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Not All Benefit From Low Mortgage Rates

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We hear incessantly that mortgage rates are at "historic lows" and that falling post-recession home prices have made this a great time for first-time homebuyers.

On paper, all this is true. The catch for new buyers, however, is that getting a loan on such wonderful terms is far easier said than done. And it may be getting even tougher.

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Despite the buzz, not everyone can get in on historically low mortgage rates.

Last week mortgage rates inched higher, but the 30-year fixed loan remained under 5%, according to Freddie Mac's survey of what lenders were offering to well-qualified buyers with 20% down payments and refinancers with 20% equity in their homes. The government-controlled housing finance firm said the week's average for a 15-year fixed-rate mortgage was 4.09%, up from 4.04% a week earlier.

Attractive rates to be sure -- if you can get them. An annual rite of spring is the seasonal uptick in potential homebuyers. According to the Treasury Department, however, as many as a third of those who apply for mortgages will be denied.

The mortgage industry, burned by the freewheeling approvals that were at the heart of the subprime crisis, has retreated in the opposite direction. Those fantastic rates and opportunities are available, but only for those with great credit scores (at the very least above 620), well-paying steady employment and a sizable pile of cash to plunk down for a down payment.

Mortgage companies, including Fannie Mae, have what, in industry jargon, is a "risk-based pricing matrix," using three key factors -- credit score, loan-to-value and duration -- to adjust interest rates. If you have a credit rating in the 700s and 20% to 30% of a home's value paid upfront, you can get those low, low rates. Those with a lower-than-desired credit rating, or are unable to put up a 10% down payment, could find an additional 1% to 1.5% tacked on.

And that's if they can even get a loan. The personal finance website Mint.com's mortgage calculator offers the following warning when we plugged in the data for a potential homebuyer with average credit seeking a 30-year-fixed mortgage on a $157,000 home with $15,000 down: "There are very few loans available with less than a 20% down payment." Though the exercise may be academic, it estimated an interest rate of 5.375%.

A recent survey by MortgageMatch.com, operated by the online real estate site Move Inc., found that two out of three Americans believe access to affordable mortgages is a serious problem when trying to buy property. Three out of four recent homebuyers reported that getting a mortgage was as, or more difficult than they expected. More than 10% of borrowers said their lender gave them a higher interest rate than what they were originally quoted.

Regulatory efforts to protect consumers against risky loans are likely to make lending prospects even tougher.

The Center for Responsible Lending is among those lashing out at provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act that could require prospective homeowners to make a 10% to 20% down payment when securing a loan to buy a home. It says that, based on average home prices, it would take 14 years for the typical American family to save enough money for a 20% down payment.

As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, lenders are required to retain at least 5% of the "risk" on loans. This, in and of itself, will mean costs are likely to be passed onto borrowers in terms of higher interest rates, closing costs, or commissions. Loans can be exempt from risk retention requirements, and designated as a Qualified Residential Mortgage, with a larger down payment (either 10% or 20% is still to be decided).

"This is seen -- mistakenly -- as 'getting back to the way mortgages used to be made,'" CRL said in a statement. "In fact, low down payment home loans have been a significant and safe part of the mortgage finance system for decades, bearing little resemblance to subprime and other alternative mortgage products that crashed our economy. Responsible, low down payment loans are also a key to the recovery of our nation's housing market and economy."

Down payment requirements, CRL says, would only serve to "materially shrink the mortgage market with little increase in loan performance."

Beyond first-time homebuyers scrambling to save a larger down payment, families looking to trade their current home for a new one are also going to be affected.

According to data released last month by CoreLogic (CLGX), a market research firm, 11.1 million properties, 23.1% of all residential homes with a mortgage, were in negative equity at the end of the fourth quarter of last year, up from 10.8 million (22.5%) in the third quarter. An additional 2.4 million borrowers had less than 5% equity, referred to as near-negative equity, in the fourth quarter. Together, they accounted for 27.9% of all residential properties with a mortgage nationwide.

Nevada had the highest negative equity percentage, with 65% of its mortgaged properties underwater, meaning borrowers owe more on their mortgages than their homes are worth. Other hard-hit states were Arizona (51%), Florida (47%), Michigan (36%), and California (32%). At 118%, Nevada had the highest average loan-to-value ratio for properties with a mortgage.

"Move-up" homebuyers will be hurt because repeat buyers will not have sufficient down payments to buy new homes with QRMs, according to Core Logic.

"Negative equity holds millions of borrowers captive in their homes, unable to move or sell their properties," says Mark Fleming, chief economist with CoreLogic. "Until the high level of negative equity begins to recede, the housing and mortgage finance markets will remain very sluggish."

Even Federal Housing Administration-backed loans, intended to make homeownership more affordable and less dependent on credit scores and down payments, are getting more expensive.

The FHA, the largest backer of mortgage loans for first-time homebuyers, insures roughly 30% of new home loans. The agency requires mortgage insurance on nearly all single-family home purchases with a 15- to 30-year loan. For loans that close on, of after, April 18, there will be an increase of 25 basis points in the price of an annual mortgage insurance premium. The increase, though relatively modest, is part of the agency's efforts to recover from post-recession defaults and could raise upward of $3 billion. What that means for the average homeowner (estimated by the government as having a $157,000 property) is an extra $400 or so a year out-of-pocket.

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