Atlanta Ga – In today’s shrinking mortgage battlefield the industry giants are moving into smaller markets at a rapid pace like never before. Nationally, the real estate market is considered to be a “buyers market” creating great deals for the would-be home purchaser. Smart investors are buying homes like crazy right now because they understand that the market will eventually return. The same is true for savvy mortgage companies as well.
The near demise of subprime lending and tightened competition have seriously affected the budget of mid to small sized lenders. The problem is that most of your medium sized lenders are not in a position to expand their operations and the smaller ones are closing their doors all together. This has left the “door” wide open for “big boys” like Countrywide, Bank of America and others to go on the market share offensive.
These mortgage giants are moving deeper into the local market place due to the void left by collapsing companies. Traditionally these companies wouldn’t risk offending their local correspondents with direct advertising in the local markets with the saturation level we are seeing. Correspondent lending represents a large portion of their business. However the local correspondent lending is down dramatically which offers justification for moving into these once taboo smaller markets. The next wave of advertising appears to be of the “no closing cost” variety.
Both Countrywide and Bank of America (BOA) have launched their new “no fees or closing cost” campaigns. We have always warned our readers to be wary of marketing “gimmicks” that sound good in advertising but are less attractive in black and white. No closing cost loans are not free, in most cases just the opposite. Attorneys do not work “for free”. Appraisers, closing agents, escrows, prepaid interest and state and local taxes do not go away when you close a “no closing cost mortgage”. If you do not include the fees in the closing cost the lender must pay them. If the lender pays them they will sell you an interest rate above what you qualify for, period, end of story.
The last round of advertising “gimmicks” focused on low payments that were based on negative amortizing loans. Do you remember the ads that would say something like “$250,000 mortgage for only $475 per month”? These advertisements were very popular over the last 3 years and perpetuated by the larger mortgage companies, with the exception of Wells Fargo. This it one of the reasons that securitized loans are not performing well on the secondary markets and mortgage companies are in trouble. Too many people were put into bad loans and are losing their houses. When this happens the loans that are grouped and sold on the secondary market are sold at a loss as opposed to a profit. This causes banks to raise prices and close departments.
We believe that the mortgage giants are good companies and would do well without having to repackage their products. No closing cost advertising is nothing more than putting a different bow on the same product they have been selling for years. Just to hit this point home, let’s think logically about the “no closing cost mortgage”. The inference is, that if the lender is “paying” the closing cost on the loans they close you are now receiving a better deal by way of lower closing cost. Doesn’t this mean the bank would have to dip into their profit to pay the closing cost causing them to earn less profit on the loans they originate? Recently Floyd Robinson at BOA has been quoted as saying this in reference to their employee pay plans: “The compensation plans have not changed with this (no closing cost) product. I won’t get into how we compensate our associates. But we haven’t changed our methodology or the amounts based on this product.”