Loan Programs

"No Cost" Mortgages Coming to an End

By James Comtois

ANN ARBOR, MI-Due to mortgage brokers and bankers having sufficient flexibility when pricing mortgages to charge a slightly higher interest rate, making a bigger commission from their lenders and using the bigger commission to pay the borrower's closing costs, many homeowners benefited from "no closing cost" mortgages throughout the mortgage refinance booms of the last 10 years.

However, according to Gibran Nicholas, chairman of the CMPS Institute, an organization that certifies mortgage bankers and brokers, the no cost mortgage may be going the way of the dodo.

The no close mortgage "was effectively a risk-free strategy for homeowners, because you could enjoy the benefits of a fixed interest rate and save money whenever rates dropped without it costing you any money," said Mr. Nicholas. "However, lenders today are severely limiting the commissions they give to mortgage brokers and bankers. This means the mortgage professional you are working with has much less flexibility than they enjoyed in the past when pricing loans and negotiating with funding sources."

A big part of this has to do with the malfunctioning market for mortgage-backed securities.

"In the past, demand for mortgage-related bonds issued by Fannie, Freddie and other institutions was so strong, that these institutions were willing to pay higher premiums when buying mortgages from banks and mortgage companies. The banks and mortgage companies were then able to use these higher premiums to pay bigger commissions to their bankers and brokers," Mr. Nicholas said, adding that the broker or banker could then use these higher prices and commissions to pay the closing costs.

Now that Fannie, Freddie and other financial institutions are unable to sell bonds as easily on the bond market, they are paying banks and mortgage companies a much lower price for the mortgages they do buy from them, and severely limiting the tiered premium structures of the past.

This, in turn, is causing banks and mortgage companies to limit the commissions they pay to their brokers and bankers, which means brokers and bankers no longer have the flexibility to price loans in ways that allow them to pay the borrower's closing costs.

Of course, this situation could change if the Fed's program to purchase $600 billion of mortgage-related bonds is enough of a catalyst to jumpstart demand for mortgage bonds in the marketplace. "Although there are some signs of premium pricing improving slightly compared to the last several weeks, it is still unclear at this point what effect the Fed's interventions will have on the way mortgage loans are priced. It's becoming rather comical to watch the rate sheets every day and witness the bizarre pricing movements," Mr. Nicholas said.