Buyers concerned about rising mortgage rates and the potential impact of the government’s housing reform proposal may find a silver lining amid the “bad news.” Although the government’s proposal to clean up the house financing market may mean higher mortgage costs it could also result in lower purchase prices.
The Obama administration recently released a report proposing three options that will phase out mortgage giants Fannie Mae and Freddie Mac. Each option, despite distinct differences, may result in rising mortgage loan costs and weighted home prices. No decision has been made about the fate of the housing market as government official debate the options.
Currently, home prices are stable. The National Association of Realtors (NAR) recently stated that 78 markets in the U.S. saw improvements from last year.
With regard to current prices, Jed Smith, managing director of quantitative research at NAR says, “If I were thinking about buying, I would want to have some perspective about where prices were headed. If they're starting to accelerate, you might want to act. If there's been a decline, you have to realize that there are opportunities out there to shop and find a real bargain.”
The Mortgage Landscape Post Housing Reform
Buyers and sellers have been dealing with the ebb and flow of fluctuating prices, dropping rates and a flooded foreclosure market. However, if one of the administration’s plans goes into effect, buyers will face a whole new landscape for mortgage financing.
For example, if the Obama administration reduces the Freddie and Fannie mortgage loan sizes, it could mean that that borrowers would have to opt for a jumbo loan to finance pricier homes.
The jumbo loan market could see high activity from borrowers in high priced property areas such as New York, Boston, Washington and cities in California. Jumbo loans are typically priced approximately .75 to 1 basis point above Fannie loans. Currently, Fannie and Freddie will buy loans up to $729,000, however, under the new plan, the government would shrink the amount to $625,000.
Additionally, the Federal Housing Administration (FHA) mortgage loan market could shrink as well. The government proposal says that it will increase FHA borrower’s fees for the third time in the past four years. This action is meant to lower the FHA’s activity level in the mortgage business and reduce taxpayer risk.
Down Payments Could Also Rise
While Fannie, Freddie and FHA lending could dissipate; mortgage brokers and lenders will call for higher down payment amounts too. Part of the housing repair proposal was to gradually increase down payments from 10% on a conventional loan. A higher down payment reduces the mortgage broker or lender’s risk as house prices continue to drop.
The march for a higher down payment has already occurred in many markets. The Wall Street Journal reports that the median down payment in nine major U.S. cities increased 22% on homes purchased through conventional mortgages.
Although economists urge buyers to provide a 20% down payment to secure a traditional mortgage loan, some borrowers still can’t produce that amount.
Until the government instates changes to the mortgage market, buyers continue to seek refuge in non-conventional programs such as FHA, USDA and Rural Development mortgage loans.
Where Does that Leave the Buyer?
Currently buyers continue to tap into a variety of government fueled mortgage loan programs, low-rate conventional loans and low home prices.
In fact, the average 30-year mortgage rate dropped this week from 5.05% to 5%. Average rate on a 15-year mortgage loan hovers at 4.27%, down from 4.29%. Low mortgage rates and the availability of loan products make the current environment ripe for both purchases and mortgage refinance.
Hopefully, once Washington comes to an agreement about the housing market, private investors will be drawn to the mortgage bond market.