5 year-end mortgage trends
Mortgage rates will remain low, getting a home loan will continue to take a long time and refinancers will be tempted by zero-closing cost mortgages.
Those are some of the trends mortgage industry insiders may see in the last three months of the year. Bankrate asked a half-dozen mortgage professionals to weigh in on where housing is headed as a difficult 2010 comes to a close.
The following are their predictions.
Mortgage rates are still low
Mortgage rates have dipped to modern record lows this fall. In the spring, economists had been warning that rates would be rising by now.
At the end of March, the Federal Reserve wrapped up an initiative intended to drive down mortgage rates by buying $1.25 trillion worth of mortgage-backed securities. The consensus view throughout the mortgage industry was that rates would rise steadily through the end of this year.
Instead, mortgage rates fell steadily through the summer and into the fall. Now, economists speculate the Fed might start buying Treasury securities to drive long-term interest rates even lower. The speculation seems to have put a cap on mortgage rates.
“I see rates low and I see them continuing low for a pretty long period,” says Paul Anastos, president of Mortgage Master, a lender based in Walpole, Mass.
A.W. Pickel, CEO of LeaderOne Financial, a mortgage bank based in Overland Park, Kan., says he doesn’t see how rates could go much lower.
“The mortgage interest rate should be inflation plus cost of funds. That should put us in the 4s, which is where it is,” he says.
Foreclosures shift into reverse
Some of the country’s biggest mortgage servicers have suspended foreclosure actions in states where courts oversee foreclosures. The reason: Flawed documents were filed in court.
Bank of America, Ally Financial, PNC Financial Services Group and JPMorgan Chase all have halted foreclosure cases while they check the truthfulness of court documents filed on the servicers’ behalf.
At issue are legal documents that were signed by people who swore that they had personal knowledge that the foreclosures were justified. Some signers have testified that they affixed their signatures assembly line-style, without reading the underlying legal documents.
“I don’t know how they got those people to sign that,” says Matt Hackett, underwriting manager for Equity Now, a direct mortgage lender in New York City. He says the issue would never have come to light if people hadn’t signed foreclosure papers where “the numbers are wrong.”
As the scandal unfolded, observers wondered about the long-term effects. Will it result in an enormous overhang of unsellable houses? Will legal paralysis allow borrowers to remain in their foreclosed homes indefinitely?
“People are sitting there,” says Michael Moskowitz, president of Equity Now. “People are not paying and sitting and paying and sitting. We’re going to have foreclosure overhang.”
Processing times are long
With rates at record lows, borrower frustration is at record highs. It seemingly takes forever to get a home loan, especially a refinance.
“Underwriting turn times are absolutely awful across the board right now,” says Dan Green, loan officer for Waterstone Mortgage in Cincinnati. “Many lenders are recommending 60-day (rate) locks right now, just because of volume.”
“It’s a tax, really. Everybody’s interest rates are a little bit higher, and fees are a little bit higher, because of the inability for appraisers to get to homes quickly, for underwriters to get through files quickly. Everybody’s just overworked right now.”
The process is particularly brutal for homeowners who have home equity loans or home equity lines of credit. Before they can refinance, these borrowers have to persuade their equity lenders to resubordinate, or agree to keep the loan in second-banana status.
“People need to realize, if they have home equity lines of credit, that the subordination can take up to 30 days,” says Dick Lepre, senior loan consultant for Residential Pacific Mortgage in San Francisco.
Because of paperwork backups and subordinations, Mortgage Master’s Anastos says his company recommends locking for 75 days, “which means we’re trying to close those loans in 65 days.”
Zero-cost refinances look tempting
Mortgage rates have fallen so much since last year that it makes sense for a lot of homeowners to apply for zero-cost refinances.
The term “zero-cost refi” isn’t completely accurate, because a refinance always carries fees. But with a zero-cost refi, the borrower accepts a higher rate in exchange for not having to pay fees out of pocket.
The final rate might be a quarter of a percentage point (or more) than the rate given to a borrower who pays the fees out of pocket.
How do you know you got a good deal on a zero-cost refi? Comparison shop, Green says.
“Make sure, when you do your comparison, that you specifically ask for a no-closing-cost mortgage,” Green says. “It’s the only way to compare rates, if you’re comparing the same fees, too.”
When a broker does it, this type of loan employs a controversial practice called a yield spread premium. (When a bank does it, it’s called a servicing release premium.) The loan officer gets a commission for persuading the borrower to take a higher-rate loan.
Yield spread premiums are restricted under the Dodd-Frank financial reform law, but no-cost mortgages are likely to remain legal.
Low jumbos attract few takers
In the last few months, rates on jumbo mortgages (home loans for more than $729,750) have been falling faster than rates on other mortgages. Now, rates on jumbos are downright attractive.
That’s quite a turnaround. Jumbo rates skyrocketed in the summer of 2007 amid the mortgage meltdown and remained high for a long time. A year ago, the benchmark jumbo was 1.2 percentage points higher than the conforming 30-year fixed. Lately, it’s been less than three-quarters of a percentage point higher.
Rates are low, but relatively few people are refinancing their jumbo loans because underwriting is strict, Anastos says.
“Some of the refinancing on a jumbo loan takes so much longer than on a conforming loan,” he says.
Jumbos are not guaranteed by Fannie Mae or Freddie Mac. Consequently, jumbo rates are higher because they pose more risk to the lender.