By Peter Miller
The government is out with a new mortgage rate site, a resource that’s been greeted with cries of outrage from many within the mortgage industry. So what is this site, does it help borrowers save money, and why has there been so much controversy?
The government routinely posts information regarding just about any topic you can imagine, and that includes mortgage rates. Freddie Mac, taken over by the government in 2008, publishes a widely-quoted weekly rate report and it syndicates rate information across the Internet. The Federal Housing Finance Agency (FHFA) publishes monthly rates while the Federal Financial Institutions Examination Council (FFIEC) posts the daily APOR — the “average prime offer rate” tables that lenders use to assure they are within allowable mortgage-rate guidelines under Wall Street reform.
Such online rate reports have not caused consternation in the lending industry, but that’s not the case with the just-introduced “Rate Checker” created by the Consumer Financial Protection Bureau (CFPB).
The Bureau launched the rate site in January to help mortgage borrowers. According to CFPB Director Richard Cordray, the checker “helps consumers understand what interest rates may be available to them. It incorporates information from lenders’ internal rate sheets, information they use to calculate what interest rate is available for a particular consumer. In other words, we are giving consumers direct access to the same type of information that the lenders themselves have.”
As an example, as of this writing the checker reports that “in Florida, most lenders in our data are offering rates at or below 3.780%.” There’s a calculator which allows visitors to compare rates over five years and 30 years as well as advice to “get quotes from three or more lenders so you can see how they compare. Rates often change from when you first talk to a lender and when you submit your mortgage application, so don’t make a final decision before comparing official Good Faith Estimates.”
What could be wrong with this presentation? According to the lending industry, a lot.
Mortgage Industry Complaints
The Community Home Lenders Association (CHLA) and Community Mortgage Lenders of America (CMLA) jointly want the checker removed. They argue that it “does not fully take into consideration wide range of variables that can have an effect on mortgage rates. These include the FICO score of the borrower; the mortgage Loan to Value (LTV); the loan amount; the loan type, location of the property; whether it was a purchase or refinance loan; and other factors. Our concern is that by focusing on average rates, the rate tracker tool might mislead certain borrowers about what they can expect with respect to a mortgage loan, which could set them up for disappointment if, as will often be the case, they do not qualify for the average rate.”
John Councilman, president of the National Association of Mortgage Brokers, says, “If a private company released this exact product, the CFPB and state regulatory authorities would have a team sent in to shut the site down.”
Actually though, the Freddie Mac and FHFA rate reports have the exact same problems — and no one seems to mind. No less important, the CFPB is not a private company; it’s not a lender of any sort. It doesn’t originate loans, sell loans, buy loans, or package loans, so the rules for lenders simply do not apply.
In a sense, the CFPB is acting as a financial publisher, an entity not covered by lender requirements. But if it’s true that the CFPB rate checker is best seen as an information resource, then it’s in that context that industry complaints have some validity.
Nonbanks Not Counted
To understand why, let’s consider that Florida rate, 3.780%. If 3.78% is the average rate, what average does it reflect? The CFPB says “our data is provided by real lenders and is updated every business day in the evening. The lenders in our data include a mix of large banks, regional banks, and credit unions.”
Apparently not counted are rates from thrifts, community banks, mutual banks, and nonbanks, a newly emerging class of mortgage lenders who do not accept deposits. This is a concern because if the mix of sources were wider, the published rate quote might be different — perhaps very different.
As an example, figures from the Mortgage Bankers Association show that in 2013 nonbanks originated 36.9% of all mortgages by dollar volume. Not only is this a huge percentage of the market to ignore, it’s also a growing percentage — in 2011 the nonbank share of the mortgage market was 27.3%.
“The growing marketplace presence of nonbanks in the mortgage marketplace is increasingly important,” said Rick Sharga, executive vice president at Auction.com. “Banks, nonbanks, and other capital sources have differing cost structures that can impact the rates and terms offered to borrowers.”
Points and Fees
The CFPB says that its quotes “assume -0.5 to 0.5 discount points and a 60-day rate lock,” assumptions which simply do not reflect marketplace realities.
A single discount point is equal to 1% of the loan amount and is paid or credited to the lender at closing. The way the market works is that a mortgage has a given interest rate, say 3.5% with no points. This is the “par” rate. If you pay a point or part of a point, the rate will be reduced. Alternatively, if you pay a higher rate, the lender might pay some or all of your closing costs.
