2013 saw a lot of changes to the U.S. mortgage industry, from Fannie Mae’s elimination of 97 percent loans and the appointment of a new head of the Federal Housing Finance Agency to nation-wide changes to provide more leniency through FHA programs for troubled borrowers. The Ability-to-Repay Rule and Qualified Mortgage Rule made headlines and worried lenders for most of the year, but the final version of these earth-shattering loan rules should serve only to protect both lenders and borrowers from faulty mortgage products. Although a lot happened this year, 2014 promises to be even more exciting for the real estate and mortgage industries – improvements across the board are inevitable.
Qualifying for mortgages will be different
I’ve seen a lot of predictions both for and against increased numbers of loan qualifications with the new mortgage laws in effect, but frankly, the only thing about mortgage qualifications that will be significantly different in 2014 is that the loans themselves will be different. The first quarter may be a bit slow in loan origination because of widespread fear and negative propaganda, but the changes made possible by the Dodd-Frank act are only going to make the process more transparent and easier for the borrower to understand.
People will get turned down for loans because of the changes to the law, but it will only be the riskiest of borrowers and the most exotic of mortgages that will be affected. I don’t expect the changes to be a huge negative once consumers actually see the legislation in action. Both mortgage professional and homeowners should be thanking their lucky stars for these modifications to existing mortgage laws, after all, they are more than just a band-aid on the mortgage system – these modifications should change the industry for the better by eliminating unscrupulous lenders and unethical loan products completely.
Will rates increase?
There’s every reason that rates SHOULD increase – an uptick in the housing supply, increase in housing value, more buyers entering the market – but according to the Federal Reserve, they won’t. During their December 2013 meeting, it was decided that rates should hold more or less steady until unemployment falls below 6 1/2 percent, provided inflation remains below two percent. The Feds are nervous that the improvements we saw in the overall economy in 2013 will be undone if rates increase dramatically, despite other predictions.
That’s fair, but as the real estate market begins churning again, something has to act as a limiting factor or prices may skyrocket out of control. Consider this: for much of the period between 2001 and 2008, mortgage rates were hovering between six and seven percent – although more lenders were finding ways to get people into houses they’d never be able to normally afford, these higher rates didn’t deter average buyers at all. Even if rates hit the five percent in 2014 that some are worried will be a reality, it will hardly slow down home buyers, especially those who have been trapped in seven percent mortgages on underwater houses for the last five or six years.
Active Buyers and Sellers
Buyers and Sellers will again be active, but with such a dramatic increase in property value across the nation in 2013, the market should be hopping again. Those homeowners who were stuck in underwater mortgages are free to get on with their lives, upsize or downsize or relocate and feel confident that the still-low mortgage rates will keep buyers buying. Some markets experienced huge shortages in housing last year as investors competed with buyers for the slim pickings in areas where all the decent foreclosed properties had already been snatched up – adding formerly underwater houses to the inventory will be a boon to these markets.
Prices are still low and everybody is itching for a change – expect the housing market to be more active through the spring and summer this year. Many financial forecasters expect the residential market to finally return to its pre-2001 cycle of slow winters and busy summers, so if you’re looking for a deal and you don’t have to move at any particular time of the year, hold out for the end of fall to buy. Your choices may be limited, but owners of those vacant homes left on the market will be motivated to get them sold.
The foreclosure explosion will end
Foreclosures are a well-known side effect to mortgage lending, but foreclosures like we saw during the height of the crash are symptoms of a sick system and severely damaged economy. Although some of the very risky loans continue to check out, most of those at-risk borrowers have either been foreclosed upon or are out of danger and have rolled their loans into more stable mortgage products from their 1/1, 2/1, or 5/1 ARMs. September 2013 was the 36th consecutive month with year-over-year decreases in foreclosure numbers – add that to the fact that foreclosure inventory is down about 33 percent since the end of 2012, and this tells me we’re finally seeing the end of the foreclosure nightmare.
With foreclosure inventory down, true values will return to neighborhoods that were artificially depressed by too many empty homes, allowing homeowners who might be at risk of foreclosure to sell out and downsize rather than simply throwing their hands up and walking away. Buyers will be out in force this year, taking advantage of low rates that can’t continue indefinitely. Without the backlog of homes that have saturated the market in previous years and make selling a home a long, drawn-out process, I expect foreclosures to return to the minimal segment of the market where they belong.
Refinances in 2014
The giant increase in value for many homeowners in 2013 means that many are finally going to be able to refinance their mortgages into better rates and terms or to combine first and second mortgages into one loan. Even if rates hit the worrisome five percent some believe we’ll see in 2014 (despite promises to the contrary from the Fed), recently underwater homeowners won’t even flinch when moving into these loans. At current rates, these formerly underwater homeowners who have just now found themselves with an option to refinance will realize significant savings over their seven percent mortgages or the astronomical blended rates they may be juggling with unsavory seconds – but a five percent refinance rate will hardly be a deterrent.
In addition to benefits for well-qualified conventional borrowers, those homeowners who have managed to maintain payments on exotic and troubling loan products may have finally reestablished their credit enough to qualify for one of the more forgiving FHA loans we’ll see in 2014. Moving more homeowners into stable, high quality mortgages is going to benefit the industry in the long-term, virtually eliminating future foreclosures. As long as banks continue to lend, the market will continue to stabilize from all sides.
Bottom line
2013 was exciting and full of drama, and it just got better and more dramatic as the year went on – we won’t see anything so fret-worthy this year, but that’s a good thing. The last thing anybody wants to worry about is the mortgage and real estate industries, and with any luck, they’ll both return to being fully functional in 2014. Realtors and bankers should breathe a sigh of relief when they recognize that the machine is finally gliding along smoothly, without making any more waves in the news. After all, these are industries that should function in the background, without anybody needing to worry about how they’ll affect employment or the world economy. I expect they’ll be a lot quieter by next Thanksgiving.