Lenders broaden use of momentary price buydown applications

Temporary rate buydown programs have become more prominent as the housing market has softened, and in the past week some lenders have launched more expansive variations of them.

United Wholesale Mortgage, for example, just announced buydowns for jumbo loans sized above the government-related market’s limits. The addition of a 30-year fixed rate jumbo offering with 2-1 or 1-0 options follows UWM’s launch of buydowns for other product types earlier this year.

In a temporary buydown, a seller, builder or lender agrees to offer a mortgage borrower what is essentially an artificially lower rate for a specified period of time. The strategy is one way the residential real estate and mortgage markets have been coping with this year’s relatively higher rates and cooling demand for homes.

Say borrowers have a 2-1 buydown for a 6% mortgage. The first year, the mortgage rate might be 4%. The year after, it’d increase to 5%, returning to 6% thereafter. The 1-0 option would instead offer a 1% discount the first year and then adjust upward to 6% from 5%. 

A third type of buydown available with some of UWM’s other products is the 3-2-1, which offers a 3% price break the first year, 2% the second and 1% the third. 

Temporary rate buydowns help borrowers free up cash in the earlier stages of homeownership, allowing consumers to absorb extra expenses related to setting up house. However, they also could lead to payment shock, as borrowers will have to make higher payments over time, the Consumer Financial Protection Bureau has warned.

”Although the initial interest rate and payments are lower, the long-term rate and payments may be higher,” the CFPB said, commenting on buydowns in a recent report on some of the current housing finance options being offered to help offset this year’s higher rates.

Loans with buydowns also might not always be the best offer available on the market, the bureau reminds borrowers in the report, noting that a fixed-rate mortgage without the option might still offer a more relatively favorable long-term rate.

However, lenders offering buydowns maintain that while they may not always be the best option for the consumer, some instances exist in which they may be.

For example, a buydown offered in conjunction with the fixed-rate product might be preferable to the uncertainty of adjustable-rate mortgages for some borrowers, depending on how long they think rising rates will persist. While ARMs are still relatively scarce in the broader mortgage market, they tend to be offered more commonly when it comes to jumbos.

“In today’s market, temporary rate buydowns for jumbo loans are a much better alternative than jumbo ARMs,” said Alex Elezaj, chief strategy officer at UWM, in an email.

In addition to upward rate adjustments, borrowers might also be worried about the possibility of downward moves, which is why Guild Mortgage recently introduced not only temporary buydowns, but a no-fee refinancing option that can be combined with them.

“Within a certain time period, they can come back and refinance and not have any out-of-pocket costs,” said David Battany, executive vice president, capital markets, at Guild Mortgage. Like the buydown, the no-fee refi concept isn’t entirely new, but it was largely dormant in the extended period when rates were relatively low.

The ability to combine the buydown and no-fee refi programs is positioned to address the growing consumer reluctance to buy a home in the relatively higher rate environment this year.

“If a person’s not quite sure if they want to buy a house in this current market due to higher rates, here’s a program that’s out there that gives you a 1% lower rate for the first year, and if rates do drop sometime next year, you can do a refinance at no cost,” Battany said “It takes away some uncertainties that they face today a little bit if you mix the two.”

In Guild’s case, the mortgage company itself is willing to buy down the rate, something not every lender is up for given the industry’s current profit squeeze. 

“It’s a Guild-funded 1% buydown,” Battany said. “The rationale behind it is twofold. The obvious part is that the buydown helps borrowers have more affordable interest rate monthly payments. So it addresses the payment shock that borrowers are facing in terms of how much rates have increased for this last year. 

“I think another more important part, which I think is often missed in buydown discussions, is that by doing a lender- or seller-funded buydown, the borrower at the end of the year may have 1% more cash in their pocket than they would’ve had.”

The use of temporary rate buyouts has been growing not just among more publicly-traded companies like UWM and Guild, but also private ones like A&D Mortgage and Planet Home Lending.

A&D recently announced new 2-1 and 3-2-1 programs available for a broad range of loans, from standard, first-lien conventional products to second homes and non-qualified mortgages, It does not offer them for investor properties or on a lender-funded basis.

Reports that some Realtor referral partners were interested in accommodating seller concessions through temporary rate buydowns prompted the introduction at A&D, said Alex Suslov, who heads up the company’s capital markets team. The company originates in 36 states through brokers and a smaller retail channel.

While it’s too early to gauge the extent of the uptake for the buydowns, Suslov said the interest originators have seen comes from “millennials who are buying properties right now trying to build their future in the United States with slow steps.”

“They don’t want high payments right away, and they view homeownership as more beneficial than paying rent because they’re building some equity in the property instead of throwing their money away,” he added. 

Adding buydowns required a few weeks of operational improvements to accommodate the escrow accounts involved and adjustments in the rate discount for the loan’s amortization schedule, Suslov said.

Sales of the loans to the government-sponsored enterprises are relatively smooth as they’re included in regular mortgage-backed securities pools, he added. The ratings agencies typically require slightly higher credit enhancement for non-QM loans even though they’re qualified at their full rate due to the potential for payment shock, but the pricing adjustment is small so they’re still economical products, said Suslov.

Planet Home has long had temporary rate buydowns funded by third parties, but not until the second half of the year, when 30-year mortgage rates got as high as 7%, did they pick up steam, said Jim Loving, senior vice president, correspondent sales. Loving estimated that roughly 10% of the mortgages sold to Planet Home by other lenders now have them.

“As soon as we hit that 7% threshold, we definitely saw a pickup in the interest in buydowns,” Loving said.

Rates have since dropped back closer to 6%. Loans with buydowns can be refinanced, which could help borrowers if rates continue to fall. Escrowed funds from a contributor get used to reduce the mortgage’s principal if that occurs, Loving said

The degree to which buydowns get used may differ by area based on the extent to which the market is competitive, and a buyer may be able to negotiate with a seller or builder willing to offer the concession.

That said, the majority of builders have been using buydowns to move inventory, according to a recent study by John Burns Real Estate Consulting. That study finds buydowns used most heavily in an area like the Southwest, and the least in Florida.

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