LIONEL PUNCHARD, President, First Republic Mortgage Corp.
The mortgage business is a hectic one these days, as rates change almost daily and brokers search frantically for the best and cheapest loans for their clients. It can also be an exciting business--one that rewards both with money and the satisfaction of helping families get into the home of their dreams, says Lionel Punchard. The 39-year-old owner and president of First Republic Mortgage Corp. in Santa Ana recently discussed his business--and the implications of the new upward trend in mortgage rates--with staff writer John O’Dell.
Interest rates have risen nearly a full percentage point in the past month after almost six months on a downward path. What does that portend?
More business and more home sales. What has happened is that people are seeing the rates rise and figure they missed their chance for an 8% loan rate, so now they’d better buy before the rates hit 9% or 9.5%. And although rates are rising, they still are pretty reasonable--about 8.75% for a 30-year, fixed loan under $200,000.
And rates like that still make refinancing attractive to many who have 11% loans from a few years ago. Refinancing seems to remain a big segment of business for many mortgage bankers. What kind of traffic do you see in your office?
Refinancing is an area that can breed a lot of false security, so we aren’t looking at it as our major business, like some do. In many mortgage companies right now, literally 85% of the loans in the pipeline are refinancing. But 40% of those refinancing loans will never close.
Why is that?
There are two major reasons. Either interest rates change and the borrower decides that it no longer pencils out to pay $2,000 to $3,000 in fees just to cut payments by $100--or the house doesn’t appraise at the value necessary to get the loan. So you see all these companies out there adding staff to handle refinancing, but six months to a year from now they’ll be laying people off.
But the reality is that a lot of people are interested in refinancing. What are the ground rules the consumer should follow?
If there is a difference of about two percentage points between your current mortgage’s interest rates and the new rates, then it makes sense to refinance. It also makes sense if refinancing can reduce your payment so that your monthly payment savings will recover the closing costs within 24 months. Also, with the uncertainty among consumers about job security, a lot of people are looking to refinance while they still are employed, so they can qualify and increase their monthly cash flow by lowering their house payments. Consolidating all your bills into mortgage payments by increasing the size of your loan in a refinancing can also be helpful because of the elimination of income tax deductions for all interest payments except mortgage interest. I just did a refinancing for a man who increased his monthly mortgage payment by $9. But he was rolling a $400 monthly car payment into the loan, so his cash flow actually increased by $391 a month. And he can deduct more interest at tax time.
Switching to regular mortgages, is there a time when a 30-year, fixed loan isn’t the best deal? What are the basic rules of thumb for mortgage shopping?
If you are going to be in the house less than seven years, never look at a 30-year fixed. We’ve got loans that are fixed for five years that are literally half a percentage point below the 30-year fixed rate. We’ve got loans that are fixed for seven years that have no repayment penalty that are three-eights of a point below the 30-year rate.
And with housing prices as high as they are today, even a fraction of a point can mean a lot of difference in the monthly payment, right?
A single percentage point on a $100,000 loan is worth $75 a month. Because we work with a lot of first-time buyers, our average loan amount is about $200,000, so if you can save 1 point, that lowers the monthly payment by $150. And there is a plethora of adjustable loans out there. About 40% of our loans right now are adjustables.
A mortgage banker uses money supplied by someone else, like Bank of America. So why, if I’m looking for a mortgage loan, should I go to you when I can go directly to the bank
Because mortgage bankers are more aggressive than retail loan officers working for banks and savings and loans. I can guarantee you that the guys from the bank aren’t going to be out on a Sunday afternoon asking for your business. They’re not going to meet you at 5 a.m. in a coffee shop to discuss your needs. They’re going to tell you to come over to the bank when you have time. People on the mortgage banking side hustle more because we make more on our loans. We can also give you the best product available for your needs, not just whatever product our bank is selling.
How do you make your money?
Well, we make very little originating the loan. It costs us about $1,000 to process an application. The profits come from servicing loans after they are funded. Let’s say we originate a $100,000 loan. After we pay the loan officers their fees, the money we make is just about enough to pay our light bill. But then we bundle the loan up with a bunch more and sell it to an investor and retain the servicing.
Basically, we process the monthly payments, send out the bills and the late notices and such. If you are paying 9.38% interest on your loan, basically you are paying 9% interest to the lender and the three-eights goes to the mortgage banker. That doesn’t sound like a lot on a $100,000 loan, but when you multiply that for a package of loans worth $500 million, you are talking about tremendous dollars.
And your other sources of income?
Late fees. And that’s ironic because we look very closely at people’s credit history. One late mortgage payment is considered bad and two late payments in a 12-month period means you probably won’t get a loan. But mortgage bankers make tremendous dollars on the 4% to 5% late fees. It’s pure gravy.
On Orange County’s residential real estate market. . .
“Anyone who has bought a home in the last two years has very little, if any, equity.”
On the future. . .
“I see a little recovery at the lower price ranges, but nothing at the higher end. I don’t see full recovery until the second quarter of 1993.”
On being a black businessman in Orange County. . .
“At first I thought it might have been a disadvantage because I didn’t become an instant success. Then I focused, targeted the new development market, and became successful. In this business the only thing you are judged on is performance.”
On success. . .
“Never stop being hungry and never take your hands off daily operations to play at being president. I work six or seven days a week, I meet with borrowers, and if I have to deliver documents or scream at an underwriter to get a loan approved, I do that, too.”
