BLOG VIEW: It's hard to imagine that mortgages could be much better in quality now compared to what we saw in 2014, but with 2015 hardly under way, borrowers – to say nothing of lenders and real estate brokers – may be shocked by the financing options that have suddenly become available.
The new mortgage marketplace is a happy byproduct of changing world conditions and the dawning realization that the housing market remains fragile. We're not out of the financial woods yet – but what follows are three concrete reasons why 2015 is already shaping up to be a very interesting year.
Let's start with interest rates. Standard & Poor's says that in the 40 years from to 1973 and 2013, the typical interest rate for 30-year, fixed-rate financing was 8.6%. Compare that range with 2014, when rates started at roughly 4.5% and slumped to 3.87% by December.
By historic standards, you'd have to say that 2014 mortgage rates were among the most attractive on record.
Imagine that you need a $150,000 to finance or refinance a home. At 4.5% fixed more than 30 years, the monthly cost for principal and interest is $760. Drop the rate to 3.63% – the typical rate reported by Freddie Mac in late January – and now the borrower's monthly P&I is down to $685. That's a savings of $75 a month or $900 a year. Just as important, the marginal borrower who may or may not have qualified for financing last year may well be an approved borrower with a debt-to-income ratio comfortably below 43% in 2015, as a result of lower rates.
And consider this: Borrowers with a higher risk tolerance can do even better with interest costs – just look at the rates for conforming 5/5 adjustable-rate mortgages.
We're not a nation of savers. In 1975, the savings rate hit 15%, but by the third quarter of last year, it was down to 4.7%. The result is that down payments are a major barrier to homeownership.
How can we solve the savings problem? Mass education would be good, but as a faster alternative – one that can pump up home sales overnight – we can simply change down payment standards.
This is precisely what Fannie Mae and Freddie Mac announced in December with 3% down (97% loan-to-value, or LTV, ratio) financing for first-time buyers. That's a big reduction from the usual 5% previously needed up front. In other words, to buy a $200,000 home under the old standard, borrowers would have needed to put $10,000 down, but now they only have to save $6,000. Given recent savings patterns, lower down payment requirements for first-time buyers are a big deal.
There's no doubt that one possible loser in the Fannie Mae and Freddie Mac switch to 97% LTV loans is the Federal Housing Administration (FHA). If conforming loans are available with just 3% down, that's an outright challenge to the FHA, which backs loans with as little as 3.5% down.
What is the FHA to do? It has already struck back by lowering its annual mortgage insurance premium (MIP) for most loans from 1.35% to 0.85%. This will save a borrower with a $200,000 mortgage roughly $1,000 in the first year, or about $83 a month. The FHA move should trigger a substantial increase in FHA Streamline refinancing, as well as encourage more prospective buyers to enter the marketplace.
The National Association of Realtors reports that, for 2014, residential values nationwide rose 5.8%, but existing-home sales were down 3.1%. Why did sales fall?
Large numbers of would-be buyers may not have realized how quickly rates fell toward the end of 2014, how much further they have already fallen in 2015, or the new advantages of lower down payment requirements and a smaller FHA annual premium. To the extent that such information is unknown, it's going to be difficult to entice new buyers into the marketplace and without more buyers, it will also be hard to expand sales, fees and revenues.
Peter G. Miller is a nationally syndicated real estate columnist. His books, published originally by Harper & Row, sold more than 300,000 copies. He blogs at OurBroker.com and contributes to such leading sites as RealtyTrac.com, the Huffington Post and Auction.com. Miller has also spoken before such groups as the National Association of Realtors and the Association of Real Estate License Law Officials.
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