Loan Officer Training 08/14/2024 - How to Structure Rate Locks

In this episode of Loan Officer Training, we explore the intricacies of structuring rate locks, a critical aspect of managing interest rate risk for your clients. Understanding how to effectively structure rate locks can help you secure favorable terms and protect borrowers from market fluctuations.

We’ll discuss the different types of rate locks, including short-term and long-term options, and explain how to choose the best strategy for each client's unique situation. Learn about the factors influencing rate lock decisions, such as market trends and loan timelines, and discover tips for communicating these options to your clients.

Whether you’re helping clients refinance or purchase a new home, mastering rate locks can enhance your service offerings and build your reputation as a knowledgeable and trustworthy loan officer.

Join us for expert insights and practical advice on how to confidently navigate the rate lock process.

Join The Mortgage Calculator at https://themortgagecalculator.com/join

About The Mortgage Calculator:

The Mortgage Calculator is a licensed Mortgage Lender (NMLS #2377459) that specializes in using technology to enable borrowers to access Conventional, FHA, VA, and USDA Programs, as well as over 5,000 Non-QM mortgage loan programs using alternative income documentation! 

Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get qualified in just minutes!

Our team of over 350 licensed Mortgage Loan Originators can assist our customers with Conventional, FHA, VA and USDA mortgages as well as access thousands of mortgage programs using Alternative Income Documentation such as Bank Statement Mort

Catch all the episodes of the Loan Officer Training Podcast at https://themortgagecalculator.com/Page/Loan-Officer-Training-Series-Podcast

Catch all the episodes of the Loan Officer Training Podcast at https://themortgagecalculator.com/Page/Loan-Officer-Training-Series-Podcast

Loan Officers for Unlimited Free Non-QM Leads & Trainings Join The Mortgage Calculator at https://themortgagecalculator.com/join

The Mortgage Calculator is a licensed Mortgage Lender (NMLS #2377459) that specializes in using technology to enable borrowers to access Conventional, FHA, VA, and USDA Programs, as well as over 5,000 Non-QM mortgage loan programs using alternative income documentation!

Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get qualified in just minutes!

Our team of over 350 licensed Mortgage Loan Originators can assist our customers with Conventional, FHA, VA and USDA mortgages as well as access...

