Mortgage Interest Rate Series

The Mortgage Professor’s new series on mortgage interest rates (henceforth MP) provide a level of detail, accuracy and market sensitivity beyond anything now available. Comparisons will be drawn to the Freddie Mac Primary Mortgage Market Survey (henceforth PMMS), which is widely used and enjoys the aura of Government sponsorship. As Freddie Mac notes:

"…the Federal Reserve Board includes the average 30-year rate on its list of Selected Interest Rates (Statistical Release H.15) as the measure of conventional mortgage rates. The Primary Mortgage Market Survey has evolved into the foremost reliable, representative source of regional and national mortgage rate trends and is relied upon by the mortgage industry and the public in gauging market conditions and evaluating mortgage loan options."

This is true, but only because until now nothing better has been available. The new MP series points up the inadequacies of the PMMS data.

Data Source and Timing: The new series is based on data provided to MP on a continuing basis by participating lenders. In effect, MP has access to the lenders’ internal pricing systems, the same systems they use to provide prices to their loan officers, web sites and perhaps other channels.

MP data are daily, and refer to the closing prices on the day specified. These may or may not be the same as the opening prices on the same day, because lenders sometimes change prices during the day.

Freddie Mac has its participating lenders fill out a form every week. "Survey reminder emails are sent out on Mondays and lenders are asked to respond by close of business Wednesday. If we have received no response on Tuesday, we follow-up with a reminder email on Wednesday morning. We receive a few responses on Monday, but most responses are returned on Tuesday with the balance received on Wednesday. So, in general, the PMMS rates reflect loans offered Monday through Wednesday."

In sum, the MP data are available for every business day whereas the FM data are available weekly and represent prices during the first three days of the week. Given the significant price volatility in this market, it is clear that the MP data are a more sensitive gauge of market changes.

Product Coverage: Both MP and PMMS cover 30-year FRMs, 15-year FRMs and 5/1 ARMs. PMMS also covers 1-year ARMs which MP does not cover because the MP lenders do not offer it. MP lenders do offer 3/1, 7/1 and 10/1 ARMs which could be added to the series at any time.

Price Definition: MP reports an interest rate adjusted for points and for lenders’ fixed-dollar fees. It does this by calculating the APR for the interest rate with the smallest positive amount of total points and fees. While the APR has a downward bias on mortgages carrying positive points and fees, the bias is negligible on the rate closest to par.

PMMS reports the most common interest rate and the most common points charged borrowers. "The points quoted in the PMMS represent the average points charged for mortgages offered at the PMMS rate during the survey week." As far as we can determine, points include all fees expressed as a percent of the loan amount, but not fees defined in dollar amounts.

Aggregation: MP reports the lowest rate quoted by any participating lender because it is designed to show the best rates available in the market. PMMS lenders report averages but it is not clear whether these are interpreted as arithmetic averages which would include loans with unusually high and low margins, or as modal averages which would ignore the extreme values.

Product Feature Specification: The rates on home mortgages depend on a large range of factors: Loan size, loan-to-value ratio, credit score, occupancy, type of property, state, whether cash-out (if a refinance), lock period, and whether escrow is accepted or waived. MP specifies all of these factors, so that the user knows the mortgage features to which the designated rate applies.

PMMS specifies an 80% loan-to-value ratio, but that is it. The other features are those characteristic of the loans reported by each lender, which are not known.

Because MP specifies the relevant mortgage features, it is able to show exactly how each factor affects the mortgage price. It does this now for 30-year FRMs, with separate series for a) Different credit scores, b) Different types of property, c) Different types of occupancy, d) Different loan amounts, and e) Whether or not a refinance is cash-out.

Treatment of Property Location: Mortgage prices also vary a little based on state location of property. MP takes account of this by placing each state in one of 6 price categories, then taking an average of the 6 in order to obtain a US average. The 6 price categories are not regional groupings, since the price differences are based mainly on state laws relating to foreclosure and other factors that bear on the cost of enforcing liens. Florida and NY, for example are in the lowest price groups, while Wyoming and D.C. are in the highest.

PMMS divides the country into 5 geographical cregions and prices are calculated for each region. These regional prices are then weighted by total origination data reported under the Home Mortgage Disclosure Act to calculate a national average. The weakness of this procedure is that the regions are based on geography rather than mortgage pricing, and the loans attributable to each region are based on the location of the lender rather than the location of the property. Price differences between the PMMS regions are meaningless.

Lender Coverage: The MP data are obtained from 6 certified retail lenders who obtain their pricing from, and sell their loans to 15 correspondent lenders. These are larger firms that have their own retail operations and also act as correspondents to independent retail firms. The 15 correspondent lenders account for about 70% of total loan volume.

To assure that they are getting the best prices available, each of the 6 certified lenders deals with 4 or more correspondent lenders. The 6 retail lenders select the best price in every market niche from the correspondent lender quoting the best price, adding their markup to obtain their own price schedule. When they lock the price of a loan to a borrower, they inform the correspondent lender whose price they used that a loan with specified features will be delivered to them in due course.

This approach, designed to assure that the individual consumers using the MP network would get the best price available in the market, also provides a highly accurate measure of what that price is. The prices posted by the correspondent lenders are based on prices prevailing in the secondary market where they resell the loans they purchase. Because there are multiple correspondent lenders competing for the business of extremely knowledgeable retail lenders, the 6 lenders on the MP network are assured of the best possible correspondent pricing. Because these 6 lenders must compete for borrowers on the MP network, the borrowers are assured of the best possible retail pricing. The MP rate series is based on the best price quoted by any of the 6 retail lenders.

PMMS has about 125 self-selected lenders who report their pricing to Freddie Mac every week. Nothing is known about the market structures within which these lenders operate, whether the loans they report as typical for them are based on inquiries on their web sites from loan prospects, referrals from realtors or builders to their loan officers, walk-ins at their branches (if they have branches), internet-based leads purchased from lead brokers, or special funding arrangements with institutions such as universities or medical associations.

Prices can vary considerably between these different channels, but their weighting in the data reported is not known. We don’t know which channels the lenders select as typical for them, and we don’t know how representative the 125 lenders are of all mortgage lenders.

In sum, the MP data are better.

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