Fed: Borrowers Could See Relaxed Mortgage Standards in 2016

With less than two months left in the year, many home buyers are looking ahead to 2016. So the Home Buying Institute has been publishing a variety of “forward-looking” reports involving home prices, mortgage rates, and other housing-related trends. This time around, we turn our attention to mortgage standards in 2016.

A new industry survey from the Federal Reserve revealed that mortgage lenders have eased the standards used to qualify borrowers for conventional home loans. This is good news for borrowers who are planning to purchase a home in 2016. Relaxed mortgage standards could make it easier for marginally qualified borrowers to secure financing.

Some Banks Ease Mortgage Standards, Going Into 2016

On November 2, 2015, the Federal Reserve published the findings from its latest Senior Loan Officer Opinion Survey. This quarterly survey is sent to up to 80 large domestic banks in the U.S., as well as 24 U.S. branches of foreign banks. As a result, it’s a pretty good indicator of mortgage qualification standards and trends.

With regard to home loans, the latest survey showed the following:

“Regarding loans to households, banks reported having eased lending standards on loans eligible for purchase by the government-sponsored enterprises and on qualified mortgage (QM) loans over the past three months on net.”

The “government-sponsored enterprises” (GSEs) mentioned above are Freddie Mac and Fannie Mae. Mortgage lenders often sell the loans they originate to the GSEs, as a way to reduce risk and increase liquidity. So the easing of mortgage standards mentioned above mainly refers to conventional home loans — those that are not insured by the federal government.

A Different Story for FHA and VA Loans?

Over on the government side, it seems that standards might actually be tougher for FHA and VA loans. According to the Fed’s November report: “In contrast [to the easing mentioned above], modest net fractions of banks tightened standards on government residential mortgages.”

In this context, “government residential mortgage” includes home loans that are insured or guaranteed by the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). This category also includes purchase mortgages that are originated under the U.S. Department of Agriculture home loan programs.

So we have some mixed results here. Senior loan officers have reported some degree of easing for conventional home loans, while standards seem to have increased a bit for government-insured products.

Pros and cons: Conventional vs. FHA loans

The bottom line: Reasonably well-qualified borrowers should be able to secure financing in 2016, and it might even be easier on the conventional side. Meanwhile, lenders appear to be setting higher standards for FHA and other government-insured home loans.

Still No Love for Subprime Borrowers

The latest survey also provided some insight into mortgage standards for “subprime” borrowers. According to the Federal Reserve’s report, most banks said they “do not extend home-purchase loans to subprime borrowers.”

These are borrowers with weak credit histories resulting from payment delinquencies, charge-offs, bankruptcies, etc. The subprime category also includes borrowers with “reduced repayment capacity” as indicated by their credit scores or debt-to-income ratios. Would-be home buyers who fall into this category are often turned down for financing.

About the Survey
The Federal Reserve’s “Senior Loan Officer Opinion Survey on Bank Lending Practices” solicits input from more than 100 banks across the United States. The goal is to gain insight into current mortgage lending trends and standards, based on survey responses. The Federal Reserve typically conducts the survey once per quarter. They time it so they can publish the results before the regularly scheduled meetings of the Federal Open Market Committee (the Fed’s “think tank”). On occasion, the Federal Reserve will conduct one or two additional surveys during the year, to gain additional insights into mortgage standards and trends for 2015 – 2016.

15-Year Mortgage Rates Dip Below 3%, Second Time This Quarter

Are you in the market for a 15-year mortgage loan? Then I have some good news. The average rate for a 15-year fixed mortgage dropped below 3% this week.

According to the weekly market survey conducted by Freddie Mac, the average interest rate assigned to 15-year home loans in the U.S. fell to 2.98% this week. That’s a decrease of five basis points (0.05%) from last week’s average of 3.03%.

That marks the second time this quarter the 15-year mortgage rate average has dipped below the 3% mark. On October 8, it dropped to 2.99%. The last time we saw rates this low for this particular loan category was April 30, when it fell to 2.94%.

Thirty-year loans dropped three basis points this week compared to last, landing at 3.79%.

Current 15-Year Mortgage Rates 7 Basis Points Below January

To give you some perspective, we started the year with 15-year mortgage rates at 3.05%. For most of 2015, they’ve been fluctuating above the 3% mark, climbing as high as 3.25% over the summer. That means today’s rates in the 15-year product category are seven basis points (0.07%) lower than where we were at the start of 2015.

