The Pulse of the Market

Well, time again to take the temperature of the real estate market. For the last several years, things have been unbelievably stable with low interest rates, moderate prices, adequate housing supply and super buyer ability. Mortgage programs were many and varied (sometimes alarmingly so), putting housing within the reach of many.

However, due to the experiences of our recent past, much is about to change. You remember the mortgages for people with ‘less than perfect credit,’ or 100 percent financing, or maybe you recall the ‘interest only’ mortgage. These programs have become as extinct as the dodo, and hopefully Fannie Mae and Barney Frank have learned their lesson—mortgages are not secure unless the borrowers have some skin in the game.

Currently, low down payment mortgages are not as readily available; check with your mortgage professional to learn the new credit and down payment parameters. Generally speaking, minimum credit scores have been increased significantly with scores below the mid 600s relegated to a limited number of possible programs. Mortgage professionals are also now required to be licensed; though it may come as a surprise to you, mortgage loan officers in Pennsylvania were not required to pass an exam or maintain a license prior to 2010.

Even the FHA, who has been our rock throughout this storm, will see some important changes. Of all the agencies involved in home finance, the FHA has experienced the least mayhem. Although the agency recognized the need to increase the borrower’s stake in the process, their minimum down payment remains at a very affordable 3.5 percent. What makes the FHA a more stable program, I believe, is the fact that all FHA loans are insured; not by some promise from the federal government, but insurance funded by FHA borrowers themselves. Upon settlement of an FHA mortgage, the borrower pays a fairly hefty insurance premium into the fund, with these funds being used to offset losses from bad loans.

The FHA recently announced a new policy, increasing the down payment requirement from 3 percent to 3.5 percent. Additionally, they have increased the FHA insurance rate from 1.75 percent to 2.25 percent, thus getting more funding in the insurance pool.

Another change coming down the pike is a reduction in seller contribution to buyer’s closing costs. When implemented, a seller will only be allowed to pay 3 percent of the purchase price toward the buyer’s costs; that contribution is currently 6 percent, forcing the buyer to come up with a little more cash. Finally, an important change in the works is that borrowers with low credit scores (sub-600) will have to increase their down payments to 10 percent. In my opinion, all good changes designed to strengthen a critical player in the national mortgage environment.

A final matter for your consideration requires a little historical background. Prior to the 1980s, mortgage lending was primarily a function of local lenders, such as savings and loans. In those days, it was not unusual to experience what we called a ‘money crunch;’ times when S&Ls had lent all of their available funds and therefore had limited resources for providing mortgage loans. During these times, the real estate industry was stalled.

Fannie Mae and Freddie Mac became major players in the market at this time. They provided a market in which mortgage originators could sell the loans they had originated. This enabled the rise of mortgage brokers, who would originate mortgages and then resell them to Fannie or Freddie. This sale enabled the broker to regain their mortgage funds and make more mortgage loans, thus keeping the mortgage funds circulating through the economy. In this way, mortgage funds were always available–no more money crunches.

Of course, Fannie and Freddie didn’t have unlimited funds, but raised money to purchase mortgages through the sale of the Mortgage Backed Security (MBS). Investors would buy these securities, knowing they were secure because they were backed by something tangible—real estate. The federal government has been purchasing these securities in order to keep interest rates low, but by the time you read this article, that practice will have stopped.

At the end of March 2010, the federal government will no longer purchase MBSs; if another investor steps up and purchases them, our rates will continue at their current low levels. However, if another investor doesn’t step up, then rates will have to rise to a level that does produce interest. MBS has, until recently, been a very secure investment, but with the mortgage and foreclosure problems we have experienced, this could be problematic. Good advice would be that if you are thinking of buying a home or refinancing your mortgage, there is no time like the present.

Gary Straub has been a real estate professional since 1970 and is a member of the Northwood Realty management team.