A Guest Blog Post from Stephen Crispin, CRP
Vice President, GenEquity Mortgage
It is widely agreed upon by economists that home loan interest rates are going to rise. What is not agreed upon, however, is when rates will rise and to what level. To be clear, there are signs currently that rates are on the increase as evidenced by an increase on the average 30 year fixed rate from a low of 3.29% in November of 2012 to a rate of 3.70% in early March, 2013 (according to Mortgage News Daily). While rates are still well below the 52 week high of 4.09%, recent reports of economic strength suggest that rates are on the way higher. Near term, the impacts of this are not expected to be significant. However, longer term, assuming rates continue to rise, the impacts will be felt more severely by relocating employees and their families.
What does this mean?
Home Selling – By virtually all measurements, the U.S. residential housing markets look to be improving. Home values are increasing, albeit from depressed levels, and list to sale times are decreasing. This has been fueled by the previously referenced low interest rate environment and economic strength. However, as rates continue to rise, one of the pillars of strength driving the housing markets will be slowly removed. This may result in a lengthening of marketing times for your employees as they try to sell their homes.
Home Purchase – For the past several years, relocating homeowners have been the beneficiaries of ever lowering interest rates. Consider the transferring employee who was moved in March of 2007 was able to secure a loan with a 6.25% interest rate. That same employee, being moved three years later, was able to secure a rate at roughly 5%. A subsequent move in March of 2013 would allow that same employee to receive a rate of roughly 3.75%. Most of the relocating homeowners over the past 10-15 years have enjoyed this rate differential. But, as previously noted, this trend is likely to reverse, making homeowners reluctant to accept assignments. To entice homeowners to accept moves in this environment, employers may need to offer incentives to these homeowners.
The incentives need to be carefully considered to not only achieve the desired benefit, but to be fully compliant with the ever changing regulations emanating from Washington, D.C. Dodd-Frank legislation has, among other things, created the Consumer Protection Financial Bureau (CFPB). The CFPB is in the process of enacting a number of new regulations which impact the mortgage markets. The regulation that is most impactful to employee benefits is the Qualified Mortgage (QM) rule. It is widely acknowledged that the vast majority of loans made will need to be compliant with QM. This rule states that in order for a loan to qualify as QM the total fees charged to the borrower cannot be in excess of 3% of the loan amount. This applies whether or not the fees are reimbursed by the consumer’s employer. With that in mind, let’s review some possibilities for incenting employees to move:
- Reimbursement for Discount Points – A discount point (a one-time fee of 1% of the mortgage amount) paid by the employer will allow a reduction in interest rate from as low as one-eighth (1/8%) of a percent to three-eighths (3/8%) of a percent, depending on the specific factors of a loan, for the life of the loan. This will help mitigate the mortgage interest differential. Caution is needed, however, when offering discount points due to the QM rules 3% fee cap. Since governmental fees (recording fees, transfer fees, etc.), closing costs (Attorney, Lender’s Title Insurance, and closing/escrow fees, etc.) can make up 1-2% of the loan amount, the Discount Point benefit will likely need to be limited to 1% so that the employee’s loan still qualifies as a QM loan.
- Buydown – A buydown is when a lump sum is paid up front to temporarily reduce a borrower’s interest rate for set period of time. Examples of this are a “2-1-0” or “3-2-1” buydown. A tangible example is as follows: A borrower who has secured a 5% interest rate and a 2-1-0 buydown. The amount of the first 12 payments will be as if the interest rate was 3%. The amount of the subsequent 12 payments will be as if the interest rate is 4%, and all ensuing payments will be at the note rate of 5%. The CFPB has not specifically addressed this per se, but there is no basis for excluding these from the 3% cap rule. Due to the high cost associated with a buydown, this benefit would in the vast majority of instances result in exceeding the 3% cap thereby resulting in the loan no longer qualifying as a QM loan.
- Mortgage Subsidy – Employers have the option of designating a set amount, generally expressed as a percentage of the loan amount, as a mortgage subsidy to reduce an employee’s monthly payment. Example, a 2%, 3 year subsidy would result in an employer paying 2% of a loan amount. This amount would be used to offset the employee’s mortgage costs for 3 years. In the instance of a $250,000 loan, the cost to the employer would be $7,500. The employee would then receive $208.33/month for the first 36 months of the mortgage to offset their costs.
The bottom line is that the next few years are likely to bring about substantial changes in the mortgage market and those changes have far reaching effects on corporate relocation.