The big news of the week was that our mortgage giants have started a new program called “Home Possible Advantage” in which qualified homebuyers will only need 3% in order to purchase.
This puts them in a great position to compete with FHA for Buyers who want to minimize the liquid assets that are putting into an owner-occupied property. Those who have discussed this subject with me will remember that I feel the FHA’s decision over the summer to make their mortgage insurance a permanent part of the loan was a real misstep as it will force refinancings in the coming years and thereby shift interest rate risk onto the Buyers (you used to be able to shed the mortgage insurance once you gained enough equity in the property).
This new program is only available to owner-occupiers of single family homes. I’ve had questions about how this will affect the overall market; it will increase the number of potential Buyers, especially younger ones who do not have family to help with a down payment.
The debt to income ratios remain however, so purchase prices will remain firmly tied to incomes, so I don’t expect it to increase appreciation significantly.
The new 97% LTV loans will allow homeowners to purchase properties for just 3% down, a reduction from their previous requirements of 5%. Although this is only a small drop, it is the hope of these government-sponsored enterprises that by decreasing the loan amount required, more individuals will be able to purchase a home.
via Breaking News: Fannie Mae and Freddie Mac Drop Some Down Payment Requirements to 3%.
Much has been made of the increase in housing costs that will come about when mortgage rates inevitably increase from their historic lows. What is less discussed, but has been referenced by the Fed more often recently, is how our booming venture capital-backed economy in the Bay Area could suffer if rising rates began to cool the demand for riskier returns.
While I would not choose to be on the opposite side of an argument with Ken Rosen, eloquently referenced in the article below, I currently suspect that any significant increase in rates will be further in the future than currently predicted. With little to no median wage growth in most of the country, Japan embarking on a massive QE program and a rising dollar – we still have some way to go before the threat of deflation is behind us.
“San Francisco’s economy has been riding high in part because of technology companies’ easy access to capital – gobbling up venture capital dollars and taking advantage of stock gains to buy smaller companies and hire more workers. That employment growth helps feed real estate demand in the city, putting apartment and condo building pace at a peak.”
Mortgages might be easier to get as Wells Fargo lowers credit requirements
Mark Calvey
Senior Reporter-
San Francisco Business Times
Wells Fargo is making it a bit easier to qualify for a mortgage.
The nation’s largest residential mortgage lender lowered its minimum credit score for loans to be sold to Fannie Mae and Freddie Mac to 620 from 660, Bloomberg News reported.
Wells Fargo’s move casts a wider net for borrowers as rising rates shut off the refinancing tap last year. That also resulted in thousands of layoffs at Wells Fargo and other lenders.
It also marks a shift in direction from last year when Chairman and CEO John Stumpf told investors on an earnings conference call that his bank was getting mixed messages from Washington on whether the bank should make it easier for Americans to qualify for mortgages.
Wells and other lenders significantly tightened credit standards after the 2008 financial crisis. Of course, such standards had only one way to move after an era when having a pulse was essentially all it took to get a home loan.
Bloomberg also reported that Wells Fargo’s (NSYE: WFC) smaller rivals also lowered their requirements to get a mortgage. The U.S. division of Toronto-Dominion Bank, for instance, reduced its down payment requirement to 3 percent without requiring costly mortgage insurance on qualifying loans.
Some may worry that banks are returning to a time of easy lending. But the industry has a long way to return to the days of the housing bubble’s loose lending, when former Wells CEO Dick Kovacevich said it would have been easier for some lenders to simply open their vaults and tell people to help themselves.
Mortgage rates could be one percentage point higher and house prices 10% lower if the U.S. mortgage market were fully privatized, according to a paper to be released Tuesday by Mark Zandi, chief economist at Moody’s Analytics.
The calculations help build Mr. Zandi’s case for replacing Fannie Mae and Freddie Mac with new entities constituting a public-private hybrid system for financing home loans.
The proposal is the latest in a growing list of white papers by economists and academics looking to influence the debate over how to reinvent the nation’s mortgage market. The Obama administration is set to issue its own recommendations as soon as this week.
For the last 40 years, the housing-finance system has been an odd blend of public and private roles. Fannie and Freddie buy mortgages from banks and other originators, repackaging them for sale to investors as securities and making investors whole when borrowers default.
Investors long assumed that the shareholder-owned firms had an “implied” government guarantee, allowing them to borrow at below-market rates. That enabled them to fund low-cost 30-year fixed-rate mortgages. The housing bust forced the government to take over the firms in 2008. Few believe the status quo is desirable or sustainable, but there’s significant disagreement over how to design a system.
Conservative Republicans say government ties should be severed to protect taxpayers, while Democrats and some moderate Republicans say government backing may be needed to keep mortgages available to qualified borrowers, particularly during bad economic times.
Mr. Zandi argues that a purely public market risks putting too much risk on taxpayers because policy makers would be tempted to subsidize homeownership by setting mortgage-insurance fees too low.
A purely private market won’t work either, he says, because investors will assume that the U.S. government will intervene in a crisis. “No matter how much you talk about ‘no government backstop,’ when push comes to shove, the government will step in,” says Mr. Zandi.
Moreover, lenders would be likely to retreat or demand much higher rates during financial shocks, exacerbating downturns. And lenders would be much less likely to offer 30-year fixed-rate loans at attractive rates, leading the majority of homeowners to opt for adjustable-rate mortgages. “I could be wrong, but I’m not sure it’s worth taking the chance,” says Mr. Zandi.
Mr. Zandi proposes a hybrid system that is part private and part public. To replace Fannie and Freddie, Mr. Zandi recommends creating between five and 10 privately owned, but government-chartered “mortgage bond insurance companies” that buy eligible loans from banks and issue mortgage-backed securities explicitly guaranteed by the U.S. government.
Mr. Zandi, who co-authored the paper with Cristian deRitis, also of Moody’s Analytics, built a steady profile as an influential centrist by providing advice on economic matters to both congressional Democrats and Sen. John McCain’s (R., Ariz.) 2008 presidential campaign.
Under the proposed hybrid system, mortgage originators would sell loans to the mortgage bond insurance companies, or MBICs, which would then bundle those mortgages and issue government-backed securities through a “mortgage securitization facility” similar to Ginnie Mae, a federal corporation that backs payments of principal and interest on securities composed of government-guaranteed loans.
The federal facility would require the MBICs to adopt the same form of mortgage security with identical legal structures, terms, and conditions in order to ensure standardization that maximizes liquidity. The MBICs would be required to hold enough capital in reserve to withstand a 25% decline in home prices; by contrast, Fannie and Freddie held just enough capital to withstand a 10% decline in prices.
Mr. Zandi estimates that under such a model, mortgage rates would be around 0.3 percentage points higher than they were before the mortgage meltdown, largely because the industry was undercapitalized before the financial crisis. Meanwhile, mortgage rates would be around 0.9 percentage points lower than under a fully private market, assuming that private investors would meet similar capital levels and require a 30% return on equity.
The difference in rates “is large enough to have meaningful impacts on the housing market and homeownership,” the paper says. Compared with a fully private market, the hybrid model would result in around 375,000 more home sales per year, an 8% gain in median home prices, and an increase of one percentage point in the homeownership rate.
via Moody’s Zandi: Replace Fannie, Freddie With Public-Private Hybrid – WSJ.com.