Throttling Explained

I am sure most of you have rented a car or booked a hotel, or searched for airline tickets online. If you have, you have experienced THROTTLING.

Just like the throttle on your car’s engine, a throttle makes things go fast, or slow things down. Lots of industries use this same concept to either regulate their flow of business, or to take advantage of a situation and make more money.

In the travel industry, if there is high demand and low inventory for cars, hotel rooms, or airline seats, the computers on these websites automatically jack up the prices. To be fair, they also lower them when the reverse is true.

In the mortgage industry, throttling is used to regulate the amount of new applications coming into a lender’s pipeline. As with most businesses, lenders have set staffing amounts based on average volume. When there’s a spike in applications, lenders will automatically throttle their rates higher. While the goal is to slow down the flow of new applications being received – to insure good service and meet mandatory government response times, the benefit is making more money per loan from the people wanting their service, but didn’t jump to it as quickly as their neighbor.

Maybe this concept is new to you, and you have never heard of it. Try and book last minute airline tickets during the holidays or Spring Break and you know you’ll pay top dollar. The law of Supply and Demand has its tentacles firmly gripped on your mortgage application as well.

Let’s give you a quick rundown of the supply chain in the mortgage industry:
A lender gives you a mortgage.
The mortgage is then sold to either Fannie Mae or Freddie Mac.
Fannie and Freddie convert those loans into bonds (Mortgage Backed Securities, or MBS).
MBS are traded like any other stock or commodity.

What does complicate clearly seeing the throttling in action, is the fact that the cost of the “goods” (MBS) changes every day. That change is based on the appetite of the investors buying the bonds being offered by Fannie & Freddie.

Lenders do offer loan products that Fannie and Freddie don’t buy, but for our purposes with this article, we are only focusing on the mortgages they do buy.

The US Treasury 10-Year Note is a separate traded instrument from MBS. The 10-Year Note does influence MBS prices because investors often use both or either bond to balance their portfolios.

The graph below shows the yield on the 10-Year Note for the last 8 trading days, which were from the day the Federal Reserve cut short-term rates by a quarter-percent on July 31st, to this past Friday, August 8th.

The 10-Year Note yield in the graph is a representation the “cost” of the underlying mortgage when lenders sell your loan to Fannie Mae and Freddie Mac.

The 4 other lines on the graph represent the points a consumer would pay that day to get a 3.625% 30-Year Fixed-Rate mortgage from 4 of the largest national lenders in the country.

Despite a relative narrow margin in the yield these past 8 trading days with the 10-Year Note, there have been wild swings in the points charged by the lenders. You will also notice that although the 4 lines do move in somewhat the same direction, on any given day some are moving up, while others are moving down.

The important point this graph is demonstrating is despite all these lenders selling their loans to the same two entities (Fannie Mae and Freddie Mac) at the same terms (no one lender gets better terms than another), the fees these lenders ultimately change the consumer are quite different. That difference is the result of throttling.

So despite the relative even “cost” for mortgage money this week, every lender ended up having higher rates on Friday than Wednesday.

The best advice I can give anyone is if you want to catch the best rates at the lowest point possible, you have to be already started with your lender to make that happen. Waiting just a week, could jeopardize that bottom of the trough rate. Also, when planning a vacation, shop around and book early!