End of a mortgage era
Fixed 30-year mortgage rates in the 5 percent range? Minimum down payments below 5 percent? Jumbo-size home loans for high-cost markets at regular interest rates? Kiss them good-bye -- possibly sooner than you might guess.
Take a snapshot of today's mortgage market conditions and frame it. It's highly likely you'll never see anything like these favorable combinations of rates and terms again. That's the inescapable conclusion emerging from the Obama administration's "white paper" on optional remedies for the two ailing giants of housing finance -- Fannie Mae and Freddie Mac -- along with events already under way in the national economy.
The administration's long-delayed housing report, released Feb. 11, drew a mix of catcalls and mild applause. Apartment developers praised the report's emphasis on expanding opportunities for people to rent their housing, as opposed to the idea that homeownership is something for everybody.
Big banks and their allies in Congress welcomed the prospect that Fannie Mae and Freddie Mac -- who together account for about 60 percent of the mortgage market but have cost taxpayers a net $150 billion in bailout money in the past three years -- will be heading into oblivion. Consumer and real estate industry groups lamented the phase-out of Fannie and Freddie, both of whom -- despite their recent crashes -- supplied steady streams of mortgage money for decades.
The report offered not only options for Congress to consider in winding down the two companies, but also recommendations on more immediate "transition" measures to achieve a smaller federal footprint in the mortgage market. Some of these transitional steps require no congressional approval, and therefore are likely to impact borrowers and home-buyers in the months immediately ahead. Factor these changes into the timing for any loan application or purchase being contemplated this year:
• Higher insurance fees on FHA mortgages -- another quarter of a percentage point on annual premiums. That's vitally important to consumers with moderate incomes and assets, especially in the African-American and Hispanic communities, where FHA loans are the dominant route to homeownership. The report also hints at a possible increase in minimum down payments for FHA -- currently just 3.5 percent -- but provides no specifics. Congressional approval would be required for any change.
• Significant reductions in maximum loan amounts later this year for both FHA and conventional loans eligible for purchase by Fannie or Freddie, unless Congress votes to retain the current statutory $729,750 limit for high-cost areas before its expiration on Oct. 1. Loans above each local market's limit -- whatever the reduced ceiling turns out to be -- will be considered jumbos, and come with higher interest rates from private lenders.
• Raising the fees Fannie Mae and Freddie Mac charge lenders to guarantee pools of their mortgages for resale to bond investors. Lenders will automatically pass those on to borrowers as a cost of doing business. The report also calls for raising down-payment requirements at Fannie Mae and Freddie Mac to 10 percent.
• Retaining the controversial and costly add-on fees now charged by Fannie Mae and Freddie Mac that can increase the expense of obtaining even a moderate-size mortgage by thousands of dollars. These add-ons now extend to applicants with FICO credit scores of 800 and above who are making substantial down payments. The white paper actually applauded the imposition of these fees, calling them one of several "first steps" on the path to weaning consumers off reliance on Fannie and Freddie for mortgage money.
The administration not only wants to wind down the two companies over the coming several years, but also wants to severely reduce the size of FHA's role -- cutting its market share from around 30 percent today to as low as 10 percent. Where will the buyers who depend upon FHA today for affordable financing turn when that sharp cut has been accomplished? That's not clear.
The white paper makes an oblique reference to a major issue bubbling on the back burner that could also push rates up: Regulators are debating what should and shouldn't be a "qualified residential mortgage" under the terms of last year's financial reform legislation. Loans that are not "qualified" -- in terms of down-payment size and other criteria --will require extra investments by lenders when they pool them into bonds; that, in turn, could raise rates for nonqualified mortgages by as much as two to three percentage points.
Among the proposals: Make 20 percent to 30 percent down payments the minimum to meet the "qualified" test. The worst-case scenario: If a buyer only has money for a small down payment, they'll be charged significantly higher rates.
Bottom line: Buyers should get ready to pay more for mortgages, no matter what ultimately happens to Fannie and Freddie.
Take a snapshot of today's mortgage market conditions and frame it. It's highly likely you'll never see anything like these favorable combinations of rates and terms again. That's the inescapable conclusion emerging from the Obama administration's "white paper" on optional remedies for the two ailing giants of housing finance -- Fannie Mae and Freddie Mac -- along with events already under way in the national economy.
The administration's long-delayed housing report, released Feb. 11, drew a mix of catcalls and mild applause. Apartment developers praised the report's emphasis on expanding opportunities for people to rent their housing, as opposed to the idea that homeownership is something for everybody.
Big banks and their allies in Congress welcomed the prospect that Fannie Mae and Freddie Mac -- who together account for about 60 percent of the mortgage market but have cost taxpayers a net $150 billion in bailout money in the past three years -- will be heading into oblivion. Consumer and real estate industry groups lamented the phase-out of Fannie and Freddie, both of whom -- despite their recent crashes -- supplied steady streams of mortgage money for decades.
The report offered not only options for Congress to consider in winding down the two companies, but also recommendations on more immediate "transition" measures to achieve a smaller federal footprint in the mortgage market. Some of these transitional steps require no congressional approval, and therefore are likely to impact borrowers and home-buyers in the months immediately ahead. Factor these changes into the timing for any loan application or purchase being contemplated this year:
• Higher insurance fees on FHA mortgages -- another quarter of a percentage point on annual premiums. That's vitally important to consumers with moderate incomes and assets, especially in the African-American and Hispanic communities, where FHA loans are the dominant route to homeownership. The report also hints at a possible increase in minimum down payments for FHA -- currently just 3.5 percent -- but provides no specifics. Congressional approval would be required for any change.
• Significant reductions in maximum loan amounts later this year for both FHA and conventional loans eligible for purchase by Fannie or Freddie, unless Congress votes to retain the current statutory $729,750 limit for high-cost areas before its expiration on Oct. 1. Loans above each local market's limit -- whatever the reduced ceiling turns out to be -- will be considered jumbos, and come with higher interest rates from private lenders.
• Raising the fees Fannie Mae and Freddie Mac charge lenders to guarantee pools of their mortgages for resale to bond investors. Lenders will automatically pass those on to borrowers as a cost of doing business. The report also calls for raising down-payment requirements at Fannie Mae and Freddie Mac to 10 percent.
• Retaining the controversial and costly add-on fees now charged by Fannie Mae and Freddie Mac that can increase the expense of obtaining even a moderate-size mortgage by thousands of dollars. These add-ons now extend to applicants with FICO credit scores of 800 and above who are making substantial down payments. The white paper actually applauded the imposition of these fees, calling them one of several "first steps" on the path to weaning consumers off reliance on Fannie and Freddie for mortgage money.
The administration not only wants to wind down the two companies over the coming several years, but also wants to severely reduce the size of FHA's role -- cutting its market share from around 30 percent today to as low as 10 percent. Where will the buyers who depend upon FHA today for affordable financing turn when that sharp cut has been accomplished? That's not clear.
The white paper makes an oblique reference to a major issue bubbling on the back burner that could also push rates up: Regulators are debating what should and shouldn't be a "qualified residential mortgage" under the terms of last year's financial reform legislation. Loans that are not "qualified" -- in terms of down-payment size and other criteria --will require extra investments by lenders when they pool them into bonds; that, in turn, could raise rates for nonqualified mortgages by as much as two to three percentage points.
Among the proposals: Make 20 percent to 30 percent down payments the minimum to meet the "qualified" test. The worst-case scenario: If a buyer only has money for a small down payment, they'll be charged significantly higher rates.
Bottom line: Buyers should get ready to pay more for mortgages, no matter what ultimately happens to Fannie and Freddie.