This trend can be seen in other loan categories as well. The 5-year adjustable (ARM) loan started the year with an average rate around 3%. In this week’s survey, the 5-year ARM average was down to 2.89%. The current average rate for a 30-year fixed mortgage, on the other hand, is almost exactly the same as it was in January 2015. So it has been a pretty stable year for borrowers.

This flies in the face of earlier predictions that said rates would likely rise steadily throughout 2015. Apparently, some crystal balls need to be re-calibrated.

Will Fed Introduce a Rate Hike in October or December?

The Federal Reserve is expected to increase the short-term federal funds rate later this year or early next. The Fed has kept the funds rate near zero for years now, as part of a broader stimulus program designed to spur the economy.

They’ve been monitoring the nation’s jobless rate (and other indicators) to decide when to increase interest rates. At their last committee meeting, Fed officials decided to preserve the status quo.

Some housing analysts have said the Fed probably won’t make a move until 2016. For example, Joseph LaVorgna, the chief economist for Deutsche Bank, recently told CNBC he thinks the Fed will increase rates in March 2016.

Federal Reserve officials will have two more opportunities to increase rates this year. Their next committee meeting is scheduled for October 27 – 28, and the last one of the year takes place on December 15 – 16.

But even if the Fed does introduce a rate hike this year, it probably won’t have a huge impact on 30- or 15-year mortgage rates. According to Selma Hepp, an economist who wrote for Trulia:

“If rates increase 25 basis points, mortgage rates are still at historical lows and exceptionally favorable for homebuyers. The actual impact on a typical homebuyer will be marginal, but this really depends on the buyer’s budget.”

So there’s a good chance home loan rates will remain relatively stable through the end of 2015, and possibly into the start of 2016 as well. But now we’re getting into the crystal ball stuff again, and that’s been covered already.

Disclaimers: This story contains third-party data that are deemed reliable but not guaranteed. It also contains forward-looking statements regarding Federal Reserve policy and mortgage industry trends. economic conditions. Such statements are the equivalent of an educated guess and should not be viewed as facts. The Home Buying Institute makes no claims or assertions about the future or 15-year mortgage rates, or interest rates in general.

Revealed: the 10 Most-Complained-About Mortgage Companies

Yesterday, the Consumer Financial Protection Bureau (CFPB) published its most recent snapshot of consumer complaints regarding financial companies in the U.S.

The new report shines a light on mortgage complaints in particular. It also provides a list of the most-complained-about mortgage companies in the United States, based on complaints filed from April to June 2015.

Mortgage Servicing Problems Are Common

The CFPB also categorizes mortgage complaints by type, in order to find out where the most common problems lie. Based on their findings, it seems that homeowners have a lot of problems with mortgage servicing in particular. (Mortgage servicers are the companies that handle the day-to-day managing of your home loan, after you’ve closed the deal with your lender.)

According to CFPB, servicing-related problems are most common during certain scenarios, such as when the homeowner applies for a mortgage loan modification in an attempt to avoid foreclosure.

The CFPB’s Office of Consumer Response maintains a public, online database of consumer complaints regarding all types of financial companies. Consumers can file a complaint through the CFPB website located at www.consumerfinance.gov.

Policing the Financial Services Industry

The watchdog agency has handled more than 192,000 mortgage complaints since its inception. That makes home loans the most frequently complained-about financial product, accounting for 27% of all complaints filed by U.S. consumers. (The agency also deals with consumer beefs relating to credit cards, student loans, debt collection, and other financial products.)

When a consumer submits a complaint on a financial services company, the Consumer Financial Protection Bureau will notify the company directly. Compared “are expected to respond to respond to complaints sent to them within 15 days.”

And make no mistake. We’re not just talking about a paperwork shuffle here. The CFPB has “teeth” given to it by the Dodd-Frank Act. A recent article in Time magazine called it “one of the most effective and feared regulators in Washington [D.C.].” The agency regularly imposes large fines against financial services companies that have wronged consumers. So clearly, it pays to stay on their good side.

The 10 Most-Complained-About Mortgage Companies

The table below shows the mortgage companies with the most complaints during the three-month period from April to June 2015. (Note: This is a partial list. The CFPB’s original report identified 19 companies in its “most-complained-about” list. Here, we have listed the 10 mortgage companies that had the most complaints of the 19 listed in the CFPB report.)

Company 3-month avg., April – June 2015
Wells Fargo 433
Bank of America 430
Ocwen 428
Nationstar Mortgage 353
JPMorgan Chase 269
Green Tree Servicing, LLC 240
Citibank 126
Select Portfolio Servicing, Inc 113
Seterus 89
U.S. Bancorp 81

According to Richard Cordray, director of the Consumer Financial Protection Bureau, the agency sees this as an ongoing issue that needs continued monitoring.

