signature place for borrowers
• Signature of Loan Originator
• Name and Address of Mortgage Company

Why is this so important?  For starters, once you agree to lock in a certain interest rate, a clock begins ticking and counting down towards the lock expiration date.  If you get too close to that date, you may need a lock extension which could have a fee depending on what the pricing is at that time.   

Equally, and possibly more important, you want to make sure that your Loan Originator has in fact locked your mortgage rate.   There are some Loan Originators out there who will say they have locked in your rate when in fact, they have not.  They’re gambling the market with hopes of still locking in your rate at what they have told you, but they’ll make a little extra on the back end OR the rate you want isn’t quite available so they’re gambling the market will improve and they’ll lock you once that rate appears.   But what if it doesn’t?   Having a document that shows that the Loan Originator committed that rate to you may help you should you need to make them honor the rate (you may have to seek their manager or higher).

It’s quite possible, especially in this volatile of a market where we are averaging two rate changes per day, that you may give the LO permission to lock in your rate and when they go to do so (even if it’s the moment you hang up the phone), the rates may be changing.  A Mortgage Professional will be upfront with you and let you know if this has happened (for better or worse).   An actual Lock-In Agreement/Confirmation should not be provided until the rate is actually locked in. 

Changes to the loan application may also impact the mortgage rate which would then change the lock.  For example:

• Credit score changes during the transaction discovered from a new report may impact the rate for better or worse.
• Changes in loan to value (after the appraisal is received).
• Change in level of documentation for the loan.
• Loan programs being terminated or guidelines tightened.
• Investor pricing changes with less time permitted than what the lock will allow.
• Information on loan application not accurate, misrepresented or changes (such as employment or the Underwriter determines occupancy to be different than stated on application).

Again, a Mortgage Professional will notify you of these changes and how they impact you as soon as they become aware.

Some lenders also offer a Forward Lock Agreement which is different than a confirmation…I’ll give you the scoop on a Forward Lock in another post soon.  Stay tuned!