Why "Discount Points" will be required for the next few months

TLDR - Your borrowers will be required to pay points for the next few months on any purchases or ask for seller concessions to do so. Set the expectations accordingly.

To understand why, you first need to understand the secondary market for mortgages - which many view as "Wall Street".

A term you may have heard of before is a "Mortgage Backed Security" (MBS). Simply put, an MBS is a package of mortgages bundled up and sold to investors as bonds in order to spread their risk across hundreds of homes instead of a single house.

The price of these packages are called a "coupon" based on the interest rates on the mortgages. These coupons are sold in .5% increments (ex. 4%, 4.5%, 5%). Each coupon is like a bucket that contains a certain range of mortgage rates with +1.125% being the upper limit.

 As an example: The 4% coupon can contain mortgages with an interest rate between 4.00% and 5.125%

In the market today, the highest yield MBS is 6%. That means, that the highest a rate can be in today's market is 7.125% to fit in that bucket.

However, for those who have been following the market and the FED announcements, interest rates have continued to rise and there is a high probability the FED will increase rates another 50 bps in October. That means, before the end of this week, the "par rate" (rate with no points) will be well above 7.25%.

Mortgage lenders will be prohibited by the secondary market to lock a conventional loan above 7.125% until the secondary market catches up and creates a 6.5% coupon for a MBS. This cannot happen until Wall Street sees some sort of stability in the market, which is nowhere on the horizon. This could take months.

For now, the only way to do a conventional mortgage will be to buy down the rate to 7.125%. As we move into October, this could rise to costs of 1 point or possibly higher.

For agents reading this, I would recommend resetting expectations with your clients. Rates rose almost a full percent in a month. That velocity is unprecedented. If any clients have been on the house hunt for the last few months or even weeks, both their monthly payments and cash to close will be much different than they previously planned.

The other way to combat this rise is to ask for seller concessions - detailed in one of our June blog posts. Since appraisals are no longer an issue, there is space in negotiations to request seller concessions instead of a reduced purchase price. This can help your clients purchase homes with limited cash and the best monthly payment possible.

A common theme this month has been resetting expectations. No one can control this market, but we can control our clients expectations when putting offers in on homes.

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If you have any additional questions or thoughts on this strategy, please reach out and I'd love to chat. 615.969.6889 or michael@nuwavelending.com