Paved With Good Intentions, Part 2: How Borrower Protection Laws (Barely) Affect Borrowing Costs
- Although state-level borrower protection laws have a significant impact on borrowers’ access to credit, they have little effect on quoted APRs – except if a borrower requests a jumbo loan.
- Independent of all other factors, borrowers seeking a jumbo (non-conforming) loan can expect to receive quotes with APRs up to 60 basis points higher than for conforming loans.
This is Zillow’s second analysis of the impact of differing state regulations on mortgages, focused on impacts to borrowing costs. To read the first part of our analysis, focused on borrower protection laws’ impacts on mortgage access, please click here.
Differing state-level borrower protection laws have more of an impact on the ability to get a mortgage, and less on the ultimate cost of that mortgage, according to Zillow’ analysis.
We previously explored how borrower protection laws can restrict access to mortgage credit, providing a powerful example of the unintended consequences that well-meaning laws, aimed at protecting borrowers, can have on credit supply.
But that analysis ignored any effects borrower protection laws may have on borrowing costs. Using unique Zillow data on borrower requests for mortgages and lender responses to those requests, we’ve estimated the effect borrower protection laws have on the annual percentage rate (APR) offered by lenders.[i] We examined the APR instead of interest rates alone because APR better reflects the actual cost of borrowing by including interest rate, fees and other charges associated with a loan.
‘Little Measurable Effect’
Although state-level borrower protection laws have a significant impact on borrowers’ access to credit, we find that borrower protection laws have little measureable effect on borrowing costs. As with access to credit, the biggest factors influencing borrowing costs are borrowers’ credit scores, loan-to-value ratios and whether the loan requested is conforming or not.
A borrower with a FICO credit score in the “good” range of 640 to 719 can expect to receive quotes with an APR 27 basis points[ii] lower than a borrower with a “bad” credit score (below 640). With a credit score in the “very good” range of 720 to 850, a borrower can expect to receive quotes with an APR an additional 65 basis points lower than a “good” borrower (table 1).
| Table 1: Basis Point Change in APR: Creditworthiness |  |
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| Good Credit (640-719) | Very Good Credit (720-850) | Loan-to-Value Ratio | |
| Basis Point Change | -27 | -92 | 21 |
| Note: Changes compared to average APR for a borrower with poor credit (<640), and difference in APR of a borrower with 90% LTV compared to average APR of borrower with 80% LTV respectively. | |||
Borrowing costs also vary depending how much money a borrower is putting down on a home (the loan-to-value ratio, or LTV), and it’s typically more advantageous to finance a mortgage with a traditional 20 percent down payment (or 80 percent LTV). A similar borrower requesting the same mortgage but only putting 10 percent down (90 percent LTV), can expect to be quoted an APR 21 basis points higher than a borrower putting 20 percent down. The typically quoted APR is 46 basis points higher if a borrower puts down only 5 percent (95 percent LTV).
The conforming loan cutoff is the most significant regulation affecting borrowing costs. Judicial foreclosure processes, recourse and right-of-redemption laws all generally impact borrowing costs by less than 2 basis points. But borrowers requesting jumbo loans, which are those exceeding the conforming limit, can expect to receive quotes with an APR 60 basis points higher than if the request was for a loan below the limit.
A borrower requesting a jumbo loan in a state with the longest foreclosure process can expect an APR 9 basis points higher than if that same borrower happened to live in the state with the shortest foreclosure timeline. But there is some relief for jumbo borrowers. A jumbo borrower living in a state that allows recourse could receive quotes with an APR 8 basis points lower than if that same borrower lived in a state prohibiting recourse (table 2).
| Table 2: Basis Point Change in APR: Regulations | |
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| Jumbo | Jumbo in Longest Foreclosure State | Jumbo in Recourse State | Judicial, Redemption, Recourse | |
| Basis Point Change | 60 | 9 | -8 | <|2| |
| Note: Changes compared to average APR for a conforming loan request, jumbo in the shortest foreclosure state, jumbo in a non-recourse state, non-judicial state, non-redemption state, and non-recourse state respectively. | ||||
Conclusion
Overall, maintaining strong credit is the best way not only to get access to credit, but also to cheap credit. A strong credit score boosts borrowers’ market power because they likely represent less of a risk to lenders, resulting in both more quotes and lower costs.
Interestingly, the price effect of the type of state-level mortgage regulations considered here is much smaller than the effect on credit access. In response to changes in one regulation, borrowing costs show no more than a 2 basis-point change, but credit access can change by more than 10 percent. And while borrowing costs on conforming loans are not significantly affected by state-level mortgage regulations, jumbo (non-conforming) loans are penalized twice. Requests for jumbo loans receive both fewer quotes and more expensive terms.
Methodology
We follow the same strategy as in the previous post on how borrower protection affects borrowers’ odds of getting a mortgage quote. However, in this case, the distribution of annual percentage rates is only bounded below by zero, and best described by a gamma distribution. Therefore, we use a gamma generalized linear model with a log link.
[i] It is important to understand how Zillow works: Borrowers interested in getting a mortgage submit information including their income, the type of loan they are seeking, the amount of the loan, their credit score, their down payment, other recurring debts they may have and several other variables. In response, a range of lenders quote the inquiry, often differing in the annual percentage rates they offer. By looking at the average APR of a given loan inquiry, we are able to provide real-time information about credit conditions across states with different foreclosure laws.
[ii] One basis point is defined as 0.01 percent or 1/100th of a percent.