“Despite strong protections that have been put in place to protect homeowners, this month’s complaint report shows consumers are still having problems when dealing with their mortgages,” Cordray said. “The Bureau will continue to work to make sure that consumers are being treated fairly on their mortgage issues.”

How to Submit a Complaint to CFPB
Consumers can submit complaints about financial services company in several ways. They can do it online by visiting www.consumerfinance.gov/complaint/, or by calling the CFPB toll free at 1-855-411-CFPB (2372). Their TTY/TDD phone number is 1-855-729-CFPB (2372). Letters can be mailed to Consumer Financial Protection Bureau, P.O. Box 4503, Iowa City, Iowa 52244.

Will Fed Policy Keep Mortgage Rates Low Through Fall 2015?

Federal Reserve officials met last week to discuss current and future monetary policy. Among other things, they decided to keep the federal funds rate between 0% and 1/4% for the foreseeable future. Apparently, the economy has not improved enough for the Fed to be comfortable with a rate hike at this point. This could preserve the low mortgage rates we’ve been seeing through the fall of 2015.

In a statement following the Federal Open Market Committee meeting, Fed officials explained:

“To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate.”

Translation: We are keeping short-term interbank interest rates low in an attempt to further strengthen the economy.

But how does this affect home buyers in 2015, or homeowners who are planning to refinance? What’s the connection between the Federal Reserve’s policies and long-term mortgage rates? And will we continue to see low mortgage rates through the fall? Here’s a quick primer.

Fed Policy Could Help Keep Mortgage Rates Low in 2015

Let’s start with an important distinction. The Federal Reserve does not control mortgage rates directly. It does, however, control the federal funds rate that banks use when trading balances with one another in the short term.

So how does this affect mortgage shoppers? The key word is “indirectly.” The Fed’s policies can have an indirect effect on long-term mortgage rates by shifting investor demand from one asset class to another. In its latest meeting, Federal Reserve officials said they would continue to invest in mortgage-backed securities (MBS). When the Fed invests heavily in MBS purchases, it tends to drive down mortgage rates for home buyers and homeowners.

As MBSQuoteline explains: “While lenders, in effect, set their own mortgage rates, how those rates are set is driven largely by the then current prices of Mortgage Backed Securities. ”

The bottom line is this. By continuing along its current course (which involves MBS purchases and keeping the funds rate near zero), the Federal Reserve is having an indirect effect on long-term mortgage rates. This has benefited home buyers and homeowners in the past, and it could continue into the fall.

The Federal Open Market Committee’s next meeting is scheduled for October 27 -28, 2015. They’ll revisit this subject at that time, and possibly make an adjustment to their existing policy. Until then, however, the status quo prevails.

A Look at Current & Projected Loan Rates

According to the weekly market survey conducted by Freddie Mac, the average rate for a 30-year fixed home loan has been hovering below 4% for the last few weeks.

Here are the average rates from their latest survey, for the week ending September 18:

  • 30-year fixed-rate mortgage (FRM): 3.91%
  • 15-year FRM: 3.11%
  • 5/1-year ARM: 2.92%
  • 1-year ARM: 2.56%

When (not if, but when) the Fed finally decides to raise the federal funds rate, we will almost certainly see mortgage rates climb as well. But whatever increase does occur will likely be gradual in nature. A “spike” is unlikely. This is precisely what the economists at Freddie Mac have predicted. In their latest housing market forecast, they’ve suggested that a gradual rise in rates is likely through the rest of 2015 and into 2016.

Jumbo Loan Credit-Score Standards Still Tough, But Getting Easier

Are you in the market for a jumbo loan? If so, be prepared for some extra scrutiny. Mortgage lenders are typically more strict when considering jumbo loan applicants, particularly where credit scores are concerned.

Credit-score standards and criteria vary from one lender to the next. There is no single cutoff point used across the board. In 2015, many mortgage companies seem to be setting the bar around 600 or 620 for a conforming home loan, and upwards of 650 for jumbo products. (This is on the FICO scoring scale, which goes from 300 to 850.)

The good news for borrowers is that we’ve seen some easing in the mortgage market lately, where non-conforming loan products are concerned. More on that in a moment. First, let’s talk about what a jumbo loan is, and why lenders have higher standards for the borrowers who use them.

Jumbo Mortgage Loans Defined

The concept of jumbo versus conforming home loans relates back to Fannie Mae and Freddie Mac. These are the two government-sponsored enterprises, or GSEs, that buy and sell bundled mortgage loans on the secondary market (think Wall Street).

