22 MAY / JUNE 2023 Buydown Program Considerations Keep it long enough and it will come back in fashion PSP SHOWCASE The early 2000s are remerging with their crop tops, low rise jeans, flip phones and mortgage buydowns. Deja-vu! Pre-crisis teaser rates have been reborn into mortgage buydowns, both temporary and permanent. With the housing markets remaining pricey and rates still higher than they have been in years, many buyers are looking for assistance in any form. As the refinancing market cools down, mortgage originators are becoming increasingly more creative finding innovative ways to bring business through the door. This has led to lender, builder and seller concessions to help close deals. Buydowns generally are going to refer to when a borrower pays “points” upfront to reduce the mortgage rate to a level that places their monthly payments in a range they can afford. It is thought that the rate has been “bought down” from its original rate for the entirety of the mortgage by paying a lump sum up front. The more recent trend has been for these to be seller-paid rate buydown concessions, with the seller offering to reduce to buyer’s mortgage interest rate for either the first few years (temporary) or for the duration of the loan (permanent). The seller is either contributing to the buyer’s closing costs or paying for a temporary rate buydown. What the market is seeing now is an influx of temporary buydowns, with the most common ones being a “2-1” and “1-0,” meaning a two-percentagepoint interest rate reduction in the first year and a one-percentage-point reduction in the second year, or a one-percentage-point interest rate reduction in the first year only, respectively. Sellers, builders, lenders or a combination of all three put up money to cover the difference in interest rate payments between the original mortgage rate and the reduced mortgage rate. For a 2-1 example, the mortgage rate is reduced by two percentage points for the first year and then will step up Elizabeth Madlem Vice President – Compliance Operations Bankers Alliance info@BankersAlliance.org by one percentage point in the second year, and another percentage point in the third year to reach the actual mortgage rate at origination. It essentially works as a subsidy for the first two years of the mortgage before reverting to the full monthly payment. The benefits are there for consumers – it can make purchasing a home more affordable (even if temporarily) and can buy time for borrowers to refinance into a lower rate should interest rates fall. With permanent rate buydowns, generally, it will be a seller paying a portion of the buyer’s closing costs that are used toward buying mortgage discount points, with each point reducing the rate on average by about 25 basis points, costing 1% of the loan amount. So if a borrower bought a $500,000 home with a 20% down payment, the mortgage amount would be $400,000, with each point costing $4,000. With permanent buydowns, borrowers are historically slower to refinance given the cost/benefit decisions taking place with recouping upfront money put down for the loan versus refinancing costs associated with a new loan. One of the biggest issues with buydowns, either temporary or permanent, is proper disclosure on the Loan Estimate (LE) and Closing Disclosure (CD). For disclosure purposes, there are specific Regulation Z contemplated buydowns: % third-party buydowns reflected in a credit contract; % third-party buydowns not reflected in a credit contract; % consumer buydowns; % lender buydowns reflected in a credit contract; % lender buydowns not reflected in a credit contract; and % split buydowns (see 12 CFR 1026, Supp. I, Paragraph 17[c][1]—3 through 5). Regulation Z provides numerous scenarios that determine whether the terms of the buydown should Bankers Alliance is a Preferred Service Provider of the Indiana Bankers Association. BANKERS A Holding Company for Review Alliance and Compliance Alliance
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