There’s a lot of shakeup in the mortgage industry right now. FHA loans will be harder to obtain in 2013. Mortgage rates will remain low. Lenders will require a mountain of paperwork. These are some of the mortgage stories making headlines in 2013. Here’s what you need to know about them.
1. FHA Continues to Tighten Their Lending Criteria
FHA loans have skyrocketed in popularity over the last few years. This is a direct result of the housing and mortgage crisis. The FHA’s market share rose from about 4% to nearly 40% in the years following the housing collapse.
But now their market share is falling, as a result of new rules and restrictions. Truth be told, the Federal Housing Administration is struggling to survive. Congress requires the agency to maintain a certain level of cash reserves. But a recent audit found them to be in the red. As a result, the FHA has been tightening loan restrictions and boosting insurance premiums for the loans they ensure. All of this will trickle down to borrowers in the primary mortgage market.
Over the last three years, the Department of Housing and Urban Development (HUD) has raised FHA premiums a total of five times. The latest hike will apply to mortgage loans processed after April 1, 2013, and it will raise the annual premium by 10 basis points or 0.10%.
This is not the only FHA mortgage story for 2013. They’ve also announced new rules for credit scores and debt-to-income (DTI) ratios. In short, borrowers with credit scores below 620, and DTI ratios above 43%, will have to undergo a manual underwriting process. The mortgage lender must find some kind of compensating factor to make up for the low score and high debt ratio.
2. Mortgage Rates Could Remain Below 4% in 2013
Mortgage rates have been hovering at historic lows for months. Earlier today, Freddie Mac announced that the average rate for a 30-year fixed-rate mortgage was holding steady at 3.53%. Many analysts have predicted the benchmark rate will remain below 4% for all of 2013.
For instance, Freddie Mac’s most recent “Economic and Housing Market Outlook” projected a slow rise from 3.4% at the beginning of 2013, to 3.7% by the end of the year. This will continue to be a strong lure for home buyers, as well as homeowners seeking to refinance.
3. Ability-to-Repay Rule Raises Documentation Requirements
During the housing boom, lenders often played it fast and loose in the documentation department. They offered “no-doc” and “low-doc” loans that required little to no documentation from the borrower. They allowed borrowers to simply state their income and assets, without any supporting evidence. Such lending practices quickly faded when the housing and mortgage market collapsed.
But voluntary restraint on the part of lenders apparently wasn’t enough for the federal government. In 2013, the government announced a new set of mortgage rules that will prohibit no-doc and low-doc loans. The Ability-to-Repay rule, as it is now known, was announced by the Consumer Financial Protection Bureau (CFPB) in January 2013. In short, it requires lenders to verify and document the borrower’s ability to repay the mortgage loan. This documentation comes in the form of bank statements, tax records, pay stubs, employment verification and the like.
Here’s an excerpt from the fact sheet released by CFPB last month:
“Under the new Ability-to-Repay rule, lenders will have to determine the consumer’s ability to pay back both the principal and the interest over the long term … Lenders can no longer offer no-doc, low-doc loans, otherwise known as ‘Alt-A’ loans, where some lenders made quick sales by not requiring documentation…”
As a result, borrowers shopping for a mortgage loan in 2013 should be prepared to provide a slew of paperwork. Not that there’s anything wrong with that.
4. The Qualified Mortgage Rule Was Born
This is another rule announced by the CFPB last month. It’s an offshoot of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The so-called “qualified mortgage” rule was announced at the same time as the aforementioned Ability-to-Repay rule. The difference is that the qualified mortgage rule won’t take effect until January 2014.
We have launched a website dedicated to this topic. It offers a basic definition of the qualified mortgage, along with the government documents that fully explain the rule. Visit www.QualifiedMortgage.org to learn more.
In short, a qualified mortgage loan is one that meets certain requirements set forth by the CFPB. These requirements are meant to limit or eliminate certain high-risk loan products and features. For instance, it will prohibit the use of interest-only loans in most cases. It also places a cap on the borrower’s debt-to-income ratio. Borrowers must have a total debt-to-income ratio no higher than 43%.
Lenders will have a strong incentive to generate such loans. It comes in the form of legal protection. The safe harbor protection, for example, shields lenders against class-action lawsuits from consumers. This rule will not take effect until 2014. But it’s already having an impact on the industry.
5. Delinquencies and Foreclosures Starts Are Dropping
Recent reports indicate that fewer people are going into foreclosure. This bodes well for the housing market in general.
According to a report by TransUnion, the credit-reporting agency, the mortgage delinquency rate in the U.S. dropped by 14% between the fourth quarter of 2011 and the same period in 2012. In this context, a delinquency occurs when a homeowner is at least 60 days behind on mortgage payments.
A December report by RealtyTrac showed that foreclosure starts hit a 71-month low in November 2012. A foreclosure start occurs when a lender initiates the paperwork required to actually foreclose on a house. It’s one step further than a delinquency.
We are not out of the woods entirely. The national foreclosure rate is still historically high. But it’s nice to know fewer homeowners are entering the pipeline.
Both of these trends, declining delinquencies and foreclosure starts, are positive indicators for the housing market. We may not see their effects right away. But they should help lower the foreclosure rate over time.
What did we miss? What other mortgage trends will make headlines in 2013? Your comments are welcome.