Mortgage Applications Likely Soared Last Week - But Not Really

When we get weekly Mortgage Bankers Loan Applications survey tomorrow morning it is going to show an explosion that will make everyone think the entire nation is refinancing all at once.  That is what the Wall Street analysts and media have been pushing for the last week as well. This is an incorrect assumption.

Below is a note I wrote to clients about IndyMac when they put out a press release saying they locked $1 billion in new loans last January. This is a very misleading press release, which I am sure was the intent. If you look at the chart, it had the effect of sending the stock price up 100% for a brief period of time. All of those who bought under the false impression that IndyMac was doing great based upon loan application counts were ultimately burned. The same rules apply today when rates surge lower in this short of a period of time.

Remember folks, with respect to mortgage and housing ‘NOTHING is at it appears’. Not even something as easy as counting up mortgage applications.

The number that comes out tomorrow will be mostly wrong. Not ’somewhat’ or ’slightly’ but ‘mostly’ wrong.  While lenders did get a surge of business that is new to them most is not new business. When rates come slamming down in a very short period of time like we saw last Tuesday very little new business is originated that day. My best guess is that of all the loan applications being counted last week that 85% of them were a result of a loan that was pulled from another lender for a better rate elsewhere.

This is because most lenders will not ‘roll down’ borrowers interest rate locks to ‘today’s rate’ when rates drop.  Because of this when rates drop through the floor in a short period of time, entire portfolios of loans that have been in process for up to a month shift from one bank to another as loan officers and borrowers do what is necessary to take advantage of ‘today’s rate’. The surge in mortgage apps last week mostly represents the past month of loans all re-locked and submitted to other lenders within a few short days.

What the survey tomorrow won’t tell you is how many loans were lost by each lender during the week.  Losing these loans is painful because they were locked and submitted at much higher (favorable) rates. When in-process loans that are locked get pulled mid-stream more money can be lost than is made from replacing that loan with a new, lower-rate loan pulled from another lender. That is because the original lender loses all of those man-hours and processing costs as well as the actual loan that carried a rate higher than market making it more valuable. Additionally, hedging for days when rates plunge is nearly impossible because lenders have no clue how much of their existing pipeline will be lost and how many of the new locks and submission will actually fund.

Now you know the real story about what happens to mortgage divisions when rates plunge. For more on what low rates in general mean now days, please see my recent report called  Mr Mortgage: In-Depth Look at Mortgage Rates - 5.5% Does Not Exist For Most

1/24/08 IndyMac locks $1 billion in loans in a single day - The Half-Truths Never Stop!

Michael Perry is the biggest information fabricators in the industry. Look back through all of your 2007 press releases and you will see how many times he has said such things only to disappoint the shareholders.

The facts are IndyMac sits on Billions of unsalable subprime, Pay Option and second mortgage loans. These three loan types make up 80% of their portfolio and most of it cannot be sold for any price.

‘IndyMac See Record Lock Volume for a Single Day’

Record lock volume is only half the story. All mortgage companies had record locks yesterday but this is not ‘new’ business necessarily.

When you lock a loan that is your rate. By and large, lenders do not roll down rates to current market daily if the market improves. When rates plunge like they did yesterday, everyone rushes out and forward locks loans with whoever has the lowest rates.  Much of this volume was already locked and in-process at a different lender but relocked somewhere else to get the better rate.

Many times in the craziness one loan is locked with multiple lenders on days with large rate drops because pricing is so different between them and people will no almost anything for the best rate.  So for every hundred ‘new’ loans IndyMac got yesterday, they may end up losing 85.  But of the 85 lost if rates had not have plunged they may have funded 60%. Of the ‘new’ 100, they may fund 45%. Net-net, they lost business in the near-term.

Yes Indy may have locked $1 Billion (3000 loans) yesterday. But this is not a daily event and they likely lost 2500 loans previously locked and in-process as portfolios shifted for the best rate. Of the 3000 ‘new’ loans, the majority were already locked and in process at another lender like Countrywide. Another fact is that following mega lock days, volume typically falls off sharply and a week later lock volume could be off 90% as rates level out or rise.

In addition, many loans that were locked will never fund because loan officers lock borrowers that their computer systems say can benefit and ask questions later. Then after calling the borrower they realize that the borrower does not qualify because the value is down too much, the borrower does not qualify under the tighter guidelines etc.

Now for the bad news…all of those loans that IndyMac already had in their pipeline previously locked at higher rates that were pulled, could cause severe losses. Not only paper and hedging losses but real operational losses from the staff work loans for weeks that will never fund.

Lastly, the lost loans are the exact ones that they wanted to fund because they carry a  higher rate than market rate in most cases. The new 3000 loans locked yesterday at the one-day lowest rates in 5-years are locked so low that funding these could create massive losses since rates shot up so much in the past 24-hours. Rates are up almost 50bps since yesterday morning. To add insult to injury, chances are IndyMac was likely not able to hedge these appropriately and/or do not have the forward commitments necessary to handle that much production. In essence, their entire pipeline of loans locked at favorable rates to IndyMac that they worked so hard on over the past month churned elsewhere for lower rates at a COST to Indymac.

A day like yesterday while it makes for great headlines, can ruin a lender. It sounds counter-intuitive, but it is absolutely fact.

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