The Great Recession and resulting housing crash of 2008 completely restructured the residential lending environment. Prior to that, most loans were not homogenized into either Fannie Mae, Freddie Mac, FHA, or VA. We had a robust and competitive secondary mortgage market (some could argue too much so) allowing private institutions to offer attractive loans to borrowers. The market functioned largely as it should without government intervention. Because of the diversity in terms and qualifying, having a capable, experienced loan broker to help you navigate the market was quite an asset. As the government vacates that space private lenders will start rushing to fill it. Unlike now, loan qualifications and terms will begin to vary greatly by lender. A good mortgage broker, like Qualified Home Loans, will know the marketplace and have better rates, more solutions, and better access to loans than any one lender.
After the crash, lenders were reeling from bad loans, and not able to lend further. This is when the Federal Reserve stepped in with Quantitative Easing. The stated primary goal was “to increase the availability of credit in private markets to help revitalize mortgage lending and support the housing market.” They accomplished this by buying mortgage securities. In doing so rates for Government loans and Conventional loans were artificially pushed lower. While this did buoy the market, it also eliminated the ability for private lenders to compete with government secured loans. The Fed effectively created a monopoly, and it has largely functioned that way for the last 14 years. Conventional loans were never intended to be the primary lending marketplace. However, if you’ve been doing business for less than 15 years you might never have experienced it any other way.
Recently, the FHFA, the agency which oversees FNMA and FHLMC, has begun to purposefully make some loans less attractive. They do this by adding “Loan Level Price Adjustments” for particular characteristics – essentially making loans more expensive or higher rates in certain circumstances. Some such characteristics include Second Home loans and loans in the High Balance counties with loan amounts above $647,000 to as high as $970,000. While Fannie and Freddie still offer the loan, a 10% down second home on a $1.0M purchase price would now have a rate about 1.5% higher than an owner occupied home with a loan under $647,000. Additionally, the Federal Reserve has begun unwinding its balance sheet; meaning that it is reducing the amount it is artificially pushing rates down. Rates on Conventional and Government loans will certainly continue to rise.
While it is shocking to watch rates rise what amounts to be 1.0% in 2 months, it has been refreshing to see how quickly the market is normalizing. Higher rates are more attractive for lenders. With the government no longer crowding them out, institutional lenders are ready to lend. Here are three positives that I expect to see, even with rates higher:
- The return of (some) common sense – I tell clients often “If you want government loans you have to play by government rules.” Lenders who don’t sell their loans to the agencies write their own rules. Lenders should become more agreeable to oddities if they don’t need to sell and securitize loans.
- More access to credit – As competition comes back we can expect lenders to have more ways to approve loans. We are nowhere near the types of hazardous lending that we had in 2006, but I do expect many borrowers who have been sidelined to find new options.
- Less paperwork – The amount of laws surrounding lending means mortgages will always have a bureaucratic tinge to them. However, I believe that the burden placed on clients to have exacting documentation will begin to improve.
Our mission is to find creative solutions and better terms for our clients. This is going to be even more important as the market adjusts. A good mortgage broker, like us, is invaluable. Contact us anytime to discuss your loan options.