Derrick Bulaich locked in a home-loan rate of 4.6 percent last week, prompted by a surge in borrowing costs as investors speculated the Federal Reserve would pull back from bond buying. Bulaich, who said he wishes he’d acted sooner, still plans to complete the purchase today of the four-bedroom Sacramento home because values in the city remain 42 percent below their 2005 peak despite recent gains.
“I was hoping rates would come back down and then I realized they weren’t going to,” said Bulaich, 24, who works for a bank. “Homes are still affordable, so that takes some of the sting” out of it.
Fed Chairman Ben S. Bernanke said this week that the central bank may scale back its unprecedented stimulus program this year as the economy and housing improve, ending the era of record-low mortgage rates and marking the first test for the year-old housing recovery. While rising costs make purchasing real estate more expensive, the upshot for homebuyers is that banks will need to respond by improving credit availability that has been holding back the market for the past five years.
“If people believe house prices are going up, credit availability will evolve,” said Paul Willen, a senior economist at the Federal Reserve Bank of Boston. “There is too much money to be made lending to homebuyers. Lenders will find a way.”
Mortgage rates in the U.S., after increasing at the fastest pace in a decade, have jumped after Bernanke confirmed on June 19 that the central bank is ready to slow its purchases amid signs of an improving economy and housing market. Wells Fargo & Co. (WFC), the largest mortgage lender, increased the rate on a 30-year mortgage to 4.5 percent yesterday from 4.13 percent on June 18 and 3.88 percent last month.
The prospects of higher rates and the ending of the bond-buying program have roiled stock markets around the world. U.S. homebuilders fell 0.7 percent today at 4:34 p.m. in New York after dropping 7.1 percent yesterday. PulteGroup Inc. (PHM), the largest homebuilder by market value, decreased 0.3 percent to $18.81 after plunging 9.1 percent yesterday.
Higher borrowing costs so far haven’t held back the housing market, which is surging after the worst downturn since the 1930s. Sales (ETSLTOTL) of previously owned U.S. homes climbed more than forecast in May to the highest level since November 2009 and the median price jumped 15.4 percent from a year earlier to the highest in almost five years, the National Association of Realtors said yesterday.
Home prices are still 28 percent below the 2006 peak, and mortgage rates, still near historic lows, are down from 6.8 percent in 2006 and more than 10 percent in 1990. That’s spurring buyers like Bulaich, who is closing today on the $158,000, 1,300-square-foot (121-square-meter) stucco home.
“All these people are flooding out there to buy a house right when the rates are going up, but it’s still pretty affordable,” Bulaich said.
The rebound has helped rebuild household wealth, which jumped to a record in the first quarter, after falling in 2007 when the housing crash plunged the U.S. into the longest recession since the 1930s.
The credit pendulum swung from irresponsibly loose during the middle of the last decade when lenders granted mortgages even to people with no income, no job or assets -- known as Ninja loans -- to extremely tight after the 2007-2009 recession. Even as Bernanke resorted to unprecedented measures, including holding borrowing costs near zero, the central banker said at the start of last year that housing was being held back partly by tight credit.
It’s now tilted closer to the averages seen in the late 1990s based on a combination of factors, such as loan-to-value, debt-to-income and credit scores, CoreLogic Inc. Chief Economist Mark Fleming said.
While credit may be opening, the process of getting a new or refinanced mortgage remains frustrating, because lenders are making more meticulous demands for evidence of borrowers’ finances, Fleming said.
That didn’t matter much to lenders last year as reduced competition and low mortgage rates allowed them to charge high prices for selling home loans into mortgage pools. Loan originations totaled $1.75 trillion in 2012 and the four biggest bank lenders reported more than $24 billion of revenue from originations as homeowners replaced their loans to cut costs.
Rising rates have already quashed refinancing, which has fallen to 68.7 percent of the market from 76 percent at the start of May, according to the Mortgage Bankers Association.
Further increases will flatten the wave of refinancing and force lenders to compete more aggressively for homebuyers, said Doug Duncan, chief economist at Washington-based Fannie Mae. In addition to easing underwriting standards, banks will also have to consider layoffs to cut costs and lowering margins to make up for lost refinancing revenue, Duncan said.
Lenders will see their refinance business fall to 45 percent of originations in the second half of this year and 35 percent next year, according to a Mortgage Bankers Association forecast.
“Companies, if they want to stay in business, they’re going to compete,” Duncan said.
Bank of America Corp. (BAC), which has hired 1,000 loan officers during the past year, plans to continue adding staff to aggressively go after home-purchase business as refinances slow, said spokesman Terry Francisco.
