When the housing market peaked in the summer of 2006, the financial magazine Barron’s wrote that home prices would drop as much as 30% over the next few years. Barron’s economists were correct—over the last six years, prices in the housing market have declined to levels that would have been impossible for most people to imagine during the boom years.
The latest S&P/ Case Shiller Home Price Index shows home prices have dropped an average of 36%. Nonetheless, beginning in the last quarter of 2011 the housing market started to show signs of an attempt to recover. Subsequently, various housing market indicators have given mixed signals. Many economists believe the market has reached a bottom or is very close.
For homebuyers and real estate investors, the recession along with a significant drop in home prices have presented an opportunity to buy properties at bargain rates and finance them at low mortgage interest rates. Well-informed buyers and homeowners who plan to finance mortgages should keep an eye on the housing market and the following developments over the next several months:
1) Mortgage Refinancing on the Increase
Americans have more options for refinancing their homes than they did a year ago. This is especially important because business analytics company CoreLogic estimates that more than 11 million homeowners owe more on their mortgages than the value of their homes. The “underwater” mortgage dynamic alone has made it nearly impossible for many borrowers to mortgage refinance and take advantage of unprecedented low interest rates.
The federal government has introduced a number of government programs, such as the Home Affordable Modification Program (HAMP) and the Home Affordable Refinance Program (HARP) designed to reduce the economic impact of job loss and plummeting home values. Unfortunately, flawed elements in the programs made it difficult for borrowers to qualify for help.
However, before recent revisions, the combine efforts of both program have barely reached a fraction of the millions of borrowers officials originally predicted would benefit from the initiatives. One major change in the HARP program enables all borrowers who have loan-to-value ratios over 80 percent to qualify for mortgage refinancing to low interest rate loans—regardless of how much the amount of the loan over the value of the home.
Other changes to the HARP mortgage refinance program include less stringent underwriting requirements and incentive increases to encourage lenders to complete more principal reductions. These changes broaden the pool of homeowners eligible to refinance their homes.
In addition, the Federal Housing Agency (FHA) will reduce the cost of mortgage insurance and annual mortgage fees for borrowers who mortgage refinance their homes through the FHA streamline program
2) Interest Rates Posed to Rise
The 30-year fixed rate fell to 3.84 percent in early May-- another record low. According to a recent hearing by a senate subcommittee, over 17 million Americans with government-insured mortgages have own homes with mortgage interest rates that exceed five percent. The hearing will address obstacles homeowners encounter when attempting to refinance or obtain mortgages.
The committee hopes to revolve the issue of refinancing borrowers into low interest rate loans before rates start trending up. The accent will start out gradually. Potential buyers who wait for a bottom in home prices should consider the possibility of rising interest rates, which would eliminate any gain from waiting for a floor.
3) Credit Standards Loosening
The Federal Reserve Board’s quarterly survey for 2012 revealed that none of the banks it polled tightened mortgage standards for prime borrowers seeking credit. The Fed anticipates lenders implementing less stringent credit standards over the coming months. This will equate to more borrowers qualifying for home mortgages and mortgage refinancing.
Even so, expect underwriting to remain tighter compared to the criteria five years ago. Borrowers looking to buy homes or refinance their mortgages will need to have excellent credit, solid jobs and provide substantial documentation to obtain loans at the best rates.
Many borrowers who fall short might find themselves paying higher down payments and interest rates. Some people will end up financing through FHA, with down payment as little as 3.5 percent. However, the FHA recently increased fees for FHA-insured mortgages.
4) More Foreclosures in the Pipeline
After suspending foreclosure activities for nearly a year, mortgage lenders returned to filing foreclosure paperwork in state courts in late 2011. On a year-to-year basis, through the first quarter of 2012, filings have continued to rise.
The $26 billion mortgage settlement in February provides new requirements for lenders to process delinquent borrowers and foreclosure filings. With the new guidelines in place, lenders will aggressively tackle the backlog of delinquent borrowers. Hundreds of thousand of foreclosures will hit the market over the next several months.
The good news-- the rate of borrowers with delinquent mortgage payments (90 days or more) has slowed down. Therefore, foreclosures will spike from state to state, but the number of borrowers in the foreclosure pipeline should start to decline.