BLOG VIEW: Mortgage lenders have traditionally wanted both an origination fee plus points when making a loan, but now there’s evidence that such charges are going the way of landlines and boom boxes.
Research from Freddie Mac shows that points and fees are now near historically low levels. Indeed, they are so low that we may be on the verge of widely marketed “zero-zero” financing, loans with neither points nor origination fees.
According to the National Association of Realtors, 98.5% of all residential loans were qualified mortgages (QMs) at the end of 2015. Though there’s a 3% cap on points and fees for larger QM mortgages, there’s no rule that says lenders can’t charge less – and that’s exactly what has happened.
Anyone who has watched the mortgage marketplace knows that today’s rates – generally less than 4% at this writing – are very close to the historic lows seen in 2012. Less visible has been the decline in fees and points. In 1985, points and fees for prime financing hit a combined average of 2.7%. If you borrowed $150,000, you paid $4,050. As of the first week of March, points and fees for the same loan amounted to just .5%. The cost to borrow $150,000 with prime financing was down to $750 – a huge savings.
It’s not just prime mortgages. According to the Mortgage Bankers Association, as of March 9, the typical jumbo borrower faced points and fees equal to .31% of the loan amount, while Federal Housing Administration borrowers were looking at .37%. The story is much the same for adjustable-rate mortgage borrowers: just .32%. A $150,000 mortgage with points and fees equal to .31% of the debt means the borrower is paying just $465 for such costs.
Why have the costs for points and fees fallen so low? Several reasons stand out.
First, in the current rate environment, there’s so much competition for borrowers that it’s impossible to support higher origination costs.
Second, lending has become remarkably transparent. Charge a dime more than the next lender and borrowers will know – and go elsewhere.
Third, points and origination fees are included when calculating the annual percentage rate (APR) – and the APR is plainly shown in the new loan estimate form.
Fourth, profits can be made elsewhere in the lending process. Borrowers have no way to see secondary marketing gains, capitalized servicing, servicing released premiums and the warehouse interest spread.
The catch is that other income streams are not possible without first grabbing the borrower. With mortgages, the lender that gets the borrower wins – there’s no prize for second place.
“Most lenders, especially banks, are issuing QM loans to stay in strict compliance with Dodd-Frank,” says Rick Sharga, executive vice president of Ten-X, an online real estate marketplace. “This limits a lender’s ability to compete for business based on interest rates, since QM rules dictate that these rates stay within a very tight range. It seems like many lenders have decided to offer lower points and fees as a way to attract qualified borrowers – a rare case of a positive unintended consequence from this legislation.”
Back in 2012, the Consumer Financial Protection Bureau (CFPB) considered mandating “zero-zero” loan quotes. Under this plan, lenders could offer any combination of rates and points they wanted, but they also had to show “a loan without discount points or origination points or fees, unless the consumers are unlikely to qualify for such a loan.”
Had this proposal been enacted, lenders would have been forced to show either the zero-zero rates or explain why they were underwriting loans for which the borrowers were unlikely to qualify. To avoid suggesting that a borrower was somehow unqualified for financing, virtually all loans would have included a zero-zero quote.
The CFPB proposal didn’t go anywhere, but the concept may be returning. We see loan quotes at par, so why not with zero-zero pricing? Once you get rid of any reference to consumers who are “unlikely to qualify,” the zero-zero idea could fit very well in today’s era of ultra-low interest rates and tough competition.
As lenders seek competitive advantages, there’s surely a lender somewhere that’s looking at the numbers and thinking it could be useful to offer a “zero-zero” loan product, a mortgage with no origination fee, no points and a smaller cash requirement up front.
Will it really happen? There’s no reason why points and fees could not fall from today’s levels, and if that happens, the zero-zero approach will become more and more alluring in the contest to grab borrower attention – a contest in which second best isn’t good enough.
Peter G. Miller is a nationally syndicated real estate columnist. His books, published originally by Harper & Row, sold more than 300,000 copies. He blogs at OurBroker.com and contributes to such leading sites as RealtyTrac.com, the Huffington Post and Ten-X. Miller has also spoken before such groups as the National Association of Realtors and the Association of Real Estate License Law Officials.