Mortgages: How to Pay Less

By JESSICA SILVER-GREENBERG
The interest rates for 30-year fixed-rate mortgages are in free fall, averaging just 4.44% on Aug. 12, according to Freddie Mac. Not only was that down from 5.07% in January, it was the lowest since Freddie began keeping records in 1970.

But even better deals can be found at smaller banks and credit unions.

“I’ve found that my clients can get routinely better rates by heading to a more regional lender and forgoing the bigger lenders,” says Sean Satkus, a real-estate agent in the Washington, D.C., area.

The differences can be stark. On average, the three biggest banks—Bank of America Corp., Wells Fargo & Co. and J.P. Morgan Chase & Co.—offer rates of 4.66% on 30-year fixed mortgages for home purchases, according to Bankrate.com. By contrast, St. Louis’s Heartland Bank is offering a rate of 4.50%. Acacia Federal Savings Bank comes in at 4.25%. And Rockland Trust Co. in Boston is offering just 4.13%. (None of these offers include “points,” or extra fees to secure lower rates.)

Jason Schneider
.To some extent smaller banks have always been a little more competitive on rates. But “the discrepancy is widening,” says Guy Cecala, publisher of Inside Mortgage Finance, an industry newsletter, “and I only expect it to get wider in the future.”

Consolidation during and after the financial crisis is the biggest factor. Together, Wells Fargo, BofA and Chase accounted for 56.5% of new mortgage originations in the first half of this year, according to Inside Mortgage Finance—up from just 36.6% in 2007.

Now these banks don’t have to compete on pricing in the same way, Mr. Cecala says: “They have a large share of the market, and aren’t worried about demand.”

Pricing Advantages
Smaller mortgage brokers and regional banks also have some built-in pricing advantages, says Greg McBride, a senior financial analyst at Bankrate.com. They are nimbler than larger competitors, he says, and can cut overhead when they need to—making them lean enough to price loans aggressively.

Compensation structures for loan officers are also a factor. Smaller lenders tend to pay on commission, “and will sometimes operate on thinner margins to get higher volumes of loans out,” Mr. McBride says. “Mortgage brokers tend to live or die on volume.” By contrast, big banks tend to pay loan officers a salary regardless of volume. In fact, it often is cheaper for big banks simply to buy loans originated by smaller banks, or “correspondent lenders,” than to reduce rates to compete with them.

“The bigger banks can save money on origination by buying the loans from correspondent lenders later in the chain,” Mr. McBride says.

Profit margins are falling sharply at smaller firms. According to a July 20 study by the Mortgage Bankers Association, profits per origination at independent mortgage lenders were down to $606 during the first quarter of 2010 from $1,088 in the same quarter last year.

Room to Fall
Yet there still may be room to fall, says Cameron Findlay, chief economist of LendingTree, an online lender. On Aug. 1, he says, the average rate for 30-year fixed-rate mortgages was 4.56%, which was more than one percentage point greater than the average of 3.45% at which lenders could sell these loans to investors in the secondary market. “There’s clearly more wiggle room there,” he says.

Borrowers looking for smaller lenders or brokers can trawl websites like Lendingtree and Bankrate.com, which lists rates in local regions.

Alex Sorokin is taking advantage of small banks’ largess. The 52-year old accountant wanted to buy a two-bedroom condominium in Brooklyn, N.Y., and initially thought he would get the best rate from Chase, Commerce Bank or Wachovia, now part of Wells Fargo.

When he started inquiring in April, he says, he was surprised to find that none would offer a rate for a $279,000 mortgage lower than 4.8%. That is when he decided to contact Luxury Mortgage, a Connecticut-based lender. He ended up with a rate of 4.625%.

“We closed in July,” Mr. Sorokin says, “and I am really happy.”

Write to Jessica Silver-Greenberg at jessica.silver-greenberg@wsj.com

Study Shows Foreclosure Lowers a Property’s Value by 27%

By: Carrie Bay DSnews.com

Foreclosed homes permeate the American landscape. According to data from the Massachusetts Institute of Technology (MIT), they make up about one in 12 houses with under $1 million left on the mortgage.

These foreclosures drive down home prices, and MIT gives two reasons for their depreciating effect – because foreclosed homes add to the housing supply and because the financial firms that acquire the houses want to unload them promptly.

However, since foreclosures often occur in economically struggling areas, it is hard to determine how much of the drop in a home’s value is due to its foreclosure, and how much can be blamed on the economy in general.

MIT economist Parag Pathak and two Harvard researchers, John Y. Campbell and Stefano Giglio, have conducted a study to put a price tag on foreclosures.

Specifically, they’ve determined how much a foreclosure affects a home’s value, as opposed to a home going on the market because the owner has died or declared bankruptcy.

The three academia colleagues examined 1.8 million home sales in Massachusetts from 1987 to 2009. By looking in granular detail at real estate prices, they concluded that a

foreclosure reduces the value of a house by 27 percent, on average.

“It’s not surprising that there is a discount due to foreclosure,” said Pathak. “But it is surprising that it’s so large.”

By contrast, other types of forced sales lower home prices by smaller amounts. When a house is sold after the death of an owner, the researchers found the price drops 5 to 7 percent on average. When an owner declares bankruptcy, the value sinks 3 percent.

The researchers believe that their discovery of the gaps between these various price reductions is a key to isolating the effects of foreclosures. They suggest that a central cause of the larger foreclosure discount is that the condition of foreclosed houses often deteriorates much more than it does for other kinds of houses whose ownership changes hands.

This tendency of foreclosed homes to fall into disrepair lies behind the other main finding of Pathak and his colleagues – the presence of a foreclosed house in a neighborhood reduces the value of the homes around it.

In their estimation, the value of a home drops by 1 percent, on average, if it is within roughly 250 feet of a foreclosed home, namely because the vacant home may not be properly maintained and because foreclosures are typically resold quickly for a discount, their sale price can affect valuation comparables.

The study is a “very valuable and important paper,” according to Christopher Mayer PhD, a professor and dean at Columbia Business School in New York, who thinks it will open up more research on whether foreclosures cause other foreclosures, a process he calls “contagion.”

Even though Pathak, Campbell, and Giglio found that foreclosures only dent the values of neighboring homes, Mayer questions whether there may be a tipping point “at which a neighborhood starts to fall apart.”

 

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