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National industry appointments update - 5/15/2006

May 14, 2006

Don't yield to the curveJennifer Creechfixed rates, option-ARM Mortgage lending is usually pretty straightforward: You connect the people who want a low rate and are willing to take some risk with short-term, adjustable-rate loans, and you point the people who want predictability and are willing to spend a little more to long-term, fixed-rate loans. This scenario makes even the least-sophisticated borrower comfortable because it's logical and easy to understand. So, what if you turned this equation upside down? What if long-term borrowing was cheaper than short-term borrowing but the associated risks remained the same? What do you tell borrowers then? This is a good time to answer those questions, because it's happening right now. The yield curve - picture a graph with rates plotted over a 30-year period - flattened throughout last year. In simple terms, this means that long-term rates are nearly as low as short-term rates. So forget about selling adjustable-rate mortgages and home equity lines of credit, right? Well, not entirely. The yield curve - It's not a highway warning sign Long-term mortgage rates are, in large part, market-driven. Mortgage-backed securities and 10- and 30-year Treasury securities provide a good indication of what long-term rates are going to do. Short-term rates, in contrast, are primarily based on the economic policies set by the Federal Reserve. Beginning in June of 2004, the Fed engaged in a campaign of measured hikes in the discount rate. This campaign has had the effect of steadily increasing short-term interest rates. While this approach is aimed at controlling inflation and economic growth, one effect of this policy has been the flattening of the yield curve. The fact is that during these rate hikes, long-term rates - driven by market forces - have not increased as much. As a mortgage broker, you know it's affecting your business, but what can you do about it? Change creates opportunity The Fed's flurry of increases in the discount rate is affecting adjustable-rate mortgage borrowers - borrowers whom you can now help. First, a dose of reality: The days of people beating down your door to refinance their first mortgage (two or three times, even) are over. You are going to have to work smarter and harder in the foreseeable future to keep your practice in the black. But don't despair - a flat or inverted rate environment is not without opportunity. Over the past several years, as the Fed employed a strict diet of rate cuts, billions of dollars were lent in variable-rate arrangements such as lines of credit, adjustable-rate mortgages, credit cards, interest-only firsts - you name it. A substantial amount of that money went to borrowers who correctly reasoned (perhaps with your counseling) that the wide gap between variable interest rates and fixed rates made the variable-rate products a savvy borrower's best bet. Besides, they figured that if the gap ever closed, they could just refinance into a fixed-rate loan. Now that the Fed has raised the discount rate 14 times, the gap has clearly closed and the rise in monthly payments is creating payment shock for many borrowers. As long as the yield curve is inverted or flat, your marketing and sales strategy can focus on helping borrowers move high-risk, variable-rate debt into safer, fixed-rate loans. Of course, with some new financing, there's no debt to move, but the basic emphasis on fixed-rate lending vehicles is the same. So whom should you target with your marketing efforts? As always, you want to continue your outreach to new customers, but you also want to target the customers you already have on your books (of course, you'll want to be sure that you comply with all applicable marketing regulations and you don't want to violate any loan-specific refinance restrictions or lender-specific, non-solicitation agreements). You'll also want to market to any promising leads you've gathered in the past. The people who knew you when & Remember all of those customers you helped with home equity lines of credit and adjustable-rate mortgages in the early part of the decade? Now is the time to help them move that debt to a fixed-rate loan. And if you're the first person to offer that advice to your customers, who already know and trust you, you may save them thousands of dollars on their interest payments while the yield curve fluctuates and your business will continue to flourish. Here are a couple of ideas to reach them before your competitors do: - Call them. Hey, it may sound simple, but the customers who appreciate the loans you helped them get will be more receptive to the personal touch of a phone call. When you get them on the line, be prepared to walk through a couple of refinance scenarios. - Send a personal note. You probably can't call all of the customers in your database, but that doesn't mean that you should blast them with a generic direct mail piece. To reinforce your marketing efforts with existing and former customers, send a personally addressed e-mail or letter. Start the note with a relevant date or bit of information. For example, "Dear Joe: I hope all is well. Since we worked together back in June 2002 to get financing for your condo downtown, interest rates have ..." If you have the details on that loan, show them a realistic example of how you might save them money and invite them for a free counseling session. The same marketing tactics you'd use to help your existing customers can be used for any of the reasonably fresh leads you've been working. Take a look through the notes on your leads. Anyone who turned you down because of the great variable rate he already had is now a hot prospect. Help him see the advantages of moving that home equity line of credit he took out last summer at the prime rate into a lower, fixed-rate home equity loan. It's still about the loans Of course, you can only do so much on your own. To be successful, you still need to work with the right lenders. A good lender will offer a wide range of loan options, either fixed-rate or variable, and often will have one or two niche products to fit your specialty borrower. For example, DeepGreen Financial offers a range of traditional fixed-rate and variable-rate loans, but also offers fixed-rate home equity loans with terms of up to 30 years. Having this variation in product offering increases the likelihood that the time taken to collect your customer's information will result in a completed transaction. The right lender knows that you don't want to go back to your high-credit quality customer empty-handed. Choose the right lenders to work with and whether you're marketing to new prospects or existing customers, you dont have to go it alone. So, fixed rates for everyone, right? Should you guide everyone to a fixed-rate product? Not necessarily. Even in the current rate environment, some of the old rules still apply. Not all borrowers have rate as their highest priority. Some want to be able to pay only interest on their loan for a period of time. Some want the flexibility of borrowing money periodically over time as they need it. Still more borrowers don't plan on staying in a property for a long and want to avoid frontloading a lot of interest expense they'll never recover. For these people, a variable-rate product might prove most sensible, even if the rate goes higher. The best option is different for every borrower, and they need you to help them find it. Jennifer Creech is executive vice president of production and marketing for Highland Hills, Ohio-based DeepGreen Financial. She can be reached through the company's Web site at
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