Rumblings from the loan industry are that loans could be much harder to get in the future. Restrictions are being imposed upon government related loans, which are big part of current financing. Nationally, Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA) buy or insure approximately 97% of residential mortgages.
FHA loans are important to sales of homes in the $50,000 to $350,000 price range. In the greater Phoenix area in March, approximately 30% of the loans made between $100,000 to $250,000 were FHA loans. Most of the buyers using FHA loans cannot satisfy the requirements for a conventional loan, so without an FHA loan, they would not be able to buy. So any significant change to the terms of FHA loans will reduce the amount of buyers and consequently the total of homes sold.
Despite their importance, the federal government has proposed Fannie Mae and Freddie Mac be phased out. The problem is that these government-sponsored entities have recently incurred huge losses, requiring more than $150 billion in taxpayer help so far. The proposal also calls for a more limited role for the FHA, which insures loans with low down payments.
According to an article in The New York Times (www.nytimes.com – “A Plan to Phase Out Fannie Mae and Freddie Mac”), consumers could see higher borrowing costs as early as this year. Should Fannie and Freddie be phased out in any considerable way, industry experts believe that the 30-year fixed-rate mortgage will likely become harder to find and more expensive. Even if not phased out in the near future, the proposal calls for an increase to a 10% minimum down payment for all Fannie and Freddie loans (up from the current 3.5%).
More negative impact is expected from the Dodd-Frank Wall Street Reform and Consumer Protection Act. Dodd-Frank contains a risk retention rule in Section 941 that requires mortgage originators to retain a certain number of loans in their portfolio when the down payment is less than 20%. In other words, they can’t sell all of the loans they originate, but must “share the risk” by retaining a number of low down payment loans. The National Association of Realtors opposes the 20% requirement, and has warned that the law may “exclude hundreds of thousands of buyers from home ownership.” (Realtors® Oppose High Down Payment Requirement for Qualified Residential Mortgage Exemption; www.realtor.org/press_room/news_releases/2011/03/downpayment).
Dodd Frank also has additional underwriting requirements, specifies certain prohibited loan features, and adds servicing requirements related to loss mitigation. As a result, there could be fewer lenders willing or able to compete in this marketplace, and less available loans from those that remain. More regulation and less competition for your loan will inevitably mean higher, and potentially unaffordable, loan costs.
So there are excellent reasons to not put off a home purchase. You also might not want to delay selling your existing home, because the new laws will result in less eligible buyers for your property. Let us know if you have any lending questions or need help buying or selling your home.
– N. Mark Kramoltz © 2015