Pre-Approval Costs
After posting yesterday’s pre-approval story, one reader asked:
Will you undertake to provide your readers with more information regarding the process of hedging?
We surely will. Here’s the gist of it…
Lenders hedge pre-approvals in a variety of ways. Among them, they may do so by buying listed or over-the-counter bond options (puts), or by short-selling bonds.
The cost of doing this can be massive. One industry exec we spoke with said it costs his lender $900 to $1,200 to hedge a 120-day rate hold on a $100,000 mortgage. It’s basically a linear relationship so the costs on a $300,000 mortgage are three times higher.
With pre-approval funding ratios as low as 15%, at some lenders, you can see why these costs are a concern for the industry. That doesn’t include the human resource and other expenses that apply to underwriting and supporting pre-approvals.
By the way, for whatever reason, bank-branch funding ratios are higher than broker-funding ratios. If that doesn’t correct itself, it is very possible that the best pre-approval choices will someday be limited to the big banks. That would really be unfortunate because it would mean far less choice for consumers.
