Lenders Charging Discount Points During Coronavirus Crisis

BREAKING NEWS: Lenders Charging Discount Points During Coronavirus Crisis

Lenders Charging Discount Points
Gustan Cho Associates

Lenders Charging Discount Points during the coronavirus mortgage crisis due to illiquidity on the secondary market.

  • The coronavirus pandemic has halted the US economy
  • This holds especially true for the mortgage industry
  • The press does not cover the horrific damage the 2020 economic meltdown has on the mortgage market
  • Mortgage rates are at an all-time historic low
  • However, lenders are increasing rates due to liquidity issues
  • What this means is when lenders fund home loans, they need to resell these loans on the secondary market in order they relieve their warehouse line of credit
  • The warehouse line of credit needs to be relieved in order for lenders to originate and fund more mortgages
  • However, the secondary market is not interested in buying mortgages (mortgage-backed securities or MBS)
  • There is no market on mortgages under 640 credit scores
  • Due to no secondary market on mortgage under 640 FICO, most lenders starting imposing lender overlays on credit scores raising them to 640 or higher
  • Many lenders have increased their credit score requirements to 680 FICO
  • Many borrowers have not heard of discount points
  • Discount points are origination fees lenders can charge
  • Borrowers can pay discount points to buy the mortgage rate
  • However, lenders are charging discount points on mortgages during the coronavirus pandemic crisis due to liquidity issues

In this breaking news ARTICLE, we will discuss and cover why Mortgage Lenders Charging Discount Points During Coronavirus Crisis.

Lenders Charging Discount Points Due To Loan Level Pricing Adjustments

Mortgage rates hit a new low today.

  • Mortgage rates for prime borrowers are 3.30% on a 30-year fixed-rate mortgage on conventional loans
  • Prime borrowers are mortgage borrowers with over 740 credit scores, 30% down payment, less than 40% DTI, automated underwriting system approval, and/or 70% LTV financing a single-family home
  • Anyone outside of the above parameters will get hit with pricing adjustments, also called Loan Level Pricing Adjustment (LLPA)
  • However, LLPAs are very expensive
  • For example, a borrower with a 699 credit score may get an LLPA of 1.50% hit which will be 3.30% plus 1.5% LLPA which is 4.8%
  • Normally pricing adjustments are not this high
  • Due to liquidity issues in the mortgage market, all lenders are jacking up their loan level pricing adjustment

Most lenders are charging LLPAs plus discount points during the coronavirus mortgage crisis.

What Are Discount Points

What Are Discount Points

Discount Points are origination fees.

  • Lenders are very regulated and cannot exceed a certain mortgage rate cap
  • Borrowers with low credit scores may get charged a certain rate plus discount points
  • One discount point is equivalent to 1.0% of the loan amount
  • Borrowers can also pay discount points to buy down the rate
  • However, due to the coronavirus meltdown and uncertainty in the secondary market, many lenders are charging a certain mortgage rate PLUS discount points
  • For example, one investor is quoting a mortgage rate of 4.5% plus a 2% discount point on a 680 borrower when par rates are 3.3% today
  • Any borrower will under 680 credit scores most likely be charged discount points until the mortgage market stabilizes

The good news is that discount points can be paid with sellers concessions by the home seller.

Lenders Charging Discount Points And Increasing Rates Due To Liquidity

Right now during this uncertain time lenders and servicers are facing many challenges. One of the challenges is many investors (hedge funds) at the top purchasing mortgage-backed securities and bonds have pulled out. With the pandemic going on and the unemployment rate hitting record highs they do not want the risk to purchase these loans. Loans 500 -639 credit score borrowers right now are not worth anything to anyone. This is what is causing interest rates to be so high and the coupon to cost discount points. This is not issue with particular lenders but rather an industry-wide problem. This will smooth out eventually but it is going to take some time. Most mortgage companies have raised credit score overlays. Lenders who had minimum credit score requirements of 580 on VA and FHA loans have increased them to 640 or higher plus discount points. Other lenders have increased minimum credit score requirements to 680 FICO on all government loan programs (FHA, VA, USDA). Other lenders have Implemented debt to income ratio overlays where they capped maximum debt to income ratios to 45% DTI. All non-QM lenders have suspended originating and funding non-QM loans until further notice. We expect most non-QM lenders will go out of business or suspend originating and funding non-QM mortgages. The whole mortgage industry is undergoing restructuring. All Jumbo Loans are on suspense until further notice. GCA Mortgage Group will keep our viewers posted as developments change in the coming days and weeks. Stay Tuned!!!

The great news is Gustan Cho Associates is aggressively originating and funding government and conventional loans with no lender overlays. We can still originate and fund VA and FHA loans with under 620 credit scores down to 500 FICO. For more information in qualifying for a mortgage with a lender with no overlays, please contact us at 262-716-8151 or text us for a faster response. Or email us at gcho@gustancho.com.

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