Federal laws limit the size of loans Fannie Mae and Freddie Mac can acquire. Anything that falls within these size limits is a conforming loan. Anything larger than those limits is considered a “jumbo” loan, and is therefore not eligible for GSE purchase.

Conforming loan limits vary by county. They are established by the Federal Housing Finance Agency (FHFA), which also oversees Fannie and Freddie. Each year, the FHFA reviews loan limits in relation to home prices and makes adjustments if necessary.

According to LoanLimits.org, the current limit for single-family home loans for most counties across the U.S. is $417,000. In more expensive areas, like Los Angeles and New York City, the conforming cap can be as high as $625,500. In Hawaii, it can be even higher.

Mortgage lenders commonly impose higher standards for borrowers who are seeking a jumbo loan, simply because there’s more money involved. A bigger loan is a bigger risk to the lender, especially when they can’t turn around and sell it to the GSEs (which is usually the case with non-conforming products). So they often require larger down payments and higher credit scores for jumbo loans, when compared to the smaller / conforming mortgage products.

Surprisingly, however, jumbo loans offer lower rates on average than their smaller conforming counterparts. It wasn’t always this way. But that has been the trend for the last few years, due to shifting demand within the secondary mortgage market.

Minimum Credit Score Needed for Jumbo

As mentioned earlier, there is no industry-wide standard for jumbo loan credit scores. Mortgage lenders have their own, often unique, ways of underwriting home loans and qualifying borrowers. The one thing you can be sure of is that a higher credit score will increase your chances of qualifying for a jumbo loan.

These days, a lot of lenders want to see a credit score of 650 or higher for borrowers seeking a jumbo mortgage product. But that number is not set in stone. Other lenders will go below that level if they feel the borrower is a strong candidate for a loan. Borrowers with high income and a lot of assets, for example, often get a “pass” in the credit score department.

Signs of Easing in the Mortgage Market

I mentioned some good news at the start of this story. Here it is. The jumbo loan market has loosened up some over the last couple of years. We first got wind of this in September 2014, when CNN did a story on the subject.

According to the CNNMoney report from last fall:

“During the past several years, most jumbo borrowers needed at least a 700 credit score to get a loan. But now [fall 2014] lenders are giving loans to borrowers with credit scores of as low as 650.”

Additional signs of easing came earlier this week, when the Mortgage Bankers Association (MBA) released the latest results of its Mortgage Credit Availability Index.

According to Mike Fratantoni, Chief Economist with the MBA:

“Mortgage credit availability increased in August and has increased in eight of the last nine months. While much of the loosening has been for jumbo loan products, the availability of conforming conventional mortgage credit has also somewhat increased…”

The bottom line is that credit score requirements are generally tougher for jumbo mortgage loans. But it might be getting a little easier.

New Forecast: Mortgage Rates to Rise Slightly By End of 2015

The economic team at Freddie Mac recently issued a revised mortgage forecast through the end of this year. They anticipate the average rate for a 30-year fixed mortgage will rise to around 4.3% by December 2015. The 30-year average was hovering around 3.9% when this article was published.

We are nine days away from the next scheduled meeting of the Federal Open Market Committee (the Federal Reserve’s think tank), and many housing analysts are wondering if the Fed will finally raise short-term interest rates. If they do, we could see a subsequent rise in mortgage rates between now and the end of 2015.

In fact, some economists have previously predicted that mortgage rates will increase gradually between now and the end of 2015.

But there’s also a good chance the Fed will do nothing. We’ll know soon enough.

Next Federal Reserve Meeting: September 16 – 17

The Federal Reserve does not directly control mortgage rates. But they do control the short-term federal funds rate, which is used when banks lend money to one another. This has an indirect influence on longer-term interest rates, such as those applied to mortgage loans.

Federal Reserve policies and operations are decided during Federal Open Market Committee (FOMC) meetings. The FOMC meets eight times per year. Their next meeting is scheduled for September 16 – 17, 2015. Announcements and meeting minutes are typically published on the second day of the meeting.

For a while, the general consensus was that Fed officials would announce a rate hike during their September meeting. But now, analysts aren’t so sure. Recent turmoil in the stock market and global economy might cause the FOMC to continue along its current course, which would mean keeping the federal funds rate near zero. If they do maintain the status quo, mortgage rates would be less likely to rise significantly during the last quarter of 2015.

Mortgage rate forecasts for 2015 usually take all of this into account. For instance, in its latest forecast and outlook for the U.S. housing market, mortgage buyer Freddie Mac stated the following:

“Six-plus years into what has been a very tepid expansion, is it finally time for the Fed to raise short-term interest rates? The Fed has stated it is waiting for evidence that labor markets have recovered and inflation is reliably expected to be at or above 2 percent before it will take action.”

