Ask Adam: Changes to the Mortgage Market

This regularly-scheduled Q&A column is sponsored by Adam Gallegos of Arlington-based real estate firm Arbour Realty, voted one of Arlington Magazine’s Best Realtors of 2013 & 2014. Please submit follow-up questions in the via email.

What changes are on the horizon for mortgages in 2014?

I posed your question to an expert in the mortgage industry, Paul Nagel at First Home Mortgage. He had the following to say:

Every year, the mortgage market changes and evolves, and 2014 will be no different, and may even see more changes than might occur in a typical year. There are three major types of changes we expect to see next year:

1) Interest rates are expected to be higher for several reasons:

(a) Federal Subsidy Program: The Fed has been actively keeping rates low through a kind of subsidy from the government, and this subsidy is expected to be reduced or eliminated. As this subsidy has been estimated to have lowered rates by 0.25-1.0 percent in rate, one would expect rates to increase by that amount once the subsidy is eliminated. No one knows exactly when or if this will occur, but it is very likely to occur.

Takeaway: When watching/reading the daily news, look for signs that the economy is improving, especially with regard to employment. As employment (specifically) and the economy (in general) improve, the likelihood that this subsidy will be eliminated increases, which would cause rates to go higher.

(b) Overall economic conditions are expected to get a bit better over 2014. Rates tend to increase when the economy improves and rates tend to decrease when the economy gets worse.

(c) Fannie Mae & Freddie Mac announced that, in the first quarter, they will increase the cost of mortgages for most credit scores and down payments less than 20 percent. A week later (this past Monday), they then reversed course and announced that the implementation of this rate increase will be put on hold and that the increase is under further review. As of the writing of this text, it is unclear what will occur. It is important to note that, should this be implemented, it does have the potential to increase rates on many borrowers an additional 0.125 percent and 0.5 percent.

Takeaway:  The best strategy for a buyer is to keep in touch with their realtor and lender, as well as keep abreast of the daily financial news. While no one knows what will happen, the more information you have, the less likely you will be surprised if this change does become a reality. In addition, it’s recommended to be more educated how to optimize one’s credit score, as should this increase be implemented, the higher the score, the better your rate will be.

2) Dodd-Frank Changes:  As a result of the mortgage market crash in 2008, the Dodd-Frank financial reforms were passed and many of these related to mortgages will become enacted in 2014. It eliminated programs where principal could rise, many (if not all) interest-only loans and loans of a greater term than 30 years. These programs had effectively gone away since 2008 and this is not expected to impact the housing market much, if at all.

It is expected that loans will be evaluated with a bit of a higher standard than years past, so if a buyer may have barely enough income to qualify for a home, perhaps they may not qualify in 2014. That said, many buyers purchase homes well under what could be approved, so this impact is not expected to be widely felt.

The wild card with the new regulations is whether the government will implement something that just cripples the lending industry, either through a new regulation or an unintended unforeseen consequence of something being currently implemented. While I agree that such a scenario is a possibility, please know that the housing market is such a large component of the economy, that Congress cannot and would not allow something catastrophic to continue for any extended period.

Takeaway: Much of the new regulations will create changes, but these changes are not expected to have a huge adverse impact. Should such a scenario occur, it is extremely likely that such an occurrence would be short lived.

3) New Products: Prior to 2008, there were upwards of 100 loan options available to each borrower. After the market crash, there were essentially four remaining options – FHA for low down payments, V.A. for veterans, Conventional loans for amounts less than $625,500, and Jumbo loans for amounts higher than $625K.

In the past year or two, more Jumbo options have been available, even at loan amounts below $625K and some second trust have been introduced to allow buyers with lower down payment to avoid mortgage insurance. While these options have been few and not the most attractive alternative, we are expecting to see these products become more attractive and additional products to be added, increasing buyer options. We don’t know whether this will occur on a grand scale in 2014 or farther into the future, we do expect this to occur in the not too distant future.

Guest contributor:

Paul D. Nagel
Vice President, Residential Lending
First Home Mortgage Corporation
NMLS#: 659474
12150 Monument Drive, Suite 500, Fairfax, VA  22033
Direct Line:  703.201.5147
Email: [email protected]
Web:  www.pauldnagel.com