Mortgage interest rates bounced around a bit this past month, largely due to investor concerns about international troubles. Before the Japanese tsunami and the uprisings in the Middle East, rates were starting to trend upward. A recent article from Foxbusiness.com suggests as the financial nerves start to settle down, that trend is likely to continue.
There have been a lot of changes in regulation lately, which is going to have a real impact on the mortgage market. There is no way of predicting just how large the impact will be of each change, but the idea is they will all contribute to generally higher interest rates.
First, a new law requires lenders to retain 5 percent on their books of every loan made, so they will have some “skin in the game.” The exception is if a loan is a “qualified residential mortgage’ (QRM). This has recently been defined as a loan with a 20 percent down payment, strict income and asset documentation and low debt-to-income ratios for the borrowers. These loans will be “safe enough” for the government to buy or back completely. Certainly not all borrowers will be able to meet the requirements, which could lead to a rise in interest rates as lenders want greater compensation for the increased risk they take on with such loans.
Second, another new law prohibits loan officers from having their pay tied to the interest rate of the loan. In order to compensate for this potential loss of income,
“you’re going to see two options,” says Reggie Green, a loan officer at Firstline Mortgage/Crossline Capital in Chandler, Ariz. according to Foxbusiness. “Pay all the loan officer’s compensation upfront or take a higher rate and the loan officer gets totally paid through the rate.”
Finally, government mortgage finance companies Fannie Mae and Freddie Mac have revised their risk-based pricing structures imposing higher interest rates on all borrowers except those with great credit, large down payments or substantial equity in their homes. This should make Freddie and Fannie less attractive options and hopefully bring some private capital back to the table, but it will certainly raise rates for many, at least in the short-term.
Even if interest rates do continue to rise, they are still fairly low, keeping loans very affordable for some time to come.