January 30th, 2014 5:51 PM by Richard T. Cirelli
Top Mortgage Expectations for 2014
Looking back at 2013, it can be categorized as a transitional year in the mortgage industry. We saw the beginning of rising interest rates and the beginning of the end to the government stimulus that has kept interest rates artificially low for the past few years. A much stronger housing market was the catalyst for an improving economy and rising home values with many homeowners regaining the equity they thought was lost for much longer. In the meantime lots of first-time home buyers and investors were able to take advantage of low prices and low interest rates.
The New Year will be fascinating as we see if we can be weaned off the government stimulus while dealing with new regulations that has the mortgage industry concerned that it may halt the progress made last year. Let’s examine the key elements that impact 2014…………………….
The mere suggestion last summer that the Fed might soon begin to cut back or taper their purchases of Mortgage-Backed Securities caused a dramatic rise in interest rates. After hitting a low point of about 3.25% early in the year, rates settled in about 1% higher by the end of the year. In their December meeting, the Fed did finally state that they will begin tapering their popular stimulus program known as “Quantitative Easing” in January, 2014. The chart below tracks the benchmark 30-year fixed rate mortgage for loan amounts less than $417,000 as published weekly by Freddie Mac, one of the two Government agencies responsible for buying mortgages originated by nearly all lenders across the country.
We’ll have to see if the real estate and mortgage industry can perform on its own with less Government dependence of interest rates. I think there is a chance that we can see rates fall in the second half of the year if the economic recovery falters due to higher rates and other factors.
The Return of Jumbo Mortgages:
The best thing to happen in the mortgage industry last year was the return of “Jumbo” mortgages. This term applies to mortgages that exceed the maximum purchase limit of $625,500 in the highest priced markets for loans originated to be sold to the Government agencies of Fannie Mae and Freddie Mac. Prior to 2013 there was virtually no jumbo product. But 2013 saw the reemergence of a secondary market for jumbo loans enabling bank and non-bank lenders to pool these mortgages and sell them to institutional investors once again. Confidence that depreciating home values are well behind us combined with much stronger underwriting guidelines eliminated much of the fear that previously existed.
Interest rates for Jumbo 30-year fixed rate loans start the year in the high 4% area - not much higher than the smaller Fannie Mae/Freddie Mac loans. Loan amounts of $2 Million and higher are readily available.
More lenders will enter the game creating more loan programs, products and niches. This will continue to support home sales and refinance opportunities
Underwriting Guidelines: Looser & Stricter - The QM Panic
I don’t recall an event or regulation that has created more panic in the mortgage industry than the “Qualified Mortgage” or “QM” definition which went into effect January 10th. The purpose of this regulation is to give lenders a “Safe Harbor” from future law suits by borrowers if they originate loans that meet the definition. QM eliminates “risky” loan features such as negative amortization, interest-only payments and loan terms longer than 30-years. These loan products have mostly been eliminated over the past several years anyway and pose no problem. But, the definition also includes loans that have a Debt-To-Income (DTI) ratio over 43%. Since about 20% of all loans approved and closed last year have DTI ratios of 43% - 50%, there is potential reason for concern!
I think this storm will blow over without much damage for several reasons. And, it may end up being a blessing in disguise for the housing and mortgage businesses. First of all, Fannie Mae and Freddie Mac have not changed their underwriting models that still allow higher DTI ratios. And, there is a 7-year period before lenders must fully comply.
But, the silver lining in this cloud is that the stricter guidelines will lead to a movement by bank and non-bank lenders to create loan programs and niches outside of the QM definition. I’m already seeing a return to looser underwriting guidelines by lenders willing to step outside the QM box. In addition to allowing higher DTI ratios, I’m seeing some lenders willing to document income via unconventional methods such as using bank statements instead of income tax returns. Some already consider invested assets such as stocks and bonds and IRA accounts as income.
With loan volume declining due to higher interest rates, let’s see how creative lenders can be. These loans may come with slightly higher interest rates than the Fannie Mae/Freddie Mac loans but also with less dependency on these rigid Government entities and hopefully more common-sense underwriting. Competition and higher yields/profits will entice more lenders to look outside QM.
A Call to ARM’s:
The popularity of Adjustable Rate Mortgages always increases as fixed rates rise. They now account for nearly 15% of all loans originated in California and will grow higher as rates rise further. ARM’s or Adjustable Rate Mortgages presently start out in the low 3% area.
Adjustable Rate Mortgages will become more popular as interest rates rise and borrowers seek the lowest terms to fit their needs. This will benefit the housing market, particularly in the higher-priced coastal markets.
The Rise of the Mortgage Broker:
Market share for mortgage brokers has risen in the past year. And, as the Government attempts to gain more profit/less risk and stricter guidelines through their sponsorship of the Fannie Mae, Freddie Mac and FHA loan programs, alternative lenders and products will emerge. Direct lenders may have some access to a few alternative/non-QM products but only mortgage brokers will have access to nearly all. Options and flexibility will be the keys to obtaining a loan this year. If one lender can’t approve a loan, another probably can. Mortgage brokers must know the subtle differences among the various lenders and their products and be able to guide the borrower to the right lender, the right loan program and the best rate & terms.
It’s a “niche” market. Mortgage brokers will continue to gain market share as options will be more important than ever as so many borrowers just won’t fit the perfect box created by the QM definition. Self-Employed borrowers will be particularly vulnerable to the Government restrictions of Fannie Mae, Freddie Mac and FHA programs. Mortgage Brokers with multiple options will prevail due to the wide array of lenders, programs and rates that they can offer their clients.