Transcript

Restream recording Aug 14, 2024 • 11:05:15 PM: 0:13

Welcome everyone. My name is Kyle Hiersche. I'm the COO of the Mortgage Calculator joined here by our President Nick Hiersche and our CSO Jose Gonzalez. We are a lender that specializes in non QM loans. And what we do every Tuesday, Wednesday, Thursday evening at 7pm Eastern on this show is a in depth loan officer training. Tonight we're going to be talking about rate locks, going to be very important. Going into this next few months in this year with some great changes coming up. So Jose, let's go ahead and talk about managing. Good evening, everybody. Thank you for joining us for tonight's training on how to structure rate locks, right? This is all going to be about effective rate lock management. Uh, it's pros, potential pitfalls. Um, you know, how do you just manage in this very volatile environment? Now, what I can state is that volatility is, is good if it's properly managed and hedged, right? Because volatility is what gets the customers, off from sitting on their hands and taking action, right? It could be volatility of the rates going down or the fear from volatility of the rate going up. Oh, so again, it's your job as a loan consultant to reach out to your borrowers, discuss those types of interest rate fluctuations in today's market environment and also combine that with the discussion of rate locks and when is the proper time to lock it and all that good stuff, right? So let's get right into it. on how to structure rate locks. Very important in this environment we're in. So what exactly is a rate lock, right? What does it mean? Well, a rate lock is an agreement between the borrower and the lender that allows the borrower to lock in the money. The chosen interest rate for a specified period of time, right? At whatever rate they chose. It says they're at the prevailing market rate, but it's really, you're locking it in at the rate you chose, depending on the price that you and you here, I'm talking about the borrower borrower locks it in at the rate that they decided that they chose due to the cost, typically the par rate, if you lock it in at zero cost and loan discount fee. Then, there's no additional cost to the borrower or borrower may choose to lock in at below market rate. And then they're going to pay a little bit of a low discount. The whole point is here is that you're locked in for a certain amount of time, be it 15 days, 30 days, which is more the normal or 45 days, which is recommended, especially on a purchase transaction. Interest rate risk. is the risk that the market interest rates will rise, which will cause a decline in the value of the instrument. In this case, the loan package. So what happens in that scenario is that if you don't have your rate locked and the secondary market of all of the investors who buys the loans is hedging for interest rate risk, That's when you get upward and downward movement in the pricing that you are able to obtain for that loan, right? That's due to their hedging for interest rate risk. Pull through rate is the number of loan applications that are closed and funded. By the lender versus the total number of submitted loan applications over a set period of time. And they like to calculate the pull through rate of locked loans, right? So once a loan is locked, that's considered like a serious loan application. And at that point, you know, you want to maintain that pull through rate. As high as possible can't just be shifting around from investor to investor with the same loan and having it locked in a bunch of different places. Float down now. Float down is a policy that does vary from investor to investor. Some investors don't have a float down. Some do. So float down is a policy that allows renegotiating the lock. Once a minimum threshold difference. Is attained now that minimum we're talking about is there has to be usually it all depends then obviously on that particular rate lock where it's locked in but usually the pricing on that loan has to increase by at least a point or in some cases the interest rate at the same cost. Has to decrease by at least a quarter of a percent. So like I was saying, it really varies from rate sheet to rate sheet and rate lock to rate lock. Should I say who it's locked with? Those are the considerations. And then if you do reach the threshold of improvement, whether it be a cost based threshold or a, or an interest rate based threshold. There is a cost then to float down. It could be anywhere from a half a point cost to a full point cost. And again, that will vary. from investor to investor. So, this is where our training that we have had, for interest rates, right? we've had the training on interest rates and, market factors and how they affect the mortgage interest rates. And this is where that training comes into play, right? When you are contemplating the rate lock, the consultation you're going to give to your borrower, you know, that you can't force them. To lock it in, but you certainly want to discuss with them, that scenario. And in order to discuss it, you definitely need to understand these factors. So to touch base on a few of them. Not going into the whole interest rate, presentation. Interest is the price that you pay to borrow money. And it's typically expressed as an annual percentage. Now the factors that are affecting interest rates, the federal reserve, you know, they've been in the headlines lately. Anytime the federal reserve, you know, anything. Well, I mean, you know, earthquakes are felt, right? So the Federal Reserve through open market operations sets interest rates, manages the money supply, regulates the financial markets and acts as a As a lender of last resort during periods of economic crisis. Now, factors that the Fed is going to monitor and then take, monetary action, policy actions with are things like inflation. And this is one of the things we've been seeing a lot of because the federal reserve counters inflation by raising the fed funds rate. That's the overnight lending rate that banks borrow from each other to meet their reserve requirement in fed capital reserve requirement. And this then obviously if the fed funds rate goes up increases all other borrower costs down the line because then the prime rate goes up, the discount rate goes up, all these rates go up, credit card rates go up, everything goes up, treasuries go up. And then, you know, mortgage rates, like to track a couple of the treasuries, especially to the 10 year treasury. Fed also monitors the unemployment rate. The lower the unemployment rate, it's deemed that it's a hotter economy, more, which means there's going to be more spending and higher prices. So then the Fed is going to take again, monetary policy action to slow down that