Mortgage Pre-approvals may not be around much longer

As a mortgage broker one of my primary roles is to get a mortgage pre-approval for my clients before they start their house hunt. This accomplishes two things for homebuyers. First, it let’s them know exactly how much they can afford so they don’t waste their time or their Realtor’s time looking at houses out of their price range. Second, it locks in their interest rate for 120 days and protects them from increases in mortgage rates. Both of these functions are very important in the home purchase process.

Unfortunately, although this is a great service for home buyers it is not so great for the banks lending the money and many of them are taking steps to change the process. Why are the banks against pre-approvals? Well, it costs the banks a significant amount of money to hold your rate for 120 days. Canadian Mortgage Trends reports that it costs the banks between $900-$1200 to hold (hedge) a $100,000 mortgage for 120 days. Obviously the higher the pre-approval the more it costs. So before you even sign the mortgage papers, the bank has already spent about $1,000 on you. This wouldn’t be so bad if you actually used that bank for your mortgage, but unfortunately the majority of pre-approvals never actually materialize into a mortgage for the bank. In fact, some banks only have a 15% conversion rate for pre-approvals to actual mortgages. That means 85% of the people that get a pre-approval end up going elsewhere and this is what hurts the banks profitability. Some lenders are reporting they lose up to $20M a year on pre-approvals that do not turn in to an approved mortgage…..and we all know banks are not in the business of losing money. Hedging costs are not the only expenses they incur to hold your pre-approval. There are also workforce costs. Your pre-approval has probably been touched by atleast 2 bank employees before it is issued to you. Those employees salaries and benefits need to be included in the equation as well so that $1,000 hedging cost is probably closer to $1,500-$2,000 once we add the additional expenses.

So what are lenders doing to remedy this situation? Well, many lenders have announced over the last couple weeks they are stopping pre-approvals completely and others have announced they are adding a .10% premium to the mortgage rate to help compensate for their hedging costs. Also keep in mind some mortgage brokers and individuals will get pre-approvals at 2 or more lenders. Not only does this cost the lenders money, but also ties up resources and slows down the approval process for others. Personally, I have had clients that have had to wait 4 days to get a mortgage approval because the bank’s have been overwhelmed with pre-approvals.

By no means am I taking the banks’ side on this issue, but I can understand where they are coming from and it is my responsibility to explain to my clients how the process works and why it is changing. The mortgage industry has been changing significantly over the last year and this is just the next step.

No related posts.

Related posts brought to you by Yet Another Related Posts Plugin.

1 Comment for this entry

• 

  Christopher Molder

  June 23rd, 2009 on 11:18 am

  Hi Brad, coming from another broker in the business this is a fantastic post. You are right to state that our industry has been changing. Its too bad for borrowers and brokers alike to have one less tool to optimize your mortgage options. I suspect that in the future one lender will one day wake up and ask “Why don’t we do pre-approvals again?” and they will make a return.