The drumbeat from the housing community was loud and clear in 2010: There was never a better time to buy a home.
For most of the past 12 months, home prices tumbled, mortgage rates ticked downward, and the inventory of available traditional and distressed homes was plentiful.
But would-be buyers, even if they were able to overcome job worries, found that the hurdles to obtain a loan were formidable. They remained on the sidelines, and housing analysts opined that if the broader economy improved and unemployment fell, pent-up demand would be unleashed, credit guidelines would ease and home sales would improve.
As the new year begins, that guarded optimism has turned into uncertainty, thanks to a combination of rising mortgage rates, tighter underwriting guidelines and sweeping government regulation. As a result, it's unlikely to get any easier and may, in fact, get much more difficult to buy a home in 2011.
"From a credit standpoint, I tend to think we're toward the bottom of that cycle," said Bob Walters, chief economist for Quicken Loans Inc. "The bad news is, I don't think it's going to get a lot better in 2011. You'll hear a lot more noise pressuring the industry to ease guidelines, and you'll hear from the industry that we don't want a redo of what's happened."
Looming large over the mortgage market are provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that have yet to be finalized. Among them is a requirement that mortgage lenders maintain some "skin" in the game on the mortgages they originate by holding at least 5 percent of the credit risk rather than bundling the loans and selling them off entirely.
The goal is to discourage a repeat of risky past practices, but the legislation makes an exception to the risk-retention standard for what is labeled a "qualified residential mortgage." It is the still-unspecified definition of what's become the industry's latest acronym to digest, QRM, that has lenders in an uproar.
If a very strict definition is applied by regulators, and a final rule isn't expected until the spring, it could become more difficult, and more costly, for homebuyers to secure mortgage financing.
"People have some very different ideas of how to define this," said Michael Fratantoni, vice president of research and economics at the Mortgage Bankers Association. "Some would say if it doesn't have a 30 percent down payment, it's not a QRM. For a first-time homebuyer, that would really be eye-opening. It definitely has the potential to turn the market upside down.
"This could dramatically tighten underwriting much more than what the lenders have already done. It's going to make it even tougher to work through the (housing) overhang."
Wells Fargo has told regulators it supports exempting mortgages with a 30 percent down payment. Community banks worry such a strict definition would curtail home mortgage lending.
"If you have to have 30 percent down, the American dream would become the American fantasy," said Nick Parisi, a senior vice president at Standard Bank and Trust Co. in Hickory Hills, Ill.
Additional regulation on mortgage bankers will mean a thinning of their ranks, weeding out the unscrupulous players. But it also will lessen consumers' ability to comparison-shop widely for the best home mortgage product.
"That means less competition, and generally, less competition is not good for consumer," said Quicken's Walters.
"It might mean that your interest rate over time is a little higher. A less competitive industry has to work less hard."
Tighter lending requirements already have steered 40 percent of buyers to secure Federal Housing Administration-backed loans, which carry their own set of fees. FHA-backed loans are exempt from the Dodd-Frank provision.
Another new wrinkle to the mortgage market is that beginning in March, Freddie Mac will raise fees for mortgages sold to Freddie that carry higher loan-to-value ratios. The additional fees will vary depending on the borrower's credit score and the loan-to-value ratio, but in some cases the upfront fees will increase by as much as 0.75 percent of a loan's balance. If a lender passes along a 0.25 percent fee to the borrower, it could add about $10 to the monthly payment on a $200,000 mortgage, according to Freddie Mac.
Fannie Mae in late December announced its own series of considerable loan-level price adjustments, effective April 1, for mortgages with greater than a 60 percent loan-to-value that will apply even to consumers with credit scores above 700.
Loan fees aren't the only item going up: So is the cost of money itself. The average rate on 30-year, fixed-rate mortgages has been below 5 percent since early May, but economists predict those days are nearing an end.
General guidance on mortgage rates for a 30-year, fixed-rate mortgage call for them to stay under 6 percent for the year and likely falling somewhere between 4.75 percent and 5.5 percent. Still, that could be a jolt to buyers on the sidelines who watched rates drop to as low as 4.2 percent in the fall.
Source: McClatchy-Tribune Information Services.