So for as long back as I can remember, and at this point, that is a pretty long time, nobody has had to pay points to get a mortgage. But that has changed, and then some in 2022! In the current market, if you can get a new loan without paying points,that’s the exception rather than the rule. So what has changed and why?
So first a little background. The entire mortgage business is built on the idea that investors can exchange any mortgage for another and they are basically equivalent. All the discussion you hear about the guidelines, FHA, VA, conventional, jumbo are all about trying to find some financial equivalency in the loans created by my team here at Benchmark with the loans created by any other lender. This way an investor in mortgages can purchase them based primarily on price knowing that the underlying mortgages and payment streams have been created within those guidelines and are solid financial investments.
In a normal market, this allows investors to have some flexibility to buy mortgages at 4 or 4.5%, or whatever rates are at, as they see fit and know that their “math” is on point. If they want the higher rate, they pay a little more. If they wish to pay less, they earn a slightly lower return.
But that has blown up in 2022 as rates have shot up from 3% to over 7% recently and falling back for some loans into the 6s as of this writing. Several things are impacting investor buyers of loans and these impacts are generally negative for the end consumer/borrower.
First and foremost, nobody wants to pay for loans that are going to refinance quickly. The fact is that most secondary market people I have spoken with are thinking that this rate increase is a bit much and that as inflation subsides over the next year or two, mortgage rates will ease. They may or may not be right about this, but it’s the market assumption. So they don’t want to pay today to collect future years of payments and then have the loan pay off very quickly within a year or so. It’s bad business to take on this interest rate risk. So they aren’t offering to purchase the highest rates.
Second is that they aren’t sure of the performance of these loans at higher rates. The foreclosure rate is as low as it’s been in years. So if there is a weakening of the economy, it stands to reason that the newest loans at the highest rates, purchase prices and monthly payments will struggle both first and as a higher percentage of the pool. So investor buyers are either less interested or want to pay less for the credit risk in addition to the interest rate risk.
Finally, there is a bit of “hey we have been letting people get away without sharing the actual cost of the loan for years” in play. Some investors think that borrowers that don’t have the most vanilla loans should pay more in fees upfront and not have them built into the borrowers rate. Fannie Mae has a Loan Level Price Adjustment grid here if you are interested. But if not, Basically it’s the a-la-carte pricing grid that we use to account and charge borrowers for credit score, down payment, property type and occupancy in a “normal” market. In this market some of these costs have to be borne by the borrowers rather than “built in” to higher rates.
So here is the bottom line, for now, and for the foreseeable future, most folks will have to pay some type of points to get to closing. It’s annoying but frankly rates would be EVEN HIGHER if investors were willing to accept higher rates to bake these costs in. We’d likely have rates in the 8s already.
It’s a bit of a jacked up market so until things moderate, paying points is likely the new normal.
