What is the Velocity of Money and How Does it Impact Home Loan Rates?

If you’ve been watching the economic news, you’ve probably noticed that market experts and traders have been keeping a close eye on the Commerce Department’s Personal Spending and Personal Income reports. Obviously, those reports provide insight into the health of our economy, but did you know they also influence home loan rates? That’s right, personal spending can actually influence the interest rates that are available when you purchase or refinance a home.

Here's why. It has to do with something called the velocity of money. Even though the government keeps pumping money into the system, nothing happens until that money is spent or lent – and passes from one hand to another or one business to another. The speed at which this money passes between parties is called the velocity of money.

With the job market still very sluggish, consumers aren't spending much money these days, and businesses are still reluctant to spend money to make investments in their business. With the present velocity at low levels, inflation remains subdued and that's good for home loan rates. That's because rates are tied to Mortgage Bonds and inflation is the archenemy of Bonds, so low inflation is good for Bonds and rates. However, once velocity increases, the excess money in the system will cause inflation – which is bad for rates, since even the slightest scent of inflation can cause home loan rates to worsen.

While we certainly want to see better economic recovery news in the near future, we have to remember that there's an inverse relationship between good economic news and Bonds and home loan rates. Weak economic news normally causes money to flow out of Stocks and into Bonds, which helps Bonds and home loan rates improve. Strong economic news, on the other hand, normally has the opposite result.

Currently, home loan rates are at a historically low level, but that situation won’t last forever. That means now is an ideal time to purchase a home or refinance before the velocity of money – and rates – change. If you or anyone you know would like to learn more about the current economic situation and how to take advantage of historically low home loan rates, then please contact me directly at 301.354.8251 or email at DBenner@embracehomeloans.com.

Change is Good

It was a great weekend with good friends, great kids, and some fall fresh air. The fall season is the best in my opinion simply because you see the changes every day. Fall is a process with a destination, a purpose and an outcome; these are things I can relate to.

Although I believe there is a grey area in many aspects of our lives, I tend to prefer responsive processes. As with the fall season, I can see change every day in my line of work: customer’s needs change the interest rate changes, the market changes, the technology changes, the guidelines change, I could go on forever but the point is there is a process which inherently encompasses change forcing me to analyze from a new and different prospective each time.

When there is a process, which there is for most things in life, you have a choice; work hard with purpose to quickly arrive at a quality outcome or allow yourself to give little effort and drag your feet the whole way with no regard.  

I choose to work hard with the purpose of helping people live better lives, whether through analyzing customer’s credit, helping a first time home buyer make educated decisions, finding the best product for my customer or simply by helping people save their money.

It is very apropos that I work for a company called Embrace because that is what I strive to do with all aspects of my life; simply embrace the process of your life with a purpose, knowing your destination and influencing your outcome.

What motivates you and for what purpose? Until next time...take care.



Applying for loan is 'like a second job'

By Michele Lerner

The Washington Times

11:11 a.m., Thursday, November 11, 2010

Media reports of the difficulty of obtaining a mortgage may have left a lot of consumers wary of lenders, but mortgage brokers and bankers say they have money to lend and can help most borrowers obtain a loan.
They also say, however, that consumers should anticipate a much more rigorous experience when applying for a mortgage than in the past.

Beyond expecting a somewhat more arduous process, mortgage loan applicants should be realistic in their attitude about what a lender can and cannot do for them. They also should be prepared to meet their lender's expectations so the transaction can proceed as smoothly as possible.

"So many people are unrealistic about the loan process," says Douglas Benner, a senior loan officer with Embrace Home Loans in Rockville. "It goes both ways. Some people think they cannot get a loan when they can, and others still think they can get a loan without providing any documentation. People need to realize that they will need to jump through a lot of hoops to get a loan now, especially compared to five years ago, when all you needed was a heartbeat to qualify."

Mortgage applicants should anticipate having a detailed conversation over the phone or in person when they first contact a lender for loan information. This initial consultation is free. In fact, if a mortgage broker or banker attempts to collect a fee, that should be a red flag to stay away. Collecting an upfront fee for a loan consultation is illegal.

