Wholesale Mortgage Prices, What Are They Good For?

October 22, 2007
Wholesale mortgage prices are those quoted by wholesale lenders to mortgage brokers and smaller lenders. I use this 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 will also be a valuable tool for shopping.

Sources of Wholesale Mortgage Price Data

Wholesale mortgage prices are those quoted by wholesale lenders to their clients -- mortgage brokers and smaller ("correspondent") lenders. (I will use the word "client" to cover both.) Clients mark up these prices to offer retail prices to borrowers.

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.

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 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 the data base covers 12 lenders, though over time the 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.

Wholesale Mortgage Prices as an Indicator of Market Changes

One 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.

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.

While the wholesale data are an excellent measure of what has happened, they have no predictive power, so don’t waste your 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. 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 is, and the $418,000 loan is not saleable to Fannie Mae and Freddie Mac. The larger loan has to be sold in the private sector which has 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%. 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.

Using Wholesale Mortgage Price Data to Shop

A third purpose of developing the wholesale price data was to provide a shopping tool which borrowers could use to help them find the best deal. This means obtaining the best retail deal, 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.

If borrowers know the wholesale price of their loans, however, they also know the retail markup. That is very useful information to have in shopping for a loan.

Not many borrowers can use my tables for this purpose because the details of the borrower’s transaction have to match those underlying a table. However, I am working on a feature called "Find Your Wholesale Price", which will tailor the price to the specifics of the transaction. It should be available by Christmas.

Copyright Jack Guttentag 2007