This article is Part II of a two-part series on the surge in mortgage rates. In Part I, we discussed simple questions. For Part II, we've selected several technical scenarios we think will interest our newsletter subscribers. We edited the transcript for clarity and length. Questions are emboldened.
Recently, Lenders Compliance Group was asked to host a meeting for a mortgage lender's sales team. 450 loan officers from across the country attended. Jonathan Foxx, our Chairman and Managing Director, hosted the meeting. We recorded it and obtained the transcript. We did not charge a fee. The format was a question-and-answer session in which loan officers asked us how to explain the surge in interest rates to their borrowers.
Jonathan covered many scenarios, from simple to complex, reflecting borrowers' familiarity with financial conditions. We placed considerable emphasis on ensuring that the LOs' responses would comply with regulatory guidelines regarding contact with the public. The meeting lasted an hour, after which many LOs sent us additional questions.
We have scheduled another compliance-related meeting with this lender on a different topic. We would like to schedule one with you! If you want us to host a free meeting, we would be glad to discuss the topic.
Please email us here and tell us about your meeting topic!
For this Part II article, we selected several technical questions we think will interest our newsletter subscribers. We edited the transcript for clarity and length. Questions are emboldened.
This two-part article is separated into simple and technical scenarios, as follows:
- Part I: Simple Questions
- Part II: Technical Questions
TECHNICAL EXPLANATIONS
Many borrowers follow the markets closely, so drop the analogies and explain how mortgages are actually priced. Depending on the borrower's level of understanding, four ideas may carry the conversation. These are the benchmark, the spread, the Fed's role, and the decisions in the borrower's control.
Together, they usually cover the general range of concerns. But if you are unfamiliar with the technical side, do yourself a favor and read up on it; and if you don't know an answer, tell the borrower you will check – and get back to them promptly.
The Benchmark
Question: I work with high-net-worth borrowers. These people follow the market constantly. Yet they come to me for more feedback, especially when they're deciding on financing. I need a way to start the discussion that helps break the ice. What would you suggest?
Answer: I would start with something easy to test the waters. I would say:
"A mortgage rate is driven mostly by the 10-year Treasury yield, not the Fed funds rate. A 30-year mortgage has a 30-year term, but most are refinanced or paid off through a sale within about 7 to 10 years. Investors therefore price them against intermediate-term Treasuries. With the 10-year near 5.29% in early October, mortgage rates followed it up."
It may seem counterintuitive to tell them what they probably already know, but start by showing you are going to tell it like it is, no matter what. Sophisticated borrowers – like all borrowers – want to work with LOs who keep it real!
The Spread
Q: I have a borrower who watched a YouTube video on the mortgage process and now thinks he's an expert! I respect his diligence. He even knew about negative convexity, which I never knew. So maybe he is an expert! But he can't figure out how the spread works. I tried explaining it. It didn't make sense to him. How can I walk him through how the spread works?
A: The spread is the part most borrowers have never heard of. With the 30-year mortgage at 7.28% and the 10-year at about 5.29%, the gap is roughly 2 points. Historically, it has averaged closer to 1.7 points.