economic activity and how they do that. the same way that they control inflationary pressures is by raising the fed funds rate again and the gross domestic product. That's the output of our country. GDP determines the country's ability to pay and the need to borrow. So, if GDP is higher, it's deemed we're going to have a great ability to pay less of a need to borrow and GDP is lower. We're probably going to have to borrow more money, additional deficit spending. That means, more, affecting on the rates because if you're going to increase treasury securities going out into circulation, because the Fed needs more money to operate, the government needs more money to operate. That's going to increase the supply of those items. They're going to have to increase the yield to be able to sell them, to make them more appealing because they're increasing the supply and what happens then. That also increases the rates. So you see how all of these factors all affect interest rates. Those are the kind of basic information you can share with your, borrowers or prospective borrowers to whet their appetites, then they can continue to do their research. Now, what are some of the challenges that we face? Managing our rate locks. This is a real key to hone in on some of these. The first one, obviously, volatility, right? That's what the one I was talking about. You know, that's a double edged sword. Could be your friend, could be your enemy, depending on how you manage the situation. Are you properly, uh, did you, Lock it when you're supposed to lock it, right? Or did you play games and try to be the hero or for whatever reason, want to do a 15 day lock in the end when that file is disclosed, and this is one of the things, you know, which I guess I'm going to get into the strategies, but the right moment to lock the file is when the customer is happy with the rate. Today, lock it. Either 30 or 45 days, whatever it's appropriate, but don't sit and wait. Maybe Friday it's going to get better or something's going to happen because they're already happy with the rate. So all you're doing is a disservice to the customer if you don't fully explain to them what can happen due to the volatility. Because what can happen is interest rates spiked and the borrower no longer qualifies at the higher rate. That's what can happen and that could be a really big challenge with volatility if you're not managing your rate locks properly. properly. Another challenge is your guidelines can be revised on you if you're not locked in. Did you know that? You lock in a rate, not just to lock the interest rate, but to lock in the guidelines. So all of a sudden guidelines are revised. You didn't lock it in. Now you go to lock it in. They'll tell you, wait a minute, it's no longer 660 for that program. Sorry, it's a 680. Now you get hit with an LTV hit from an 80 to 75. I mean, all sorts of things can happen, even to the point that now your borrower is disqualified from the loan because they can't meet the new guidelines. And furthering that scenario, total elimination of programs. If you're, you know, if you're locked in, they may tell you, hey, This program is being eliminated. If you're still locked in, close your loan. If you're not locked in, sorry, these are the guidelines. And watch out that they may not let you extend that rate lock. They may say, hey, you better close it by the time that rate lock expires or else you're out of gas. And then that program doesn't even exist. That happened, believe me. higher cost, right? You didn't lock it in when you were supposed to. Now, yeah, the program's still available. The guidelines haven't changed, but the pricing changed, and now the issue is due to the much higher cost on the rate, the rate that you need in order for the, for the borrower to qualify. Now they don't have the funds. Because it's more expensive. So, now the borrower has to increase their down payment and or their closing cost to qualify at the higher rate and will not be able to close if they do not have the additional cash to close. So, the end result here in the end, your borrower's upset, thinks that you just haven't managed the situation properly, maybe thinks that you've been lying about, that their rate was ever even available. and now you've lost credibility and now you're trying to just keep the borrower from canceling the loan and if they do close they vow never to conduct business nor refer a loan to the MLO and worse yet to the either so you can see it's also in the social media age how that could really mushroom into a very bad scenario there for everybody involved so again the strategies for effective rate lock management are pretty cut and dry. You see there the happy loan officer holding. The rate lock and you know, he, he listened to the training and, and, and, and everything else. Cause a, he analyzed the market trends and economic indicators daily, and he shared these with the borrower, right? First thing he did properly. And actually here early, cause at this point, there's still a prospective. You haven't done the loan, right? But. Definitely early in the process before loan disclosure, you should be communicating with the borrower and having this discussion about when is the right time to lock and the need to lock. This is part of the empowerment process that we discussed in yesterday's training. Right about setting expectations. This is definitely when you're setting the expectations about the interest rate and if they like the rate and they want to keep the rate and about locking the rate and about a 30 day rate, being one price and a 45 day costing a little bit more, but certainly worth it because if you now need 15 days, To extend the 30 day to a 45 day, it costs three times more usually at that point. And then also certain investors only allow a certain number of extensions, you know, so you got to be aware of that. You may reach the limit where they may say, no, you already extended this loan rate block twice. That's it. Now, the next one, if it expires, you gotta let it expire and now we're gonna relock at worst case pricing for the market plus a relock fee of anywhere from a quarter to a half a point. So again, Early in the process, you want to have that discussion and see when is the time to lock and also you want to communicate with that to them when you are requesting them to lock, like, not only call them, but send them an email, making sure, hey, do you want to lock the rate in today? So they can see this a yes or no via email and via phone because you want to document if they say no, later on, they're not going to hit you with, hey, why didn't you lock it in? On such and such date. Now the rates are, you know, higher and you didn't do your job and you know, you don't want to point fingers, but