We’re halfway through 2022, and not only have interest rates moved higher, but the volatility has increased. Borrowers often ask Orion’s brokers how mortgage rates are derived, and how prices are determined. And experienced brokers will inform their clients that there are two basic sets of rate and price determinants that borrowers should be aware of which may clear up some of the confusion.

The first set of components that determine a particular mortgage’s rate and price is primarily quantitative, made up of numbers, ratios, and formulas, many of which come straight from Fannie Mae and Freddie Mac. Mortgage rates are derived from prices on securities backed by those same mortgages, and those prices are a function of supply and demand (supply from lenders, and demand by investors). The value of servicing the loan is added, which includes how long the loan will be on the books, the property’s state and foreclosure laws, the likelihood of delinquency, etc. Orion’s brokers doing business in more than one state have probably seen this.

But that is not all. The key to margins over the past few years, and including 2022, has been capacity. What does that mean? Orion, or any broker, basically can control the demand for its products by changing the pricing. If a lender or broker wants to slow things down because of capacity constraints, it can make its prices worse as we saw throughout much of 2020 and early 2021. If a company wants to adjust its competitive position in the marketplace, it changes its price. If a company wants to increase or decrease its profit margins, it adjusts its price. Finally, if a company wants to adjust its market share, it adjusts its price.In these respects, lenders are no different than any other for-profit business.

Lenders, when setting the price for brokers every day on their rate sheet, balance all of the above. But what most borrowers don’t see, and articles don’t discuss, is the huge increase in costs that all lenders face. The MBA reports that for the latest quarter, the cost to originate a loan is more than $10,000. Whether it is the increased cost of compliance due to the Consumer Finance Protection Bureau’s rules and regulations, or the higher costs of originating FHA, VA,Fannie Mae, or Freddie Mac loans, or the higher cost of servicing compliance and processing foreclosures, the cost of making a loan for lenders has gone up. And unfortunately the borrower will bear the brunt of it.

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