"The most important expectation that should be met on both sides of a mortgage transaction is honesty," says Marv Stanger, a senior loan officer at Primary Residential Mortgage Inc. in Springfield, Va. "The lender needs to be completely honest about whether they can help someone qualify for a loan, and the borrower needs to be completely honest and open about everything."

Brent Mendelson, a senior loan officer with Monarch Mortgage in Rockville, Md., agrees that honesty should be the No. 1 priority for both borrower and lender.

"Lenders need to educate the borrowers about what it takes to get a loan these days in terms of credit and debt-to-income ratios and realistically describe the timeline from application to settlement," Mr. Mendelson says. "On the borrowers' side, it is vital not to hide anything.

"Sometimes people don't bother to mention some extra income from a side business or the fact that they declared bankruptcy a few years ago. No matter what it is, we will find out, because everything needs to be documented now. It is better to be open from the beginning because a preliminary disclosure can go a long way toward saving everyone time."

Borrowers should expect a seemingly endless stream of questions from the lender. The better prepared the borrowers are from the beginning, with items such as recent pay stubs, bank statements and tax returns, the easier the loan application process will be. Some lenders quote a minimum of 30 days to process a loan, but many take 60 to 90 days to reach closing because of the volume of loan applications and the depth of documentation required.

"The lender needs to ask enough questions at that first meeting to find out if the borrower has the ability to repay their obligations and good enough credit to qualify for a loan," says Peg Partlow, a loan officer assistant with Embrace Home Loans in Rockville. "After that initial fact-finding discussion, borrowers should be educated on the fact that the loan approval depends on a variety of factors, including property type, debt-to-income ratios, the credit score and documentation of everything. A lot of borrowers are unprepared for the level of documentation they will need to provide."

Borrowers also need to realize that sometimes they will not qualify for a mortgage.

"Sometimes a loan simply will not fit into the guidelines for a particular program, and it can be frustrating for people," Mr. Stanger says. "For example, even if someone has good credit and good income, if they own too many investment properties, they might not be able to get another mortgage for a new one. Sometimes the appraisal will not show enough value in a property to allow the loan to go through. This can be frustrating for consumers, but the lenders have to stick to the guidelines."

Mr. Stanger says some borrowers think lenders are being intrusive when they ask for information about things like alimony or child support, but they need to be prepared to answer all these questions, even if they seem personal.

"Borrowers need to to jump in and make a commitment when they apply for a loan," Ms. Partlow says. "They should really treat the application process almost like a second job because if they are not timely in their responses to the lender they can delay the loan.

"Consumers need to commit to timeliness and they need a sense of humor, too. It helps everyone if we recognize that there is a lot of paperwork required, so loan applicants should not get offended by the loan officer's requests."

Mr. Benner says borrowers today need to keep careful track of their funds as they go through the loan process.

"Everyone needs to show a 30-to-60-day paper trail of where the money is coming from when they apply for a loan," Mr. Benner says. "A lot of people do all their transactions online now and may move money around in order to prepare for their down payment and closing costs, but they need to be able to give us printed statements that show where the assets are coming from."

While borrowers must provide most of the documentation in the loan transaction, lenders are required to provide borrowers with a good-faith estimate within three days of the loan application. The estimate details anticipated closing costs along with the loan details so borrowers can compare loans with what other potential lenders offer.

Once borrowers understand they will need to be responsive to lender requests for documents and information, they also should be comfortable enough to ask for financial advice from their lender.

"We definitely provide advice to our borrowers, but not all lenders do that," Mr. Stanger says. "We think it's important that we are not just qualifying someone for a loan, but we also discuss the borrowers' overall comfort level with their mortgage payment.

"I think lenders have a valuable role to play in terms of discussing the pros and cons of various loan options. For instance, if someone calls to check on interest rates for refinancing, it is better to discuss their overall financial goals and their current loan before focusing solely on rates. People need to understand the implications of their loan choices."

Mr. Mendelson explains to his customers the option of wrapping closing costs into the loan or of paying a slightly higher interest rate to eliminate closing costs. He says his job is to educate borrowers on the pros and cons of different loan products.

