The cost of originating mortgages and loan production is officially ridiculous and a question that arose at the Mortgage Bankers Association’s convention and expo last week was “Are record low mortgage rates masking from borrowers the high cost of mortgages?”
Mortgage rates for much of 2014 have been low, with rates lately dipping below the 4% threshold.
Meanwhile, total loan production expenses – commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations – took a giant leap up and increased to $8,025 per loan in the first quarter, up from $6,959 in the fourth quarter of 2013 and $6,368 in the third quarter of 2013.
The reality is, these costs are being passed onto borrowers, and it goes to the question of whether low rates are masking the cost of mortgage origination.
HousingWire surveyed leading economists in the housing field, and here is what they had to say.
“Many folks who might have higher costs simply aren't qualifying today, so the higher costs on some mortgages are not as apparent for that reason as well,” said Jonathan Smoke, chief economist for Realtor.com. “When rates go up – and the credit box widens – we should see a much wider spread of actual rates on purchases.
“I don't think that's quite ‘sticker shock’ – maybe more payment shock for the rate that they will actually get. And given focus on DTI and LTI ratios, the higher costs might still price many out of the market,” Smoke said.
Lawrence Yun, chief economist for the National Association of Realtors, said he thinks fees are too high.
“Most consumers have taken out 30-yr fixed rate, so they are protected from future rate increases and even from general cost of living increase. I do believe fees – FHA premiums and Fannie and Freddie guarantee fees - are too high in relation to current default rates,” Yun said. “Mortgage rates rising to 5% next year, my forecast, should not be alarming, especially if credit box open up from less stringent conditions.”
Lindsey Piegza, chief economist for Sterne Agee, said it could be challenging for buyers.
“Well they don't mask the cost - the current cost is based on the current rate and price environment - but with housing so ‘affordable’ over the past few years, consumers sense of normal has been adjusted down and when rates do start to rise, there is bound to be some sticker shock and negative reaction,” she said. “In other words, rising rates may cause some homebuyers to assess a new higher rate environment as ‘expensive’ (relative to low rates today) or unreasonably high, deterring new demand.
“But new demand will remain dependent on the consumers ability to pay. Meaning if income growth is keeping up with rising financing costs, consumers are less likely to bat an eye,” Piegza said. “But if financing costs are rising and income growth remains stagnant, consumers are likely to be twice as unlikely to buy a home.”
Dr. Stan Humphries, chief economist for Zillow (Z), said low rates are making housing look more affordable, and that rates will affect how buyers perceive the actual cost of mortgages.
“Low rates have masked the rapid increase in home prices themselves over the past couple of years, and are the chief reason that housing affordability looks as good as it does right now,” Humphries said. “Affordability at the national level is 32% better than the historical average, in terms of the share of income spent on a typical mortgage payment. If rates were at a more normal level though, affordability would look about on par with historic norms, a clear indication that it's the rate, not the price, that's making homes look so affordable right now.”
Jed Kolko, chief economist for Trulia (TRLA), said essentially all of this is academic if the economy doesn’t strengthen and incomes along with it.
“Higher rates make buying more expensive, all else equal. But it matters why rates rise. If they’re rising because the economy is strengthening, then all else is not equal. If incomes and consumer confidence are rising alongside rates, then higher rates might make only a small dent in housing demand,” Kolko said. “Also, rising rents mean that buying looks relatively affordable compared with renting even at higher mortgage rates. At current rates, buying is 38% cheaper than renting. Buying would remain cheaper than renting, both nationally and in all of the 100 largest metros, at current prices and rents even if rates rise through the fives.”