If The Federal Interest Rates Are Zero Percent, Why Isn’t Home Loan Interest Rates Lower?

I have been getting a lot of questions from friends and clients why home loan interest rates aren’t lower if the Federal Reserve is loaning out (printing money) at 0% interest to the big banks. Here is some feedback below from loan officer Ian Wright, from a recent conversation about why it seems buyers such as VA and FHA are asking for bigger home seller credits when they are submitting purchase offers on homes during the COVID-19 quarantine.

We recently received a purchase offer from a VA buyer on a townhome and they were asking the seller to credit them 2.5% of the sale price in closing cost credit. This was not an unreasonable thing for a buyer to do since a buyer’s closing costs generally are about 2.5% of the purchase price and they were using a VA loan 100% financing loan. It was I just haven’t seen buyers asking for that much of seller credit for quite a while.

Here is Ian’s feedback:

There’s less ability for lenders to provide large lender credits due to the economic challenges impacting lenders liquidity and lack of appetite investors have…especially with Government loans right now as the Loan Servicers are losing money on those loans with many people going into Forbearance on those coming up, they’re fearful of them.

So for example,  using a 700 FICO score & 440k sales price, you’ll see the rate pricing chart looks weird.

For example 2.75% has a cost of 1.220pts, but I could probably get it for about .50pt – .75pts cost with some discounts

But you’ll see 3.125 has the exact same terms which is odd.

Then from 3.25% – 4.5% the pricing is about the same at 0pts, I could probably throw in a credit of about $2,200 – $3,000 if I had to, but no way is there enough Yield Spread to cover all closing costs of 2-2.5%.

Seller credit is allowed to cover all Closing Costs, including impounds so don’t worry about the VA loan Non-Allowable fees too much as I don’t see that followed much anymore.

Investors are trying to prevent people refinancing 6-months later which would likely happen if lender gave them higher rate to cover their closing costs. Loan Servicers lose money if someone pays off their loan before 3-year mark…so its not worth the risk for them.

Investors don’t want to buy these loans right now and the Loan Servicers and lenders don’t want to keep them on their own books so it’s a conflict at the moment….

Watch loan officer, Cathy Sabater from Caliber Home Loans, interview four Realtors about how they are adapting to help their home buyer and sellers in the new COVID-19 quarantine real estate market. Realtor Panel Consists of Patricia Henderson, Manuel Sanchez, Debbie Avey, & Jason Kardos. Recorded on April 2, 2020 via ZOOM. Cathy Sabater 619-846-2675 cathy.sabater@caliberhomeloans.com http://cathysabater.com

Ian Wright Continued…

As a result, Listing Agents & Sellers will now start to see more requests for Seller Credits. New market and mindset we’ll all have to adapt to.

Basically, the Government Servicing value has gone to 0 or less (FHA, VA, USDA). If the borrower is not making payments, the Loan Servicer has to front the interest to Ginnie Mae, the bond holder, so whoever is Servicing those loans they’re obligated to make payments to those investors to avoid default.

So right now, depending on the lender, there’s actually better Servicing value on the lower rates vs. the high rate with large lender credit that will get refinanced after 6 payments.  Loan Servicers don’t get positive returns on investment until about year 3 so that’s a concern for them.

So these fears combined with many loans soon going into Forbearance are causing big FHA/VA guideline changes causing higher FICO score requirements, lower Debt to Income Ratio (DTI) caps, more reserves, etc.

You’ll see more of a need for borrowers to go Conventional to avoid the new government overlays, work on credit score/rapid rescores and get the Seller Credits.

Below is additional information explaining what’s happening with the mortgage market. It may sound conflicting & confusing with everything going on, but the attached article & link explain it VERY well. If you have more questions about home loans you can contact Ian Wright at 619.871.4995 iwright@bayeq.com https://www.bayequityhomeloans.com/ian-wright/

Download the Mortgage Crisis and Fed Unintended Consequences Report

Download (PDF, 125KB)

This video basically explains why rates still aren’t reacting to the data we see on the MBS market, Stocks or 10yr Treasury and why rates may seem higher than they should be.

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