The company is doing more lower-down-payment originations because mortgage insurers are getting more comfortable with them as home prices rise, he said. The company is considering lowering its down-payment requirement for jumbo loans to 15 percent from 20 percent, he said.
“We would never change credit conditions due to market pressures,” he said. “Any changes would be based on economic factors.”
Vickee Adams, a Wells Fargo spokeswoman, said there are “lots of opportunities for refinancing and purchasing activity. The most important thing for prospective borrowers is to work with an experienced mortgage professional to identify their best loan option.”
Lenders raised standards after the housing crash compelled the government to rescue Fannie Mae and Freddie Mac and bondholders forced them to buy back faulty loans. In all, poorly underwritten mortgages have cost five banks -- Wells Fargo, Bank of America, JPMorgan Chase, Citigroup Inc. (C) and Ally Financial Inc. (ALLY) -- at least $94 billion in the six years ending 2012.
Mortgage originators remain concerned that the government-supported mortgage guarantors will force them to repurchase loans if they make underwriting mistakes.
“What we’ve seen in the last three or four years is that lenders were so skittish about doing something wrong,” said Guy Cecala, publisher of Inside Mortgage Finance, a trade journal. “They said let’s do the safest loans on earth. What’s prodding them away from that is being more comfortable with the quality of loans and also the fact of life that unless they start being more flexible, volumes will go down.”
While underwriting standards are far more restrictive than they were during the real estate boom, lenders are becoming more flexible, said Cecala. They’re dialing back documentation requirements for jumbo loans for pricier properties and allowing lower down payments even for conventional mortgages, he said.
Zillow Mortgage Marketplace, an online comparison shopping site for home loans, saw a 570 percent increase in the number of lenders offering conforming loan quotes with down payments of 3.5 percent to 5 percent in March 2013 compared with two years earlier, said Erin Lantz, director of the site, which received 15 million loan requests during the past 12 months.
“More lenders are willing to lend to borrowers with lower down payments -- it’s an indication that they are able to extend credit more broadly,” Lantz said.
More buyers are also getting low down-payment loans backed by government sponsored mortgage enterprises, Fannie Mae and Freddie Mac, said Credit Suisse Group AG mortgage strategists Mahesh Swaminathan and Vikram Rao.
In May, 20 percent of purchase mortgages in the U.S. were Fannie Mae or Freddie Mac loans requiring private mortgage insurance, up from 9 percent two years earlier. The share of Federal Housing Administration and Veterans Administration mortgages remained at about 40 percent in May from May 2011.
Rising home prices have made mortgage insurers more willing to take on loans with lower down payments.
“Otherwise creditworthy borrowers who wanted to buy homes with lower down payments were largely left out of the market a couple of years ago,” Rao said. “Now some of those people are able to come into the market and buy. The market has opened for them.”
Even amid rising interest rates, more people are refinancing their mortgages because rising prices have helped them gain equity, which makes loan approval easier, according to Jeff Lazerson, president of Mortgage Grader Inc., an independent mortgage broker in Laguna Niguel, California.
In another sign of loosening credit, Lazerson began this year offering piggy-back loans to allow borrowers to refinance as much as 90 percent of the value of their property. A 10 percent piggy-back mortgage plus an 80 percent prime mortgage on a $700,000 home can cost about $3,100 a month at today’s rates, compared with about $3,575 for a 90 percent loan with mortgage insurance on the same property, Lazerson said.
“That $475 a month adds up over time,” he said in a telephone interview. “And I don’t perceive it as being high risk.”
Piggy-back loans became common during the credit bubble before the housing crash, when lenders offered first loans worth 80 percent of a home along with 20 percent second mortgages, enabling purchases with no down payment, even for borrowers with low credit scores. Those types of loans became rarer when home prices plunged and lenders in the second position faced mounting losses.
When it comes to purchases, buyers offering low down payments still are locked out of the market in California, the only state where Lazerson is licensed to offer loans, because appraisals haven’t been keeping pace with price increases and other bidders can offer more reliable financing, he said.
“Listing agents aren’t willing to accept buyers with low down payments,” Lazerson said. “It’s a sellers’ market and every house has five or 10 offers if it’s priced right.”
For those who can find a property, rates are low enough that it won’t “crimp people’s ability to buy,” said Credit Suisse’s Swaminathan.
“It’s much more dependent on jobs growth, sentiment and outlook on where things are going and as long as that remains solid then even a 5 percent mortgage rate is not the end of the world,” he said.
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