While the job market has improved since the start of 2015, inflation is still below 2% and could actually drop further according to some estimates. So there’s a good chance the FOMC will decide against any policy changes and continue along it charted course for now (with the funds rate near zero).

At a recent news conference, New York Federal Reserve president William C. Dudley said: “From my perspective, at this moment, the decision to begin the normalization process at the September F.O.M.C. meeting seems less compelling to me than it was a few weeks ago.” (Full story at New York Times)

Revised Mortgage Rate Forecast by Freddie Mac

The Chief Economist’s Office at Freddie Mac has taken all of these factors into account, and recently issued a revised forecast for mortgage rates. Their housing outlook report for August called for a slight increase in rates through the end of 2015.

They’ve actually revised their forecast downward in recent months. This time last year, Freddie Mac estimated that the average rate for a 30-year mortgage would approach 5% by the end of 2015. But it’s highly unlikely that will happen, given that the 30-year average is currently hovering below 4%.

Now, the company has issued a revised mortgage rate forecast with a lower year-end estimate. Based on current trends, they expect 30-year mortgage rates to rise slightly to around 4.3% by December 2015.

Why Too Much Student Loan Debt Could Derail Your Mortgage

According to a recent report by the Federal Reserve Bank of New York, a higher percentage of college graduates have fallen behind on their student loan payments. Many of them will run into problems down the road, when applying for a mortgage loan to fund a home purchase.

Here’s an updated look at the student loan debt “bubble” that is growing in the U.S., and how it can turn a mortgage approval into a mortgage denial.

More Than 20% of Borrowers Delinquent on Student Loan Payments

The New York Fed’s quarterly report revealed a startling statistic that was buried in the footnotes. According to their data, about 11.5% of student loan debt was 90+ days delinquent or in default, during the second quarter of 2015.

But the actual number of borrowers who are significantly behind on their payments could be twice that number — or more. As the Federal Reserve Bank explained it in a corresponding footnote:

“…delinquency rates for student loans are likely to understate actual delinquency rates because about half of these loans are currently in deferment, in grace periods or in forbearance and therefore temporarily not in the repayment cycle. This implies that among loans in the repayment cycle delinquency rates are roughly twice as high.”

That means the actual delinquency / default rate could be 20% or higher. In a separate but related report issued earlier this year, the Federal Reserve Bank of St. Louis put the number even higher. Their analysis suggested “a delinquency rate of 27.3 percent for borrowers with loans in repayment.”

So yes, it’s a big problem. And for those graduates who attempt to buy a home a few years out of college, it could be a bigger problem than they realize.

The bottom line is that student loan debt can affect mortgage loan approval in a negative way. Having too much debt in relation to one’s income (and/or having a history of delinquency and default) can make it much harder to get approved for a home loan. To understand why, we have to talk about credit scores and debt ratios — both of which are very important during the mortgage application process.

Student Loans Affect Your Debt Ratios, and Mortgage Approval

Student loan debt by itself isn’t a mortgage killer. In fact, having a student loan on the books could actually improve your shot at qualifying for a home loan. Or it could throw up additional obstacles for you. The difference has to do with (A) your loan repayment history, and (B) the total amount of debt you carry in relation to your monthly income. These two factors can help or hamper your quest for a home loan.

Student loan debt can directly affect mortgage approval because it influences your debt-to-income ratio, or DTI. This is a numerical (percentage) comparison between the amount of money you earn each month, and the amount you spend to cover your recurring debts — such as student loan payments.

Related: New rule could ease debt requirements

From a mortgage lending standpoint, you have two DTI ratios. The “front-end” number uses housing-related debts only. The “back-end” DTI looks at all of your monthly debts combined (car payments, student loan, credit cards, estimated mortgage payment, etc.). While they’ll look at both numbers, lenders are mostly concerned with your total or “back-end” debt-to-income ratio. After all, it’s a better indicator of a person’s ability to repay a home loan.

Student loan debt contributes to your back-end DTI ratio, and therefore affects your ability to qualify for mortgage financing. Different lenders have different standards where debt is concerned. Many of them draw the “line” somewhere around 43% – 45%. So, by this commonly used standard, a borrower with a total debt-to-income ratio higher than 45% might have trouble getting approved for a home loan.*

Just to be clear, having too much debt can be a problem regardless of how you’ve handled your payments in the past. A borrower with an excessive debt load will likely have trouble landing a mortgage loan, even if he or she has never missed a single payment in the past.

