Mortgage Rates: Why Are Zero-Zero Loan Quotes Missing?

country houseWhatever happened to zero-zero mortgage quotes?

Two years ago the government said lenders needed to change their ways and proposed four adjustments. The result was that three of the proposals were approved and one fell by the wayside. Three out of four is pretty good in Washington, but would it surprise anyone that the missing change is arguably the most important for borrowers, the idea of zero-zero mortgage pricing?

When you shop for a home loan you want to know about mortgage rates. Going further, you want to check the APR or annual percentage rate. The APR includes both the annual interest rate as well as some — but maybe not all — non-interest charges paid at closing. The APR will be higher than the nominal interest rate because it includes additional costs.

The problem with mortgage rates and the APR is that they do not really tell you which loan option is cheaper in terms that most people understand. The reason is that most loan quotes include both the interest rate and points, so do you choose one loan at 4.3 percent plus .4 points or a second loan at 4.5 percent and .2 points.

The answer depends on how long you expect to hold the loan. Points are paid up-front, in cash (or a higher loan amount) at closing. If you expect to be a short-term owner then maybe the loan with .2 percent is the better deal because the mortgage rate is higher but you’re not paying a lot of cash up front, cash you’ll never get back. If you expect to be a long-term owner then paying points and having a lower fixed-rate can be very attractive.

Alternatively, I prefer par pricing. In this situation all loan quotes show the interest rate with zero points. Now it’s very easy to compare rates. An FHA mortgage at 4.4 percent and an FHA mortgage at 4.6 percent are the same financial product with different costs. Why would you pay more?

Zero-Zero Mortgage Rates

In 2012 the Consumer Financial Protection Bureau came out with an alternative idea, the zero-zero mortgage quote.

“Under the proposed rule,” said the CFPB, “creditors would have to make available to consumers a loan without discount points or origination points or fees, unless the consumers are unlikely to qualify for such a loan. These options would enable a consumer buying or refinancing a home to better compare competing offers from different creditors, better able to compare loan offers from a particular creditor, and decide whether they would receive an adequate reduction in monthly loan payments in exchange for the choice of making upfront payments.”

Translation: Under the CFPB proposal lenders could provide whatever loan quotes they like but they would also have to offer a zero-zero option, an option that would include the interest rate, points and loan fees. Because it includes all loan costs, the zero-zero option would show a loan rate that was “higher” than the nominal rate of interest.

It was argued that the requirement to use a zero-zero quote would “force up” mortgage rates but that’s not the case. The nominal rate would not change. All a zero-zero loan quote would show is the actual cost of the loan including all related fees and charges so that borrowers might better compare the real costs of financing.

Mortgage Rates Revealed

Spring ahead to 2013 and the CFPB announced the adoption of several loan standards including requirements to prohibit steering incentives, “dual compensation” for a single loan and common qualification standards for loan officers whether they work for a bank, mortgage broker, mortgage banker or non-bank.

Meanwhile, the zero-zero proposal got dumped because, “based on the comments received, the CFPB has decided not to finalize this part of the proposal.”

Okay, fair enough. Not every good idea survives the regulatory process.

However, there is something borrowers can do to protect their interests: Ask lenders for a mortgage quote at par; that is, an interest rate with no points. Par pricing remains the easiest way to compare similar loan products, say a conventional loan from Lender Smith versus a conventional loan from Lender Jones. The loans are the same so the only issue is which lender can offer a better price.

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