White House's Unwritten Mortgage Memo: Act Now
The Obama Administration's newly unveiled housing finance plan may have clouded the picture for policymakers, lenders and bond buyers, but it made the future for borrowers starkly clear: It's going to cost more to get a home loan.
Mortgages have already become more expensive in recent weeks, as Fannie Mae and Freddie Mac began adding risk fees to almost all of the loans they sponsor. Average rates on 30-year fixed rate-loans have already moved from 4.4% in November to 5.2% now, according to Mortgage Marvel, a loan comparison web site.
In a much-awaited report released Friday, the administration proposed winding down the role of the two government-sponsored mortgage repackagers and left open for prolonged Washington debate what would remain in their place.
It also called for higher down payments, a lower cap on the amount of mortgage that could be guaranteed and another increase in the fees Freddie and Fannie charge in the short term. All of those measures are likely to steepen the cost of securing a home mortgage.
"Rates are probably on the rise, due to the increases in fees," said Keith Gumbinger of HSH Associates, a mortgage research firm. "But will the borrowing process get better, faster or easier as a result of reforms? No."If you can effect a transaction now, it's probably not a bad idea," Gumbinger said.
Rates are also likely to rise as the economy improves and the rock-bottom interest rates that have been protected by the Federal Reserve Board edge up.
The rising credit market rates will have a bigger effect on mortgages than the winding down of Freddie and Fannie, said Scott Happ, president of Mortgagebot, a company that builds and runs mortgage web sites.
The cost of loans that are not handled by the guaranteed mortgages and those that aren't guaranteed is roughly 0.6 percentage points now, he said.
RISING RATES, FEWER OPTIONS
It's not just low rates, but also mortgage products that could disappear as reforms worked their way through the system, some analysts believe. The end of U.S. loan program -- one of the options outlined in the White House report -- "almost certainly will lead to fewer long term fixed rate mortgages (and) higher prices," the Consumer Federation of America said in a statement released after the report.
Home loans in Europe and Canada are dominated by variable-rate loans, for example, and it's conceivable that the long-term fixed-rate loan could become much less common -- or even extinct -- in the U.S., if lenders don't want to offer them without guarantees.
A more likely scenario is that fixed-rate loans would remain, but become relatively more costly, said Sam Garcia of Mortgage Daily, a trade publication.
Homeowners who haven't already nailed down long-term low-rate loans may want to jump at the chance with a refinance now, even if it means bringing cash to the table to replenish equity that may have disappeared in the housing market's price decline.
SHORTER DURATIONS, MORE SAVINGS
Some advisers say the best way to save money on a mortgage could be to look at shorter-term financing, instead of focusing on rising rates and fees that they cannot control. The pullback of Federal subsidies might encourage more prudent borrowing.
"The best way to build equity is with a 15-year loan. Within the first five years of the loan, "the additional equity built (compared to a 30-year loan) is really significant," he said.
Short-term borrowers get a rate break, too, since rates on 15-year fixed-rate loans are running almost 0.5 percentage points below the rates on 30-year mortgages.
The biggest impact may be on pricey homes. The ceiling on loans guaranteed by Fannie and Freddie, currently $729,750, is scheduled to drop to $625,500 on October 1. The White House is supports that size reduction.
For buyers, it could lead to a jump in offerings on the market as sellers try to get homes sold before the cap takes effect.