This is just one of the ways student loan debt can affect mortgage approval. There’s another factor to consider as well, and that’s your credit score.

How Your Payment History Affects Your Credit Score

Lenders measure risk in various ways. But the goal is always the same. They want to know how much risk a borrower brings to the table, in terms of default. Borrowers with a history of repaying their debts on time have a better chance of being approved for a home loan. On the other hand, borrowers with late payments, delinquencies and/or defaults in their past could have a much harder time getting approved.

This is another area where student loan debt can affect mortgage approval. And it could be a problem for an increasing number of future home buyers, based on the statistics that began this article.

Mortgage lenders use credit scores to assess risk. A higher score indicates a lower risk of default, and vice versa. So a borrower with excellent credit has a better chance of getting approved for a home loan. Computers generate credit scores based on a handful of scoring factors. Of all the scoring factors they use, a person’s “payment history” weighs the most.

According to myFICO, the company that designed the widely used FICO score, “credit payment history determines 35% of a FICO Score.”

This is another way student loan debt can impact mortgage loan approval. Borrowers with a history of late payments usually end up with lower credit scores as a result of their delinquencies. So lenders see them as having a higher risk of mortgage default. Borrowers in this category tend to have a harder time getting approved for loans, and usually pay more interest as well.

On the other hand, a pattern of responsible credit usage (i.e., paying one’s bills on time) could result in a higher score and a better chance of getting a loan. When it comes to mortgage approval, much depends on the borrower’s total debt load at the time of application, as well as the payment history.

It’s also important to realize that these factors can be deal-breakers on their own, or in combination with one another. For example, a borrower with a reasonable debt-to-income ratio but a pattern of late payments might be turned down for a home loan. Likewise, a borrower with a good credit score and a pattern of paying bills on time might be turned down for having too much debt. When you combine these negative factors (a high DTI and a bad credit score), it can put mortgage financing even further out of reach.

The Bottom Line for Borrowers

Does student loan debt affect mortgage approval? Absolutely. But it’s not necessarily a deal-breaker by itself. In fact, having a positive payment history on loans and other forms of credit could improve your chances of getting a home loan.

On the other hand, borrowers with delinquencies or defaults in their past could face additional scrutiny when applying for a mortgage loan. And it seems as though more and more college graduates are headed down this path.

* The debt-to-income standards mentioned above reflect industry trends at the time of publication. But those numbers are not set in stone. Lenders can, and often do, make exceptions for borrowers they feel are good candidates for a home loan. So don’t be discouraged by anything covered in this story. This article is meant to educate future home buyers on the connection between student loan debt and mortgage approval. It is not the “final word” on the subject, nor does it constitute financial advice.

Summer Mortgage Rates Enter 4% Range; First Time Since November

Home buying activity typically picks up during the summer months, as families with school-age children attempt to move while school is out. But rising mortgage rates could cause some buyers to put their plans on hold. According to the latest survey data reported by Freddie Mac, summer mortgage rates are 0.21% higher than they were at the start of 2015.

Earlier today, Freddie Mac released the results of its latest mortgage lender survey. According to that report, the average rate for a 30-year fixed mortgage loan rose to 4.08%. That was a slight increase over the previous week’s average of 4.02%, and an increase of 21 basis points (0.21%) since January 1, 2015.

5 things home buyers should know this summer

The average rate for a 15-year fixed mortgage also rose this week, climbing from 3.21% to 3.24%. Five-year ARM loan rates are still hovering around 3%, while the average for a 1-year ARM is at 2.52%.

Summer Alert: 30-Year Mortgage Rates Rise Above 4%

For the first half of 2015, the average rate for a 30-year mortgage hovered below 4%. This is based on the weekly market survey conducted by Freddie Mac. But at the start of the summer, long-term mortgage rates rose into the 4% range.

During the second week of June, the 30-year average rose above 4% for the first time since November of last year. Long-term mortgage rates have been hovering in that range for the last few weeks, with a slight upward trend.

Federal Reserve Waits for 2% Inflation

Summer mortgage rates are still very attractive. They have remained at or near historically low levels for many months, largely in response to the Federal Reserve’s stimulus program.

While the Fed does not directly control mortgage rates, its stimulus measures do have an indirect influence. For several years now, the Fed has been purchasing mortgage-backed securities and holding the federal funds rate near 0% in order to stimulate a sluggish economy.

The question is, when will the Fed change its current policy, and how might this affect mortgage rates going forward?

