It's about to get harder to buy a home
Getting a mortgage will become trickier and more costly in 2014. Here are the reasons it's happening.
Consumers shopping for a home might want to pick up the pace: Getting a mortgage will likely become more challenging and costly next year.
Loan limits for popular mortgages are scheduled to drop in January, according to a Wall Street Journal report this week.
The Federal Housing Finance Agency is planning to slash the maximum size of mortgages eligible to be backed by Fannie Mae and Freddie Mac, which currently run as high as $417,000 in most parts of the country and up to $625,500 in pricier cities, including New York and San Francisco. That same month, new mortgage rules by the Consumer Financial Protection Bureau go into effect, which restrict the types of mortgages lenders can provide.
The changes could leave next year’s mortgage applicants with fewer and more expensive financing options to choose from than what’s currently available, experts say. "If you’re comfortable with what you can get this year, lock it in," says John Vogel, adjunct professor of real estate at the Tuck School of Business at Dartmouth College. "Most rules that will come are in fact going to be less favorable to borrowers."
This all comes as the government tries to reduce its role in the mortgage market. During the second quarter, two out of three mortgages were funded by Fannie Mae and Freddie Mac, according to Inside Mortgage Finance, a trade publication. By lowering the loan sizes backed by these agencies, regulators are hoping that lenders will step in to pick up the mortgage applicants who are impacted and that a private market for purchasing these loans -- which basically disappeared in 2008 -- will reopen.
There has been some growth in private mortgage financing recently, though it remains small compared with pre-recession advances in the space. Just 2.1% of mortgages originated in April were sold to private investors, while roughly 90% were purchased by government agencies, according to Lender Processing Services, a mortgage-data tracking firm.
But lower loan sizes could shut some applicants out. The FHFA hasn’t announced how much Fannie Mae and Freddie Mac’s cap will drop, but their larger-size mortgages are commonly used by home buyers in cities with expensive real estate. These buyers often have relatively small down payments and few assets.
In contrast, most private mortgages are currently being given to wealthy borrowers who have hefty down payments for multi-million-dollar homes. It’s unclear whether the market will open up to lower net worth borrowers who suddenly fall below government-backed loan thresholds, and if it does, what rates they’ll be charged. Complicating matters, new CFPB mortgage rules set to go into effect in January could limit the kinds of loans available in the private mortgage market.
Would-be homebuyers who are planning to get a mortgage that’s close to the Fannie and Freddie caps might want to consider getting the loan before the year ends. An FHFA spokesperson says that the agency will announce any changes "with adequate advance notice."
Once these changes take effect, borrowers who no longer qualify for Fannie and Freddie mortgages could face the following setbacks.
1. Harder to find a mortgage
Most applicants who get shut out of Fannie Mae and Freddie Mac loans will have to turn to the private market. Private lenders, include many banks, credit unions and independent mortgage lenders, originate mortgages under their own terms and in most cases hold the loans on their books. Most are very selective, seeking out affluent borrowers who present little risk of default. “The concern will now be for less well-qualified borrowers who [will] fall above the loan size limitations," says Stuart Gabriel, director of the Ziman Center for Real Estate at the University of California, Los Angeles.
Borrowers could also have a difficult time qualifying for a private mortgage since many lenders require at least 25% to 30% down. With Fannie and Freddie mortgages, borrowers can put down 20%; smaller down payments are accepted, but borrowers must pay mortgage insurance.
2. Adjustable rates as the only option
Applicants who qualify for private mortgages could find that adjustable-rate home loans are their only option.
Tom Wind, executive vice president of residential and consumer lending at national lender EverBank, says many lenders who keep these loans on their books are more interested in offering ARMs than fixed-rate mortgages. When the Federal Reserve raises rates, banks will have to increase the rates they pay out on deposit accounts, but they’ll receive larger interest payments from ARM borrowers whose rates reset at that time and will likely then go higher.
With ARMs, borrowers have a fixed rate for a set period of time -- often five years -- before rates become variable. ARM origination in the private market is already on the rise: They accounted for 27.3% of mortgages originated and sold to private investors in June, up from 23.2% in the beginning of the year, according to LPS.
Federal officials are preparing to reduce the maximum size of home-mortgage loans eligible for backing by Fannie Mae and Freddie Mac, a move that is likely to face resistance from some lawmakers and the real estate industry.
3. Higher interest rates
Private mortgages tend to charge higher interest rates than Fannie Mae and Freddie Mac-backed loans. But increased lender appetite for private mortgages has helped lower their rates, which are hovering near and in some cases lower than rates on government-backed mortgages. (Historically, private mortgages had higher rates.)
It’s unclear whether rates will rise if more borrowers enter this market. While an increase in demand could cause rates to move higher, the opposite could occur if the secondary mortgage market takes off, says Stu Feldstein, president at mortgage-research firm SMR Research.
4. Fewer choices in the private market
Though small in number, some lenders have been offering low-income documentation mortgages and interest-only mortgages to affluent borrowers and holding those loans on their books. The CFPB’s new mortgage rules that kick in next year will offer more protection from lawsuits to lenders who avoid these mortgages.
Lenders who want this legal protection also won’t be able to approve borrowers for mortgages if their total monthly debt is over 43% of their monthly pre-tax income. These changes could result in fewer loan options at the same time that more borrowers enter this space.
More from MarketWatch:
- Why new mortgage rules may fail borrowers
- New hurdles for reverse-mortgage seekers
- About 2.5 million homes no longer underwater
90% purchased by government agencies! WTF does that mean. The government needs to get out of everything except upholding the constitution and protecting OUR OWN BORDERS!
The problem is that there are too many irresponsible people out there who are poor loan risks. For some it is just too difficult to pay their bills on time and meet the obligations which they created for themselves. It should not be the responsibility of others, through the government, to guarantee loans or make it easy for irresponsible people to evade their responsibilities. They should stand on their own feet and not expect others to do everything for them. We need to return to the times when there was a stigma attached to those who would not organize their lives in such a way that they could pay theor bills.
Another point of view is that there is a pretty hefty under body of folks who will never be able to do something as simple as owning a home. We could learn to live with that fact, or continue to bail the irresponsible ones out at the expense to others who are responsible. I say live with that fact and stop catering to morons!
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