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The secondary market overview: From Bonds to Production ... How Long Will They Stay Low?

Dave Hershman
Oct 11, 2010

Now the prognosticators have changed the question. Instead of asking whether rates are rising or falling, they are now asking: “How long will they stay low?” It is quite logical that we should now shift the focus because it seems very unlikely that rates can move significantly down from today’s levels now that they have hit a shade below the 4.5 percent mark as of early August. A couple of points here … ►That is what we said when rates went below five percent. Don’t expect them to dip anymore. ►Even though you and the experts may not be expecting rates to drop any further, that does not mean your prospects are thinking the same thing. The first point I will make I seem to be making every month, and I have been for my whole career—never try to predict the future. Yes, there is much more room for rates to rise than to fall. However, we need some evidence that the economy is going to gain steam. That will not happen until the real estate markets start to recover and the real estate markets will not recover until the economy produces jobs. Well, the economy cannot produce jobs at the rate we need it without a healthy real estate market. Talk about a vicious circle. Yes, we are in a terrible vicious circle today and it is the exact opposite of the cycle that produced the real estate explosion of a half-a decade ago. Every positive influence was causing other positive effects. For example, the fact that houses were going up in value was causing the public to want even more houses. I did read with interest a recent CNN/Money article last month that was titled—“Venture Capitalists Are Back.” Here is an excerpt: “These are the glory days of the residential real estate investor. Low prices, rock-bottom interest rates and stable rental markets have created huge buying opportunities. "It's awesome right now. I don't think we'll ever see another time like this," said Tanya Marchiol of Team Investments, which has operations in about 10 states, but focuses mostly on the Phoenix market. These investors are known to many as vultures because they swoop in and buy "distressed properties"—foreclosures and short sales—cheap.” Now vultures are not necessarily flipping properties. Some are fixing them and renting them. The point is that while the general American public is not rushing to purchase real estate, smart investors are. This is one indication of a bottom in the markets. However, it does not say when the markets will start moving up. The real turn does not happen until Americans are not only working, but they are working and not worried about losing their job. Here is the second point: You should be rooting for rates to move up. Why? Because rates moving up will be one result of a real estate recovery. More than half of those who want to refinance at these low rates cannot do so because they simply do not qualify. They won’t qualify until lenders start loosening credit guidelines (and I am not talking about going back to the “no money down, stated-income, low credit score” era) and housing prices are going up. So even rising rates could help at least some people refinance. For now, you should be focusing on two things … First, helping get people qualified. There are three main reasons now they don’t qualify: ►They don’t have income (hard to help with that). ►Their credit score is too low. ►They are underwater. While today, you cannot get more than half of your prospects qualified, you can help many others. Let’s say you see 20 prospects in month and 10 of them do not qualify. Perhaps you convert three into loans. What if you could convert two more? That’s an income increase of 66 percent. Not bad. You do that by making sure their credit score is as high as it can be and not by doing the work yourself—by getting them to a mortgage professional. This helps conversions in two ways: ►Some can now qualify under today’s tight standards. ►Because of risk-based premiums, which are not going away even when credit standards loosen, a higher score will enable you to lower your rate quote for them. This helps against competition and will help make more refinance transactions make sense. The underwater issue is another tough issue, but not as insurmountable as the income issue. The two avenues are modification or short refis with a lender, and if this is not possible, debt reduction that will help them pare down the mortgage in the long run. I understand that neither of these may mean a transaction to you today; however, in the long run, it helps them become clients, and in the short run, it will result in referrals. I am always counseling loan officers to have more of a long-term review if they want to be successful. Don’t just focus on the deals that are possible right now, but build a base for the future, like the venture capitalists are doing with the real estate market. Want to learn about how to help people with both score improvement and debt reduction with one system? Download this recorded Webinar at The second focus for right now … help your prospects see that there is more of a risk for rates to rise right now than fall. Keep in mind that you are not predicting that rates will go up and you are not predicting how long they will stay down. However, I guarantee if rates do spike up, or I should say when rates spike up—your phone will be ringing off the hook from prospects that were waiting for rates to go a little lower or just procrastinating and are now afraid they missed the boat. Actually, little spikes in rate help our business in the short run because it wakes people up. I gave you an avenue to help get people qualified. Now I have to give you an avenue to wake people up. I have developed a letter which is part of our NewsletterPro Marketing System. It focuses upon the “cost of waiting.” You need to show people “the cost of waiting for rates” to go down. There is a cost, even if rates stay the same. If you would like a copy of this letter, e-mail me at [email protected] Here is my message: Let’s stop focusing on how long rates will stay down. Let’s focus on how to get more people to take advantage of these record-low rates. As the venture capitalists say, “This is the opportunity of a lifetime” Don’t let your clients miss it. Dave Hershman is a leading author for the mortgage industry with eight books and several hundred articles to his credit. He is also head of OriginationPro Mortgage School and a top industry speaker. Dave’s Certified Mortgage Advisor Program can be found at If you would like to stay ahead of what is happening in the markets, visit for a free trial or e-mail [email protected]
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