Mortgage rates will go up in 2014 and the middle class is going to feel the burn of higher fees on mortgages: Can this momentum continue into 2014?
The Fed’s archaic language makes it very clear that there will be no taper anytime soon. To the contrary, the Fed will still be buying something like $75 billion a month in bonds instead of $85 billion. What bold movement right? Of course this sent the stock market into another easy money induced rally. However, during the same period we find that existing home sales took a hit and prices are definitely softening. Over the summer, the popular FHA insured loans took a giant hit via mortgage insurance premiums increasing dramatically. This action certainly impacted the origination volume of one product that was leveraging buyers into homes with as little as 3.5 percent down. Even in expensive SoCal, FHA insured loans made up 20 percent of purchases last month. In 2014 there will be new fees hitting vanilla mortgages as part of the Federal Housing Finance Agency (FHFA) trying to push private lenders to take on some of the mortgage market which is fully dominated by the Fed and government. These fees will happen at a time when home owners are already leveraging up to compete with big money investors.
The slowdown in housing
Higher rates have certainly had an impact on the housing market. The median price nationwide has certainly slowed down during the last few months (we will find out soon how much of this is seasonal and how much of this is due to changing winds):
We’ve already noted that investors are certainly pulling back in many inflated markets around the country. Some seem to think the Fed is fully omnipotent in controlling rates. People do realize that the 30-year fixed rate mortgage has gone up over 100 basis points in spite of the Fed now having a balance sheet well above $4 trillion and now owning 12 percent of the mortgage market? When the stock market is rallying as it is, tiny gains in land-lording don’t look as appealing as jumping on the next IPO.
The new fee increases next year will have an impact. They come in two parts:
-1. A mandated 0.1 percent to the rate for all new loans
-2. Loan Level Price Adjustments (LLPAs)
The second item is going to make a bigger impact as it is going to make it more expensive for people to borrow (table below depending on LTV):
These are fairly significant increases when you consider most middle class families are squeezing into mortgages. The bigger impact from LLPAs will come with raising the standard with credit scores for the best mortgage rates. For example, borrowers with scores of 740 receive Fannie Mae’s lowest pricing but the new requirements will push it above 800. In 2007 a 680 received the best (and look how things turned out).
Again, I want to be clear that the last housing crisis was brought on by more than just subprime buyers. The bulk of people that lost their homes were in traditional vanilla 30-year mortgages. The facts back this up. Yet people like to believe that subprime borrowers were the central cause of the implosion of our entire system.
The FHA already required a lifeline this year since loans were performing poorly in spite of the hot market. The problem with looking at aggregate data is that the 30 percent cash buyers have distorted the typical down payment across the board. For example, the typical down payment for FHA buyers is 4 percent (slightly above the mandated minimum 3.5 percent). Adjustable rate mortgages are already going up in usage as more regular buyers need more leverage as household incomes are not going up.
Source: Bloomberg, ZeroHedge
Mortgage applications hit a 13 year low even with the housing market having one of its best years in terms of prices. Let us be clear, prices moved because of low inventory, low rates (for the first half), and manic demand from investors. Yet this has obviously changed towards the end of the year.
Regular buyers are already tapped out and the data reflects this. There is also an odd notion that folks, either domestic or international, are ready to lose their money no matter what in real estate. People do realize that many people that have saved a good amount are actually concerned about preserving their funds? This is why investors have slowed down buying in this market. As those double-digit price gains ebb to single-digit to possibly flat or negative year-over-year gains, the headlines will enter another echo chamber that isn’t going to sound so pleasing to investors. It already started in the middle of the year.
The fee increases coming next year simply add another cost to getting a mortgage regardless of what the 30-year does or doesn’t do (similar to MIP on FHA insured loans). People also were pointing to the nice little jump in recent housing starts but most of these were for multi-unit dwelling (i.e., the rental revolution continues).