At their last regularly scheduled committee meeting, Fed officials stated they were content to preserve the status quo for now. They also said they would likely raise the federal funds rate when inflation hits 2%. That’s the key benchmark that will cause them to adjust their monetary policy.

According to the Federal Open Market Committee (FOMC), an inflation rate of 2% “is most consistent over the longer run with the Federal Reserve’s mandate for price stability and maximum employment.” Their monetary policy is designed to keep inflation at around 2% over the medium term. So when U.S. inflation rises to this level, the Fed will likely raise the federal funds rate. This could eventually lead to an increase in long-term mortgage rates as well.

Many analysts expect the central bank to adjust its monetary policy in September, during their fall committee meeting. But we’re getting into the weeds of speculation here.

Creating Urgency Among Home Buyers

The bottom line is that summer mortgage rates are rising, and they could rise further between now and the end of 2015. This is creating a sense of urgency for many home buyers, especially those who are in housing markets where home prices are also rising. When home prices and mortgage rates rise at the same time, it greatly reduces housing affordability. So, from a purely financial perspective, home buyers might be better off making a purchase sooner rather than later.

Disclaimer: This story contains summer mortgage rate trends and other data that are deemed reliable but not guaranteed. It also contains forward-looking statements about the economy in general. We make no claims, guarantees or assertions about future trends within the mortgage industry or the broader economy.

Interest-Only Home Loans More Common in 2015, But Just as Risky

Imagine having a home loan where you only had to pay the interest each month, while ignoring the principal. Sounds great, right? It would certainly reduce the size of your monthly payments, freeing up cash for other purposes.

There is such a loan. It’s called the interest-only mortgage loan, and it appears to have made a comeback over the last couple of years. In 2015, a number of lenders are offering this type of product.

But if they sound too good to be true, that’s because they often are. Here’s what borrowers need to know about these high-risk mortgage products.

Interest-Only Home Loans Defined

As the name implies, an interest-only home loan is one where the borrower pays only interest for a certain period of time. During this time, none of the monthly payments are applied to the principal. Therefore the principal amount borrowed (and due) remains the same.

The interest-only payment period does not last forever. The borrower will have to pay off the full principal at some point. In most cases, the interest-only period last for 5 to 10 years, but there are other product variations as well.

Home buyers use these loans to minimize their monthly payments during the first few years of the repayment term. These products are commonly used by borrowers who expect their income to grow over the coming years. For instance, a recent college graduate who lands a good job with high income potential might use an interest-only home loan to reduce the monthly payment during the first few years, until his or her income increases.

But this is where the interest-only mortgage can come back to haunt you. If the expected income growth does not occur, the borrower could be stuck with an unaffordable home loan. That’s because the monthly payments could eventually increase, when the interest-only period expires.

Making a Comeback in 2015

Interest-only mortgage loans were all the rage during the housing boom years of the late 1990s and early 2000s. They faded from use when the housing market collapsed, because they’re essentially a riskier type of mortgage. And lenders were doing everything to reduce risk in those days.

Now, in 2015, interest-only home loans seem to be making a comeback. More lenders are offering them these days, despite the bad reputation they earned during the housing collapse.

But the prevalence of these loans doesn’t change the fact that they are full of risk. Borrowers who fail to sell or refinance the home before the interest-only period expires could see a huge jump in their monthly payments.

Consumer Protection Agency Calls Them ‘Toxic’

The federal government actually warns borrowers away from interest-only home loans. This alone should raise some red flags in the minds of would-be borrowers. But despite such warnings, many borrowers embrace these products as a way to reduce their monthly payments.

It’s true, an interest-only mortgage can reduce your monthly payments. But that’s only because you’re ignoring the principal. You’re putting off the actual debt until a later date, which often causes problems down the road. At some point, the remaining loan balance will be amortized for a shorter period of time, thus increasing the size of the payments.

The Consumer Financial Protection Bureau (CFPB) has lumped interest-only products into its definition of “toxic loan features.” They’ve also excluded these products from their definition of a Qualified Mortgage (QM), a home loan model that is designed to reduce the amount of risk passed on to the borrower.

According to a 2013 press release that explained the new QM rules, CFPB officials stated: “The rule also protects borrowers from risky lending practices such as ‘no doc’ and ‘interest only’ features that contributed to many homeowners ending up in delinquency and foreclosure after the 2008 housing collapse.”

In a separate but related news release, CFPB said their new rules were designed to protect consumers from “irresponsible mortgage lending” and “toxic loan features,” such as an interest-only payment structure.

‘Payment Shock’ Associated with Interest-Only Mortgages

It begs the question: Why has the government worked so hard to shield consumers from these mortgage products? What makes them so “toxic” and “risky”? It has to do with the long-term behavior of the loan.

