Thursday, January 2, 2014

What to Expect in 2014 - Mortgage Market

As 2014 kicks-off, I would like to share some insight on what to expect in 2014 with the mortgage market:

Where are interest rates headed?
The economy is getting stronger and this is causing interest rates to rise. 30 year mortgage rates are around 4.625% as we begin the year.  At the beginning of 2013, rates were 3.375% which was near an all-time low. The average rate for the last 30 years was 7.580%. Freddie Mac is predicting that rates will go up to around 5% over the next 12 months.

In the spring, Fannie Mae and Freddie Mac are set to boost mortgage costs for borrowers without big down payments and with less-than-perfect credit scores. For instance, for a 30-year mortgage, a borrower with a credit score of 735 making a 10% down payment will pay fees totaling 2% of the loan amount, up from 0.75% right now. This is a fairly significant increase and is one more reason for buyers to buy now and not wait. An upfront fee of 2.5% can raise the mortgage rate by around 0.5 percentage points over the life of the loan.

Underwriting, Regulations and Qualified Mortgages
In 2013, underwriting was pretty tough. Common sense underwriting seems to have disappeared, and now the underwriting mantra is “prove it with paperwork.” The borrower does not have to be “perfect” to qualify for a loan, but the paperwork sure does. Lenders have paid out billions in lawsuits and “buy-backs.” One of the bigger changes last year was documenting all large deposits on a bank statement.  A large deposit is defined as a deposit that is greater than or equal to 25% of your monthly gross income.  

Starting January 10th of 2014, the Qualified Mortgage Rules will take effect.  The goal of the new mortgage rules from the Consumer Financial Protection Bureau is to better protect borrowers from the lax underwriting that wreaked havoc on people and the housing market. Wow, talk about being late to the party! The regulations are designed to ensure a borrower's "ability to repay" a mortgage while also offering lenders protection from borrower lawsuits so long as they make safer so-called qualified mortgages.

A qualified mortgage is a home loan that meets certain standards set forth by the federal government.  The new rules include: upfront points and fees totaling no more than 3% of the loan amount, no interest-only loans, no negative amortization loans, no terms beyond 30 years, no balloon payments, and the debt-to-income ratios will likely be lowered to 43% from 45%. 

With these changes, we expect underwriting and regulations to get even tighter during 2014.  Borrowers will need to be even more patient with the paperwork requirements that are there to “protect” them. With rates likely to go up and with home price appreciation continuing, the time to buy is NOW. Please contact me if you have any questions on these topics.

New Programs and Changes to Existing Programs

Oregon Bond Loan
Oregon Bond has a new allocation of funds and I think this will be a HOT loan in 2014 because the rates are amazing. This program provides a below-market interest rate (3.375%) or cash assistance (3.875% rate but Oregon Bond contributes 3% of loan amount towards the buyer’s closing costs and prepaids) to eligible first-time homebuyers purchasing a primary residence.  These are fantastic 30 year fixed rates!

Mortgage Credit Certificate (MCC)
The Portland Housing Bureau recently received a new allocation of funds for the MCC program.  This is available to lower-income first-time homebuyers buying in the City of Portland.  It provides a federal income tax credit of 20% on the mortgage interest paid for that year.  We are among a handful of mortgage consultants approved to originate these loans. 

We have a program/investor that will match a borrower’s 10% down payment to make for a 20% down payment with no monthly payments on the 10% match!  Great for Jumbo buyers!  For more information check out:

FHA loans had a few big changes in 2013.  In April, they raised their annual mortgage insurance premiums. In June of 2013, they made the mortgage insurance on new FHA loans last the life of the loan!  In order for borrowers to get out of their FHA mortgage insurance, they must either refinance out of FHA or sell the home.  Therefore, in 2014 we will see a lot more buyers try and get the extra 1.5% down payment to go conventional.  Something to keep in mind, 100% gift funds can be used for the down payment on a single-family, principal residence conventional loan!

Also, starting January 1st of 2014, FHA will be lowering their maximum loan limits nationwide.  The new loan limit for Clackamas, Columbia, Multnomah, Washington, and Yamhill County will be $362,250.  This is down over $55,000 from the previous limit!  For specific loan limits in other Oregon counties, please contact me.

As FHA lowered their loan limits, lowering conventional loan limits is currently being contemplated. The proposed limit is $400,000 which it currently is at $417,000.  This is approximately a four percent reduction.  The Federal Housing Finance Agency (FHFA) has promised to give at least six months advance notice of any reduction. 

Data provided by the FHFA shows how this change, if implemented in 2012, would have affected loans originated in 2012.  In total, 3,614 loans originated in Oregon would have been considered Jumbo loans (above statutory maximum loan limits), which typically has a higher interest rate and more strict guidelines to qualify.  In the Portland-Vancouver-Hillsboro area, a total of 2,995 loans would have been considered Jumbo loans.  

Changes to the eligible areas for USDA loans were scheduled for October of 2013 but will remain unchanged through January 15, 2014.  Future eligible areas can now be seen at the USDA website:  Once there, select “Future Eligible Areas” on the left menu. 

I hope you find this information of value which you can use to plan ahead for a great 2014!