Description of Wholesale Mortgage Price Data

October 10, 2007, Revised March 9, 2009, January 27  2010, August 18, 2010

Wholesale mortgage prices are those quoted by wholesale lenders to mortgage brokers and smaller mortgage lenders. I use these data to compile daily series on wholesale interest rates covering 14 types of mortgages. These data are a superior way to measure day-to-day changes in the market, and how prices very with loan features at any one time. They can also be a valuable tool for mortgage shopping if properly used. 

Wholesale Mortgage Price Data Are Proprietary

Wholesale mortgage prices are those quoted by wholesale lenders to their clients -- mortgage brokers and smaller ("correspondent") lenders. Wholesale lenders do not deal with borrowers directly but obtain their loans through these third parties.

 Wholesale price data have never been available to the general public. Each wholesale lender views its prices as proprietary information available only to those clients who have been approved by them to receive it.

The internet is now the principal method used to distribute wholesale prices, but (with a few exceptions) a password is needed to gain access. The few lenders who don’t require passwords probably assume that any borrowers who stumbled on their site would find the data so overwhelming that they would quickly leave.

Accessing Wholesale Price Data

Wholesale price data is extremely complicated. It takes time for clients to master all the pricing adjustments contained on any lender’s price sheet. To make it worse, no two wholesale lenders format their prices in the same way. This is why pricing mistakes are extremely common.

It is too time-consuming for a client receiving prices from multiple wholesale lenders to compare prices for more than a few unless they have a technology that converts all the disparate formats into one uniform format. With a single format, it is possible to find the best wholesale price in any market niche among any number of lenders. Not many clients have this capacity.

One that does is Amerisave, which gave me access to their data base of wholesale prices. At any one time, it covers only a small number of the more than 100 wholesale lenders operating in 2009, but the lenders it covers are representative of the market. Intermittently, composition changes as some lenders are replaced by others with better pricing.

[Note: I have a business relationship with Amerisave, a description of which can be found by clicking on Fixed Markup Lender.]

Processing Wholesale Mortgage Price Data

I use this data to compile daily series on wholesale interest rates covering 14 types of mortgages, see Wholesale Price Tables and Charts. A snapshot covering 5 products is at the top of my home page.

The data are updated automatically every 30 minutes -- not that they change that frequently but they are reset every morning and sometimes during the day. I am indebted to Daryl Tubbs, who figured out how to do this.

The interest rate shown is for zero points. Lenders don’t actually offer loans at the rates shown, they offer them in even increments of .125%, e.g., 6%, 6.125%, 6.25%, etc. As the rates go up, the points charge goes down. Points are an upfront charge expressed as a percent of the loan balance.

I interpolate between the rate with the smallest positive points and the rate with the smallest negative points to obtain the rate at zero points. The error from interpolation is very small, and having one price makes it easy to compare price differences among programs and at different dates.

Note that the rate shown is the lowest available from the participating lenders. The best rate on one type of mortgage (say a 30-year FRM) may come from a different lender than the best rate for another type, such as a 5/1 ARM.

Wholesale Mortgage Prices as an Indicator of Market Changes

A major purpose in developing these data was to provide an accurate measure of day-to-day changes in the market as a whole. For this purpose data are required daily for a wide variety of loan types.

Wholesale price data are a much better gauge of market conditions than retail price data because they contain much less statistical "noise". Wholesale data do not include retail markups, which vary widely. Furthermore, the wholesale data pertain to transactions where the borrower’s credit score, loan size, down payment and other factors that affect price are specified. In the retail series, these factors are not reported, and any changes in them will affect the price. Furthermore, the most widely used retail series are weekly averages, which are of little use in determining the market change between two days.

Borrowers can use the wholesale data to protect themselves against one of the most pervasive frauds in this market: price escalation between the day they are quoted a price and the day the price is locked. If the market price goes down, the borrower’s price will stay the same, and if the market price goes up, the borrower’s price will go up even more. Loan providers explain a price increase as stemming from "changes in the market", but the market price on the lock day is what they say it is, and borrowers have had no good way to check it. Now they do. The borrower needs only to calculate the change in the wholesale price on the same type of mortgage between the quote day and the lock day. It is not perfect, partly because rates mayh change during the day, but it is the best gauge available.

While the wholesale data are an excellent measure of what has happened, they have no predictive power, so don’t waste time trying to spot "trends". Even if the price rises 10 days in a row, view the probability that it will rise in day 11 as 50%.

Wholesale Mortgage Prices as a Measure of Pricing Structure

A second purpose I had in developing the data was to provide accurate measures of how, at any one time, mortgage prices vary with different features of the loan transaction. These features include loan size, FICO score of borrower, down payment, type of documentation provided, and loan purpose.

This is designed as a general education tool for potential borrowers. For example, borrowers considering how much of a down payment they are going to make ought to know how much more costly a low down payment loan is. Similarly, if you want to avoid the hassle of fully documenting your income, it is a good idea to know how much the convenience of merely "stating" your income will cost you.

The tables that show how the interest rate varies with other features of the loan ordinarily don’t change much from day to day, so I compile them weekly rather than daily. However, over a long period they will capture the occasional changes that occur in how the market appraises risk.

Changes in Pricing Structure During 2007

Such a change, in fact, occurred while these tables were being developed. A trial run was done on May 4, 2007, which was before the full eruption of the sub-prime crisis. While the May 4 data covered California rather than the US, the differences between California and the US average are very small.

A marked increase in risk premiums occurred between May 4 and September 21, 2007. The difference in rate between a $417,000 loan and a $418,000 loan rose from 0.278% to 0.745%. The $417,000 loan was, and the $418,000 loan was not saleable to Fannie Mae and Freddie Mac at that time. The larger loan had to be sold in the private sector which had been badly shaken by the sub-prime crisis.

In a similar vein, the difference in rate between a full documentation and a no-documentation loan rose from .525% to 1.022%, and soon thereafter all documentation options other than full documentation were scrapped. The rate difference between a 740 FICO score and a 620 score rose from 0.30% on May 4 to 1.37% on September 14. A week later, there were no price quotes on the 620.

Don’t Try to Borrow at Wholesale Prices

You can’t borrow from a wholesale lender, though some borrowers try.

Mortgage brokers often conceal the identity of the wholesale lender whose product has been selected for a potential borrower because they fear the borrower will go directly to the wholesale lender. The borrower may, indeed, find a lender with the same name, but it will be the retail arm of the same firm, and the borrower will be charged retail prices. All the larger lenders have both retail and wholesale divisions.

The brokers and lenders receiving wholesale prices add a markup before quoting retail prices to borrowers. The markup covers the cost of the various retail functions, including marketing to borrowers, counseling and advising them, taking their applications, verifying credit, employment and other information provided by applicants, pulling together all the documents required for the loan to be executed (called "processing"), and arranging for all the third party services required for the loan including insurance (title, mortgage, flood, homeowner) and closing services.

Wholesale lenders don’t have the infrastructure to do any of these things, so forget about the possibility of "getting it wholesale". That occasionally works in men’s suits, but never in mortgages.

Using Wholesale Price Data to Shop

Other than for monitoring day-to-day changes in the market in order to keep the loan originator honest, I don’t recommend it. The borrower is concerned with the retail price, which is the wholesale price plus the loan originator's markup. Correspondent lenders typically receive lower wholesale prices than mortgage brokers because they close loans with their own money and perform other services that brokers do not do. But because correspondents have higher costs, their markups also tend to be higher.

The wholesale rates shown on my site are those made available to correspondents, not brokers. Borrowers should expect that the wholesale prices disclosed by a UMB will be higher.  

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