In an article published today by “Mortgage News Daily” entitled “Fed Exit from MBS Program on Course as Planned” it is quite obvious that the Fed Chairman will exit the buying of Mortgage Backed Securities. That leaves very little doubt that mortgage interest rates are bound to climb. When or how high is the $1.25 trillion question.
The mortgage reports most definitely indicate that the sustainability of a housing recovery is about to enter a very precarious phase. An increase in interest rates will lower the purchasing power of borrowers seeking loans. If a borrower was previously pre-qualified for a loan at 5% with a debt to income ratio (divide your monthly principal, interest, taxes and insurance by gross monthly income) of 31%, an increase of just 0.125% to 0.25% makes that same borrower ineligible for the loan amount they had applied for. That could be especially dangerous since the majority of current purchases are based on FHA programs, and the addition of the mandatory Private Mortgage Insurance could lower the pre-approved loan amount by $50,000-$75,000. Therein lies the domino effect: if the purchasing power of the consumer goes down, then home prices will have to come down respectively so the average income borrower can afford the median priced home for any given geography. (Supply and demand economics 101.) So, regardless of the direction or liquidity of the mortgage market, we must be sentient of Wall Street’s response. The housing market could remain at a veritable standstill based on poor performance of the current assets, as well as lurking fear of strategic defaults and an increase in so-called ghost inventory that the media notoriously spotlights every evening.
My fantasy is that Wall Street accepts that the previous bubble was created due to the financial institutions Sub-Prime and Exotic loans. (Read earlier post “How long does it take to go from “Exotic” assets to “Toxic” assets?”.) Although finger-pointing is in extremely poor taste, it’s due time for Wall Street (and all other earthlings) to swallow the bitter pill of truth: lenders invented subprime, exotic, and otherwise impossible-to-pay-off loans, then looked the other way while ordering their underwriters to approve every borrower that applied. We’ll be paying the price for generations to come.
As a mortgage professional I have always emphasized that your home is way more than an investment. This seems especially true in the current economic climate, as most homeowners are clinging desparately to their homes, and as President Obama is equally anxious to keep them there. Due to the current circumstances I have a feeling that I will be expressing this sentiment in the coming months more than I have in the last 7 years. After all, we are still waiting for the effects of the current hangover from the 2000-2006 housing-boom party to wear off, and as of right now the headache seems to have no intention of going away.
Michael Mekler is an active loan officer. Reach Michael via email at mmekler@fhaexpert.net or call toll-free at 1-888-218-0094
