Most consumers believe that mortgage rates will stay very low for a long period of time. The main reason is that the Fed announced that “interest rates” will stay at near zero through 2014. But it is important to understand that mortgage rates and these interest rates are two different things. Potential buyers should be aware that mortgage rates could change drastically and quickly. Remember, the average mortgage rates for the past 50 years were 8% and expect to see those rates again in the next 3-5 years.
The interest rate highlighted by the Fed is the Federal Funds rate that banks use to borrow money from the Federal Reserve. Mortgage rates are impacted by different factors and change frequently. In fact, they change many times each day. Two of the main factors that impact mortgage rates are bonds and mortgage securities. Typically, mortgages are pooled together and sold to investors as mortgage securities. Most banks do not hold these loans. The consumer-facing mortgage rates are determined in large part by the rate that investors will pay to purchase these securities. Today, the largest “investor” is the Fed. They have a current program to purchase $40 billion in mortgage-backed securities each month. But this artificial stimulant cannot last forever as our country has to deal with a $16 Trillion deficit. That means that regular investors will need to come back into the market and buy mortgage securities. How will this happen? Investors are predictable. They buy things based upon the combination of returns and risk. So we need to make the mortgage securities very low risk and provide a better return relative to other investment choices around the globe. So how do we do this?
That debate has been going on for a while in Congress. There are several significant areas of pending legislation that could have a major impact on the outcome. They include Basel III, Qualified Mortgages and Qualified Residential Mortgages. These initiatives are intended to put more safeguards into the mortgage system but the results will likely be higher rates, higher additional costs and tighter credit standards. Here is a brief explanation of each topic:
Basil III – Basel III imposes greater capital requirements on the banking industry over the next several years. The main issue with Basel III and mortgages is the change to risk weighting for various mortgage products depending on the issuer. FHA loans are the most favored because of their clear and direct government backing. GSE loans (Freddie Mac, Fannie Mae) do not receive the same treatment even though the GSEs are currently being backed by the government. Essentially, what Basel III does is require greater risk weighting depending on loan-to-value (LTV) ratios.This will likely translate into less higher loan-t0-value lending or even greater costs to consumers who borrow with smaller down payments.
Qualified Mortgages - The proposed QM rule is due to be finalized by the end of the year. The two main issues are whether the QM will be sufficiently broad enough to capture the vast majority of an already tight mortgage market and whether QM will be a safe harbor for lenders or give them the more limited protection. Lenders big and small are likely to tighten lending well within the QM standard to ensure their ability to repay a violation that rarely or never occurs. Furthermore, smaller lenders fear the costs of potential litigation. There is concern that litigation costs will be so great that many will not take the risk at all and push lending to the larger banks. The fear is that while lending may be pushed to the larger banks, the banks will either be unable or unwilling to absorb that lending because of its effects on their capital requirements. Even if they do absorb it, it will likely be much more costly to consumers.
Qualified Residential Mortgages - The QRM, which requires 5-percent risk retention for securitized loans that do not meet the QRM standard, cannot be broader than the QM. It seems the regulators have backed away from requiring a 20 percent down payment. However, it is unclear where they have “ended up.” Ideally, the QRM would track evenly with a broad QM with a safe harbor, but there is no guarantee that will be the case.
Conclusion:
Yes, there could be significant changes ahead for
Lake Lanier area real estate. Basel III, QM and QRM are expected to have a major impact on the cost and availability of mortgage credit. These are all efforts to return to a sustainable mortgage system that is not reliant on government support. The current system is being artificially supported by the Fed but that cannot last as we face looming debt and deficit challenges. A true market-based mortgage market will likely see higher rates, higher fees and tight credit availability. If you are considering a purchase, you may want to act quickly before the rules change. Stay tuned for more updates…
