Yes, negative point loans
(sometimes called "premium loans") are on the level, but they
are not necessarily a good buy for a cash-short borrower like you. If you
do elect to take a negative point loan, furthermore, you will be hard
pressed to find one at reasonable terms in shopping conventional channels.
The best place to find them is on the web, or through an Upfront
Mortgage Broker.
Lenders typically offer a
range of rate/point combinations on every type of loan. For example, on
November 24, 1998 one large lender offered 16 rate/point combinations on
30-year fixed-rate mortgages covering single-family homes purchased for
occupancy in California. These combinations ranged from 6% with 3.5 points
to 6.75% with zero points, to 8% with negative 3 points.
Negative points must be used
to defray the borrower's settlement costs. They cannot be used to pay any
part of the down payment. For this reason, you do not want to select a
rate/point combination that has negative points in excess of your
settlement costs. For example, if your total settlement costs on a
$100,000 loan is $2,500, negative 2.5 points would just cover it. If you
took a negative 3 point loan, you would be leaving $500 on the table.
Two categories of borrowers
gravitate toward negative point loans. Borrowers with short time horizons
like them because they will not be paying the high interest rate for very
long. For such borrowers, negative point loans can be a good buy.
The second category, into
which you fall, consists of borrowers who are short on cash. If they have
a long time horizon, negative point loans are a bad buy because they are
priced for borrowers with short horizons. When points are positive, for
example, a 1 point decline in points may require only a .25% increase in
the rate, but when points are negative, a 1 point decline in points may
require a .50% increase in the rate. If you have a long horizon,
therefore, you want the fewest negative points you can manage.
The other problem is finding
a negative point loan without being fleeced. The problem is that, off the
web, lenders provide price information on negative point loans to
independent mortgage brokers and to their own loan officer employees, but
not to consumers. Many loan officers and mortgage brokers view
negative point loans as an opportunity for a larger markup or commission.
In a study I did a while ago,
I found that the markups earned by mortgage brokers were persistently
higher on negative point loans than on positive point loans. For example,
on a loan on which the quote by the wholesale lender was 6% and 2 points,
the deal to the borrower might be 6% and 3 points, or a markup of 1 point.
On a loan on which the quote by the wholesale lender was 7% and -2.375
points, the price to the borrower might be 7% and zero points -- a markup
of 2.375 points.
Why is this? Borrowers do not
have the information they need to protect themselves, and their resistance
to paying higher rates is lower than their resistance to paying more
points. Inadequate disclosure rules are a contributing factor. The
mortgage broker in the first case above would record a Mortgage Broker Fee
of 1 point on the Good Faith Estimate of Disclosure provided to the
borrower, while in the second case the Mortgage Broker Fee would be shown
as zero! The rationale for this rule, which is totally absurd, is that the
fee in the second case is being paid by the lender rather than by the
borrower.
But even if the disclosure
rules applicable to mortgage brokers were fixed, it won't help consumers
dealing directly with lenders because loan officer employees of lenders
who overcharge for negative point loans leave no tracks. This is why
mortgage brokers view having to disclose their charges as unfair.
The Government is not going
to solve this problem anytime soon. Meanwhile, borrowers can protect
themselves by dealing with Upfront
Mortgage Brokers, who charge a fee for their services and pass along
the negative point quotes they get from lenders.
Copyright Jack Guttentag
2002
