Mortgage Finance – Big Changes Ahead... | by a Katy Texas Real Estate Agent
For some time, there have been rumblings of major change in the wind regarding mortgage finance, but specific information regarding exactly what those changes might be has not been available. Of course, the changes to be made were prompted by the “mortgage meltdown” and financial crisis that became apparent in the last quarter of 2008 as well as the ensuing government response referred to as T.A.R.P. or Troubled Asset Recovery Plan being enacted. There has been much discussion regarding the effectiveness of the program; including criticism that the program has been ineffective and served only to rescue those financial institutions and individuals that were largely responsible for creating the problem in the first place. [View my Katy Texas Real Estate Website Here]
A Katy Texas Realtor Speaks About Mortgage Changes!
While I cannot claim the particular expertise to specifically place blame for the crisis, nor to judge whether or not the governmental response provided beneficial relief and prevented a general collapse of the U.S. economy, there are certain realities that are quite apparent. First, the economy as a whole continues to perform at substantially lower levels than prior to the third quarter of 2008. Residential foreclosures are taking place at an unhealthy and unprecedented rate. Residential property values in major markets around the country have plummeted leaving homeowners “underwater” resulting in actual market values of homes being less than the outstanding mortgage balances. Unemployment remains unacceptably high with a recent report indicating an unemployment rate of 9.1%. According to many credible estimates, when the numbers of those job seekers who have simply given up looking for work and those job seekers who are grossly underemployed are considered, the actual unemployment rate is more than double those figures reported by the government agencies.
Also, the programs aimed at compelling lending institutions to recast mortgages at “affordable” levels to existing borrowers to prevent foreclosure have been abject failures. The majority of the loans that were actually renegotiated have fallen into delinquency after the mortgage was recast at lower interest rates and/or lower principal balances.
A reality of the mortgage market has been that lenders have significantly tightened their underwriting standards and it has been much more difficult for those seeking to purchase a home or to refinance a mortgage have found it much more difficult to obtain financing. A part of the problem has been that there has been, on the part of the lenders, awareness that substantial changes from the regulatory agencies were coming, but there was no definitive information regarding what those new standards and guidelines were to be. The lending guidelines and requirements from the investors changed often; not only from day-to-day, but in many cases more than once a day. Experienced mortgage loan officers were unable to be assured that a mortgage loan would close until the closing and funding had actually taken place.
It now appears that some of the uncertainty is being removed and the powers that be are actually fleshing out what the changes will be. The good news that we have been waiting to hear may, in fact, turn out instead to be bad news. Once again, it appears that governmental regulatory efforts to solve a problem may serve to exacerbate the problem rather than provide a solution.
The major proposal for solving the mortgage crisis is a change to the Qualified Residential Guidelines (QRM). Simply put, the proposed change that appears almost certain to be adopted, is that the required cash down payment of borrowers be changed to a minimum of 20% in order for that mortgage loan to be considered a “Qualified” residential mortgage. This will not mandate that a financial institution is prohibited from making a mortgage loan to a borrower with less than a 20% cash down payment, but it will require substantially more risk-retention for the institution making such a loan. That is likely to result in higher rates for those “non-qualified” mortgages (estimated to be as much as 3% higher) than for the “qualified residential mortgages”.
The new requirement will, undoubtedly, make the purchase of a home, or refinancing a mortgage, unaffordable to large segments of home buyers and homeowners. It is estimated that the requirement could remove as many as 34% of the pool of potential home buyers from the market and data indicates that it would take fifteen years for an average family to save the necessary down payment to meet the “Qualified Residential Guidelines”.
Although an exact date for the change has not been established, it is almost certain that getting a residential mortgage next year will be even MORE challenging than it is now. The implementation of this regulation has the potential of inflicting great harm on the real estate, home building and mortgage lending businesses, but most importantly, on the ability of the public to achieve the “great American dream” of homeownership. Although there still remains a great deal of uncertainty regarding exact changes and implementation dates of specific changes, there is one thing that is likely to be an absolute certainty. That is that if you are considering the purchase of a home, considering selling your existing home and purchasing a new home or considering refinancing an existing mortgage you would be well advised to do that now, rather than waiting until next year.