In 2014 mortgage rates rise and qualifying criteria tighten. But, the cause is not a slowdown in the housing market.
The Mortgage Bankers Association (MBA) expects mortgage loans to increase by nine percent in 2014. However, the Mortgage Bankers Association sees residential loan origination falling nearly a third from 2013 to 1.2 trillion dollars. The MBA estimates that mortgage volume in 2013 will reach $1.7 trillion.
So, there are many buyers, why is the mortgage industry going to tighten up and do less business?
True, there are many buyers, but there is a shortage of houses on the market. Less houses for sale means less homes sold and fewer mortgages closed.
One of the main reasons for this shortage is current homeowners now are waiting. By holding on now, they hope to see their home values appreciate more before putting their homes on the market.
But, it is not only market conditions that influence the mortgage industry. Twenty-fourteen will see higher mortgage interest rates, lower caps on federally insured mortgages and tighter qualifications for those taking out a mortgage.
The Consumer Protection Financial Bureau (CPFB) ordered the debt-to-income ratio for mortgage borrowers to change from 45 percent to 43 percent. The CPFB also tightened rules effective 2014 for documentation. The changes in documentation rules follow those changes made to rules for appraisers who can be successfully sued if a plaintiff can show negligence or misconduct.
According to one analyst, the changes will tighten the mortgage market – the biggest constraint being the 43 percent rule. But, it is likely to have more effect on refinances than home purchases as many refis use a high debt-to-income ratio. Others likely to be hurt by the changes are those buying in distressed environments. However, the Mortgage Bankers Association predicts that the demand for refinancing will fall dramatically in 2014. The association expects a decrease of 57 percent. Most homeowners who could refinance did so already, which explains the extraordinary prediction for 2014’s refinancing activity. A secondary reason for the huge drop off in home refinancing is the conviction of most in the real estate and mortgage fields that 2014 will see the return of the five percent mortgage. As mortgage rates rise, refinancing rates go up too – further tempering demand.
Known to the industry as the QM rule, it is an underwriting protection for lenders who follow the more strict qualifying guidelines. In 2014, fees charged by these lenders may not exceed 3 percent of the amount of the Qualified Mortgage. Some feel that depending on how fees are defined by authorities, consumer choices may be limited. But, remember it is likely that mortgage interest rates will rise to five percent or more, mitigating any loss to lenders by capping fees.
The other big change in conventional mortgages is the previously discussed lowering of debt-to-income ratio.
So far, these federal lenders have not communicated their plans for compliance with the guidance from the Consumer Financial Protection Board.
However, the FHA through some informational releases is leaning towards the capping of fees without any talk of changing their debt-to-income ratios. The FHA has the most generous debt-to-income ratio with borrowers with as much as a 56 percent ratio being approved for a mortgage. Should the FHA tighten this up, the effects will be felt at once, it will be significant and affect the entire mortgage industry as well as housing.
Twenty-fourteen is heading to be a strange year for mortgage rates and the mortgage industry. It appears to be full of contradictions. Nevertheless, certain economic basics are in play – supply, demand, and regulation. Overall, the mortgage industry will see the following changes.
Based on lower housing inventory, the total dollar amount of mortgages will decrease in 2014. Mortgage rates will increase, as it is likely that the Federal Reserve will stop buying mortgage-backed securities to attract private lenders back into the market.
Private lenders will come back into the market and as the number of mortgages increase, rates will rise. Five percent is still a low enough rate to keep buyers interested. Homeowners who are holding onto their property will sell as the market price of their property rises. These sellers will then become buyers, increasing the demand for mortgages.
Lenders will carefully check mortgage documents to insure that they follow sound lending practices. Income verification and source of down payment will be scrutinized.
New regulations will make it difficult or impossible for up to 10 percent of potential borrowers who are low income borrowers to qualify for a mortgage. Also, the very wealthy, many with high debt-to-income ratios will have problems obtaining a conventional mortgage. However, these wealthy people often have alternative financing available to them, mitigating the effect the new rules have.
The Consumer Financial Protection Board will closely monitor mortgage lending and address any problems with new rules.
With tighter qualifications for mortgages a sure thing next year, the most important mortgage tips for 2014 are:
It is good that the Federal government is taking steps to make sure that banks and other mortgage lenders make loans that are more responsible than the junk mortgages that led to the nation’s financial collapse in 2007 – 2008.