"I can also help people with credit problems improve their score," Mr. Mendelson says. "Not all lenders have this expertise, but some can help their customers by giving them advice about fixing errors, settling debt or shifting debt in order to improve their score. We have a computer program we can use that can help us evaluate what will improve someone's score the fastest."

Ms. Partlow says the credit bureaus have software that lenders can use to anticipate potential improvements in the score depending on various steps a consumer takes.

"We can't physically take over and fix someone's credit, but we can give them advice on things like paying down their credit card balance to keep it under 50 percent [of the credit limit]," Ms. Partlow says.

Communication is key to a smooth mortgage transaction, and borrowers should establish how they want to communicate - by phone or e-mail, for example - as soon as they choose a lender.

"If you are not hearing from your lender for a little while, you should definitely get in touch and make sure everything is going smoothly," Ms. Partlow says. "There are some lulls in the process sometimes, but you should expect to hear frequently from your lender about what is happening."

Mr. Mendelson and Mr. Stanger say they send e-mails about once per week during the loan process and are immediately responsive if a client has a question.

"Keeping people in the loop is an important part of good customer service," Mr. Mendelson says. "Customers should feel comfortable enough to ask questions or to discuss potential issues. I've had people quit their job just before settlement, which, of course, derailed the whole loan process. If they had just talked to me about it first, I would have told them to wait until after settlement."

Mr. Mendelson says borrowers should be careful while waiting on their loan not to buy a new car, apply for new credit cards, overspend on their current credit cards or co-sign a loan for someone else, because each of these situations could cause the loan approval to be rescinded because of a lower credit score or a higher debt-to-income ratio.

Preparing for Tomorrow

Monday, November 8, 2010
By Brad Finkelstein

Doug Benner, whose 2010 volume has already surpassed last year’s, is taking steps to source where his business will come from in the future.

There are plenty of quotes and clichés about those who fail to adapt and change being left in the dust. Doug Benner, senior loan officer with Embrace Home Loans, knows that by being willing to adopt the latest marketing trends, he will stay ahead of the game.

Benner has been in the mortgage business approximately 13 years, starting at the now-defunct Federal Funding Mortgage. He has been with Embrace Home Loans’ Rockville, Md., office for the past three and a half years.

Embrace, he notes, has the best technology he has seen from a loan officer and compliance standpoint.

Prior to entering the mortgage business, for 13 years he traveled the world working for a government contractor. He was a looking for an opportunity where if he put the effort in, he would get compensated fairly for it.

Benner spoke with people in the industry and figured he would give this a shot. Furthermore, he adds, he liked real estate (he has been a long-time purchaser of investment properties) and he liked math and doing calculations.

In his time in the business, he has ridden the up-and-down waves, and right now he is in “a very big upturn right now.”

For the year so far, Benner has loan production volume of $54 million, with many more loans in the pipeline. So he will far surpass his 2009 volume of $52 million.

Having been through the cycles, Benner has learned a few lessons he has applied to his business, one of which is “don’t let an opportunity go when you have an opportunity like” today’s market. He and a few of his colleagues are working as much as they can to take advantage of what is happening, doing the things to keep the funnel full on the front end and keep them flowing through the system on the back end.

Benner is one of the top purchase loan originators at his company, although the bulk of his business by market share is refinance, approximately 70% to 30%.

His business is all referral-based. “I’m lucky enough to have a lot of A-paper professional clients, attorney, doctors and such. I would say I do a lot more conforming products, in the large loan amounts, $400,000 plus.

“Being in the D.C. metropolitan marketplace, there are FHA loans, VA loans, rural housing loans and these other niche products. But I find the referrals I get are for conforming, conventional financing, purchase and/or refinance clients.
“So my loan sizes are larger than the average,” Benner said. Given that client base, he also originates traditional jumbo mortgages as well.

Approximately 80% of his business comes from Montgomery County, Md., Washington and northern Virginia. He does some loans in Delaware. One recent application was for a USDA Rural Development loan in western Maryland.

His clients come from three sources: Realtor referrals for purchase loans, financial planner, typically (but not always for) refis and current and past client referrals.