you want to be able to show that you've communicated clearly throughout the process. Now when you are, going to lock that file, I mentioned 30 days and I also mentioned 45 days. So listen, give yourself a cushion if you're locking it in right after a loan disclosure and lock it in for 45 days and not 30 days, unless you get an appraisal waiver. Then do 30 days. If you didn't get an appraisal waiver, do 45 days. You know, especially re filed. Remember you have rescission period, a three day rescission period on a primary, right? And remember, like I mentioned, the cost to extend is two to three times higher to extend a 30 day to a 45 days to get those extra 15 days than the original locking for 45 days from the beginning. I recommend locking that file in as soon as it's disclosed, unless for whatever reason. So, you know, you're in the, in the, in the bar or super sure of what's going to happen with the market. Make sure now again when you do log it in that you've properly analyzed credit income property type to protect the pull through rate. Why do I say that? Because if now all of a sudden things change on the file now, especially this happens with the income or the property value comes in different. Now, the LTV changes or the DTI changes. Maybe it's a DSCR loan. Now you drop from a 1. 25 DSCR to a 1 DSCR. Now you have different interest rates or different costs. So again, make sure that you have the file set up properly and it doesn't get torn apart in underwriting and you end up with a different loan. And like I mentioned, you know, manage borrower expectations throughout the process, right? All of this, this is when we talk about communicating early in the process, that is what we're doing there. So in our last slide here, we talk about the benefits of effective rate lock management, right? There's our happy MLO again. He hit the rate lock bullseye, right? And due to him hitting the rate lock bullseye, he has a Stack of money there to give to the borrower, right? Borrowers happily getting that cash out refi, everything worked out. That's the way you want it. Thumbs up, all the way because as you can tell there as from the, picture there from the image, benefits are pretty obvious to reach the promised land, right? Minimize. It's interest rate risks, right? You're talking about that's one of our challenges in this volatile environment. That's the key there. Lock it in. If it's the customer's happy with that rate lock, if the rates go down substantially, you may have the opportunity for a float down depending on where it's locked in. Don't hesitate and not wanting to lock it in just because you think the rates are going to go down. If that happens, we could still do a float down. It's great to have. Certainty in the financial planning, right? The DTI is going to be the DTI. The income is going to be adequate. You don't want to have a scenario where you thought you were going to have a 6. 5 percent interest rate, which allowed you to qualify. And now you have a 7. 25 interest rate. Now you're, you, you blew up the DTI and your bar no longer qualifies that that is the ultimate, you know, like you want to, you'll feel really like a heel. If you do that to your borrower and definitely for our investor borrowers, as well as our primary borrowers that want the best deal, increasing profitability again, by enhancing the financial stability of the deal. Especially if it's an investment property now, right? They think they're going to get a certain amount, not just for the DSCR, but cashflow. They want their profit. Now all of a sudden 1 percent higher interest rate, you're cutting into their profit. You're cutting into the ROI. They may not like the deal. And if it's a refi, they may even cancel the deal on you. That's the worst part. We haven't even talked about that, right? Canceling the deal because the rate is not the same on a, on a refi, especially a rate and term refi. That can happen very easily. And definitely here, the reason you see that smiling MLO there, right? All thumbs up is because you're going to increase the overall positivity of the MLO experience through a number of factors, right? That all. are interconnected, right? The MLO is going to have higher earnings due to less deals falling apart from rate lock issues, right? That interest rate risk that we talked about. The MLO is going to have higher earnings due to increased referrals from satisfied customers, right? We talked about managing expectations and all the way through to the closing. The MLO again is going to have a more positive experience. The reason he has the higher earnings is because He's going to be spending more time on production and closings and less time dealing with borrower complaints, right? The deal that's blowing up because the rate wasn't locked until the last minute, now you're running around having to document additional income, document, additional assets, document, whatever wasn't supposed to be documented. If the deal would have been managed properly in the beginning and the rate would have been locked when it should have. And last but not least the MLO. And this is, this emanates from the inside out too, especially even when you're talking to people on the phone, you know, they can pick up the positivity that our, our MLO that's not struggling with all of these issues that we mentioned that could be issues. They're going to have a more positive business outlook from it. from the increased satisfaction of being a successful non consultant, right? Because in the end, all of this goes to being a successful non consultant. That's, that's the bull, that's the bullseye there. That, that, MLO hit. And that's really what we strive for all of our loan officers here at office calculator, right? And, and what we strive for all loan officers basically is all loan officers, you want to be a loan consultant. You don't really want to just be like taking in applications and not, and not knowing what's going on unless you are a reformer. Referring loan officer where you just reel in the deals and then refer it to the loan officer that's actually going to structure it and close the loan. That's a different story, but to get a referrals to have a sustainable, uh, MLO career, you have to think, act, eat and breathe loan consultant. All right. Great stuff there. I do not see any questions, but that was definitely awesome, Jose. Good stuff. We'll go ahead and wrap it up then because I don't see any questions. Remember that we do this every Tuesday Wednesday and Thursday evening at 7 p. m. Eastern time where we go through A different loan officer training so we appreciate everybody tuning in and we will see you tomorrow 7 p. m. Eastern for the next episode of the loan officer training series with the mortgage company