Having a range that goes from -0.5 to 0.5 is huge. The final rates within that range can be radically different, depending on how many points are paid, not paid, or credited back to the borrower.
For instance, you might be able to get a loan at 3.5% with no points but 3.25% with 1 point. Accept a loan at 3.75% and the lender might pay some or all of your closing costs. For a $200,000 loan, a difference of 0.5% — say the difference between 3.25% and 3.75% — is about $1,000 in just the first year of the loan term.
The CFPB rate checker does not account for smaller mortgages, those below $100,000. While points and fees for qualified loans above $100,000 are capped at 3% of the original debt, under Wall Street reform points and fees can be higher for smaller loans.
As to the 60-day lock, it doesn’t help most borrowers for two reasons: First, the shorter the lock, the lower the rate because a longer lock implies more risk for the lender. Second, most loans close in a lot fewer than 60 days. According to EllieMae, in December the typical loan took just 42 days to close, so on average a 45-day lock is more realistic.
Whatever rates are posted are always subject to change — but more importantly, they also depend on the borrower’s credit standing. If you have an 830 credit score you’ll get the best posted rate in town, while at 590 lenders will ask for a much higher rate to compensate for taking a greater risk.
The CFPB site doesn’t directly explain this issue, nor does it explain why borrowers with a 20% down payment will have radically lower monthly costs than borrowers who pay less cash up front. It doesn’t explain why jumbo loan borrowers currently pay less than borrowers who take out smaller amounts.
It certainly doesn’t say that a borrower who pays 3.78% — that typical rate for Florida on the day we checked — is getting a good deal. For some borrowers such a rate might be wildly above what they should pay given their circumstances. We had no trouble finding lower rates from a credible mortgage source, meaning that a borrower who accepts 3.78% might be over-paying.
The CFPB describes its rate check system as being a “beta” project, implying that there’s more work to be done. Lenders no doubt agree, and some would like to go further.
“We’ve stood with the CFPB before when they’ve done the right thing; in this case, they are wrong,” said David Stevens, president and CEO of the Mortgage Bankers Association. “We don’t like this because it is just flat-out bad. The Bureau should leave rate quotes to lenders.”
The CFPB rate checker is unlikely to be removed unless Congress intervenes — something that could happen in the budget process — but it’s surely subject to change.
Maybe the next version can use more-relevant data, provide better context, and clarify that rates and terms involve a variety of factors including credit standing, loan length, points, locking decisions and the date of closing. The rate shown on the CFPB site may not be the rate you get — some borrowers will pay less and some will pay more, depending on their particular circumstances and willingness to negotiate.
Access to internal rate sheets does not resolve the loan comparison problem for consumers. No doubt different lenders have different rate sheets, but what really counts is the rate actually offered to borrowers.
Despite constant exhortations to shop around, many borrowers don’t and the result is less leverage in the marketplace and needlessly higher loan costs. In a recent report, the CFPB found that “almost half of consumers who took out a home purchase mortgage reported that they seriously considered only a single lender or mortgage broker before applying for a loan.”
Three Steps to a Better Approach
Under Dodd-Frank, mortgage loan officers can no longer be compensated on the basis of a higher loan price. Instead, loan officers now have every motivation to sell as many loans as they can, and the way to do that is to offer the best rates and terms. With the incentives for loan officers and borrowers better aligned, the real issue is how to get consumers to actually shop for financing.
To make its rate checker more valuable there are three steps the CFBP can take:
- First, use the Freddie Mac weekly numbers to give a basic sense of market trends, numbers everyone accepts. Even better would be the publication of daily Freddie Mac data to make the rates more immediate and useful.
- Second, numbers without context aren’t much help. The site needs clearer and better information regarding how the marketplace works.
- Third, there’s more than one way to present mortgage information. Why not recognize that many private-sector sites do a good job showcasing mortgage rates and information? Why not also recognize that most borrowers are not going to the CFPB site? Create a CFPB seal-of-approval to reward lenders, real estate brokers, and informational sites that meet certain standards. Consumers could look for the seal when they consider financing options.
With these three steps the CFPB rate checker could go from “beta” to “alpha” in no time — and a lot of consumers would benefit in the process.
Peter G. Miller is a nationally syndicated real estate columnist. His books, published originally by Harper & Row, have sold more than 300,000 copies. He blogs at OurBroker.com and contributes to such leading sites as RealtyTrac.com, the Huffington Post, and Auction.com. Miller has spoken before such groups as the National Association of Realtors and the Association of Real Estate License Law Officials.