Borrowers and brokers often wonder how mortgage rates are derived, and how prices are determined. Orion would like to remind you that there are two basic sets of rate and price determinants that you 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; 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, the likelihood of delinquency, etc. Orion’s capital markets group is happy to go through the mechanics with you.

But that is not all. The key to margins over the past few years and including 2012 has been capacity. What does that mean? A lender, or any company, can control the demand for its products by changing the pricing. If a company wants to slow things down because of capacity constraints, it can make its prices worse. If a company wants to adjust its competitive position in the market place, 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 such as Orion, when setting the price for brokers every day on our rate sheet,balance all of the above. Until the end of 2021 the “thumb” has been on the capacity side of the scale for several years for most of those in the industry. But what most borrowers don’t see, and articles don’t discuss, is the huge increase in costs that all lenders face. 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 the borrower will bear the brunt of it.

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