In the short term, interest-only loans almost seem to good to be true. You take out a mortgage to buy a house, and you basically blow off the principal debt for a while. You only pay the interest that is due each month, reducing the size of your monthly payment. This makes the loan more affordable and allows you to buy more house. But only in the short term.

Over the long term, it makes the loan more of a risk. That’s because you’ll eventually have to tackle the principal, and this could cause the size of your monthly payments to increase significantly.

Unlike a traditional fixed-rate mortgage loan, where the interest rate and monthly payments stay the same, an interest-only home loan can lead to higher monthly payments down the road. When the interest-only period expires, the untouched principal is factored in and there’s a shorter amortization period as well. So the borrower might have to repay the entire outstanding principal in a shorter period of time, resulting in much higher payments.

In some cases, the monthly payments rise beyond the borrower’s ability to repay, resulting in financial hardship or even foreclosure. This is referred to as “payment shock.”

Bottom line: Interest-only home loans aren’t always bad. In some cases, they can actually work out to the borrower’s advantage. The point is that they are much riskier than a traditional fixed-rate mortgage loan, where the borrower chips away at the principal from day one. You really have to know what you’re getting yourself into, when using one of these products. So buyer beware.

10,000 Phoenix, Arizona Homeowners Eligible for HARP Refinancing

Thousands of Phoenix, Arizona homeowners could refinance into a mortgage with a lower interest rate, thereby saving money each month — but many of them don’t even know it. This has prompted the federal government to launch an awareness campaign designed to educate eligible borrowers.

According to a government report released in May, approximately 18,000 Arizona homeowners are currently eligible for the Home Affordable Refinance Program (HARP). Roughly 10,000 of these homeowners are located within the Phoenix metro area, Arizona’s densest population center.

The Home Affordable Refinance Program

The HARP program offers refinancing options to people who wouldn’t otherwise qualify, including those with little or no equity in their homes. In fact, Arizona homeowners who are currently upside down in their homes (meaning mortgage balances exceed their house values) could still qualify for refinancing through HARP.

According to a fact sheet published by the Federal Housing Finance Agency (FHFA), HARP is the only program that allows underwater Arizona homeowners to refinance their home loans.

HARP eligibility
HARP eligibility (enlarge)

To be eligible for this program, Arizona homeowners must be current on their mortgage payments at the time of application. Additionally, the existing mortgage loan (the one being refinanced) must have been sold to Fannie Mae or Freddie Mac on or before May 31, 2009.

Homeowners must not have had any late mortgage payments within the last six months, and no more than one late payment within the last year.

The infographic on the right (courtesy of HARP.gov) explains who might be eligible for mortgage refinancing through HARP. You can click the image to enlarge it.

The program deadline was originally scheduled to expire at the end of this year. It was recently extended through the end of 2016. This gives Arizona homeowners additional time to take advantage of the refinancing benefits offered by HARP.

Thousands of Phoenix, Arizona Homeowners Are Eligible

In 2014, the Federal Housing Finance Agency (FHFA) began a series of outreach events in key cities across America. The agency is mainly focusing on metro areas with the highest numbers of eligible borrowers — places like Atlanta, Detroit and Miami. They recently added Phoenix to the list.

On June 12, FHFA officials held a town hall-style meeting at the Arizona Capitol Museum in Phoenix. The outreach event gave community leaders the tools and information they need to reach out to homeowners across the state.

According to government statistics, around 10,000 homeowners in the Phoenix metro area currently qualify for HARP, and could therefore save money on their monthly payments by refinancing into a lower rate.

The agency’s message boils down to this: Eligible homeowners in Arizona could refinance their existing mortgage loans through HARP and save, on average, more than $2,400 per year. That’s because today’s mortgage rates are lower than those assigned to many home loans across the state of Arizona.

By refinancing into a loan with a lower interest rate, homeowners can reduce their monthly payments and the total amount of interest paid over time. This could add up to significant savings over the repayment term.

But the low mortgage rates we’ve seen in recent weeks might not last long. Last week, the average rate for a 30-year fixed home loan rose to 4.04%, up from 3.87% the week before. Many experts believe they will continue rising between now and the end of this year. Such a trend would close the refinancing “window” for many homeowners.

According to FHFA director Melvin Watt, Arizona homeowners “who are current on their mortgage, but have little equity in their homes … can still join the 3.3 million Americans who have saved money by refinancing through HARP.”

To learn more about this program, or to find out if you are eligible, visit HARP.gov.