Benner does very little in the way of co-branding with his Realtor referral sources. Rather he relies on his reputation for attracting this business source—that he has good rates, he will take care of the loan through the process and that he and his team will make sure the loan closes on time, without hiccups.

Benner says he might provide open house financing sheets but for the most part he does not spend marketing dollars on co-branding efforts. The logic behind this: If a real estate office has 50 brokers and he only co-brands with only one, the other 49 in the office might not refer their clients to him.

He also does a blog, which he said his assistants helped him develop. The blog provides mortgage news and trends as well as occasional personal information as well.

For example, the week of Oct. 11, the blog had entries on the effect of the foreclosure crisis on buyers and sellers, short sales and pictures from an open house Embrace had.

To keep in touch with his database of past clients, Benner utilizes the marketing campaigns provided by Loan Toolbox. He called it “the best follow-up system in the country.”

Helping Benner is a production assistant who helps him do things like ordering title, appraisals, and subordinations and helping get the loan set up in the system. When this assistant is done with it, the loan then goes to his processing staff.

He takes 80% of the applications over the telephone himself. There is also an online link for some of his more tech savvy clients.

Still, he said he could take an application over the telephone himself in less than 10 minutes. He likes to have some communication with the client on the front end to help personalize their dialog. It lets him get a feel for the client, what they are looking to do and what their concerns are and what they are trying to achieve.

Plus, some real estate agents that he works with insist that he meets face-to-face with the client at the agent’s office, “and develop the bond between the three of us, the agent, the client and myself.” Benner added, while he does do this in some cases, but if it is done too much, he (and any other sales person) won’t have time to take their sales to the next level.

“When I started out 13 years ago I would drive anywhere to get a deal, anywhere to get a document, to get a loan closed. But that is just the way we were,” he said.

In addition, Benner has a marketing assistant that helps him update his client database, get the information to Loan Toolbox and also help his social media marketing efforts.

In fact, he continued the use of things like Facebook, LinkedIn, Twitter and the like (including his blog) are “the most critical going forward” in terms of mortgage marketing, especially with the upcoming generation of potential homebuyers.

In fact, he calls this type of marketing better than being part of a Business Network International B2B referral group. “Putting yourself out there like that is exponentially more powerful,” Benner said. He has pages on both Facebook and LinkedIn.

Most people who are starting the home buying process today are first going to real estate websites. In the same vein, going forward, there will be a large group of those under the age of 30 using social media to find a loan officer and/or seek referrals about those originators, he said.

So he hired his marketing assistant “to help me develop that part of the business model that I never even explored before. So that is a new piece of the business.”

Benner adds there are only so many referrals that can be gotten from past clients and business partners. “If you can grow that and find even more business on the front end through these other mediums, there is nothing wrong with that.

“I would love to get to the point (where he is so busy) where I can’t take loans,” he continued, noting one should not do more loans than either he or she and/or their company can handle.

Part of that is having enough people to handle the workload. Even though he is a W-2 employee, Benner said he can still help employ people by growing his business. But that business is not going to grow if he stays static.

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Do Lenders Even Want to Close Deals?

I can't tell you how many emails and phone calls I receive asking me why I need so much more information than the last time they purchased or refinanced their home.

The answer is two-fold, It is not only the credit crisis which has tightened guidelines considerably but also Freddie Mac and Fannie Mae are sitting on mountains of bad loans and losses. So what are they doing? They are requiring lenders to buy back loans with any flaw they can find.

So what do the lenders do? Well, they make sure there are no flaws, period. You are just at the end of the chain here. I recently spoke to an underwriter who works for a major national lender and he said he can now only underwrite two loans per day compared to ten loans per day just a short time ago because of all the checks and balances now required by the lenders. The time and cost of properly underwriting is increasing the cost of the entire process.

Will this get better? The pendulum swings both ways but I do not think it will swing all the way back to where it was. Let's hope it doesn't because we all know the damage it can do to our nation as a whole when we don't require strict enough guidelines. We will all suffer for some time to come and improvements will come gradually, just like the housing and employment markets. In the meantime, we must document your loans accordingly. It is important that all originators have a thorough understanding of what documentation will be required from the lender so they can properly advise their clients on what to expect during the underwriting process.