Mortgage Expectations for 2010

The questions on most home owners minds are; “When will we see an end to the current housing crisis?” “How much longer will lenders remain skeptical?” “What are interest rates going to do?” “Is the housing market going to show signs of loosing up this year?” “Even with the Federal tax credit, is it time to buy a new home?”

We’ve been in our current housing slump for about three years now; at least we’ve been hearing about it in the news for at least that long. Recently there have been small but not insignificant signs that the real estate market is stabilizing. The number of home sales is up, housing inventories are showing signs of decline and prices of homes are beginning to plateau.

Stiffer Standards. There’s no doubting that lenders have tightened their qualification standards over the past two years. And for good reason. Their “too loose” lending standards in part fueled the inflated housing bubble. Then as the bubble popped and banks began realizing huge losses they began tightening lending standards on all borrowers. Now with unemployment at historic highs along with mortgage delinquencies, don’t expect lender’s to relax their guidelines, at least until after 2010.

FICO Scores. That’s your credit score. Up until two years ago all that was needed to get a great interest rate was a FICO score of 640 or better. Now that number has jumped to 720 and higher. I still regularly talk with people who want a “stated income mortgage”. Ain’t no such animal any more. Even with credit scores in the 800’s, you’ll still have to verify every dollar of your income and assets in order to qualify for a home loan. Everyone should monitor their credit regularly to check for errors. The Fair and Accurate Credit Transactions Act entitles consumers to one free credit report from each of the three major credit report bureaus each year. These bureaus are known as, Transunion, Experian and Equifax, and the reports are available at: www.annualcreditreport.com.

Higher Down Payment. Part of the reason we are in our current housing troubles is because lenders allowed borrowers to purchase homes with no down payment. With no “skin in the game” it was much easier for many home owners to walk away from their home mortgage obligations when finances got tight. On this subject also, I still regularly field questions on how people can get into a home with no money down. Minimum down payments are 3.5% with loans backed by the Federal Housing Administration (FHA). And conforming lenders are requiring down payments of up to 20%. If lenders become convinced that home prices are back on a permanent rise, they could lower down payment standards, but I wouldn’t look for this to happen anytime in 2010.

Changes in FHA. Because conventional loan standards have tightened so rapidly, borrowers by the thousands have flocked to FHA loans. Approximately 29% of our nation’s home loans are FHA loans. That’s up from about 3% (that’s right, three-percent) in 2006. And now, even the FHA is beginning to tighten their requirements. Over the past year minimum down payments have increased to 3.5% and the required up front mortgage insurance has increased from 1.5% of the loan amount to 1.75%. A recent announcement states that this percentage will soon increase to 2.25%.

Rising Rates. Just about all leading advisors to the housing industry believe that mortgage interest rates will without doubt trend upward this year. Last year the Federal Reserve announced plans to purchase assist Fannie Mae and Freddie Mac by purchasing some of their debt and mortgage-backed securities. After these actions, home mortgage interest rates fell to historic lows. Keep in mind that this plan by the Fed is scheduled to expire at the end of the first quarter of this year and unless private demand for mortgage-backed securities strengthens, rates will rise. The present expiration date on the Fed’s current action is an extension and should the market require continued Fed involvement to keep rates low and spur on further recovery, another extension could be forthcoming. No promises…just a thought.