In less than a month, Fannie Mae is implementing some tough new mortgage guidelines, including a larger minimum down payment requirement.
Come November 16th, the maximum LTV ratio for loans delivered to Fannie Mae will fall from 97% to 95%.
In other words, you’ll need to come up with a 5% down payment if you want to go the conventional route, even for HomePath financing.
The rule change means the “Conventional 97 loan” is essentially a thing of the past, and borrowers with little set aside will probably need to look elsewhere for low-down payment financing.
For the record, Freddie Mac did away with their “Home Possible® 97 Mortgages” back in 2011 after stating that the performance of such loans was “unacceptable.”
Don’t even ask about Freddie Mac’s “Home Possible 100 Mortgage,” which was touted during the housing boom, flanked by this cool little graphic that kind of summed up the default underwriting decision.
The word “yes” was common prior to the mortgage crisis.
Will Fannie Mae Borrowers Flock to the FHA?
Anyway, when the change goes into effect, those seeking to put the least amount of money down will probably have to turn to the FHA, which should send the underserved back to the agency originally created to serve the underserved.
The FHA only requires a 3.5% down payment, though borrowers do need minimum credit scores of 580 to qualify (10% down if score below 580).
However, FHA loans have become a lot less attractive than they used to be, thanks to numerous recent changes to the associated mortgage insurance premiums.
For example, the FHA raised the upfront mortgage insurance premium to 1.75% of the loan amount while also boosting annual insurance premiums.
If that wasn’t enough, the agency also requires mortgage insurance to stay in force for the life of the loan in many cases, instead of being dropped once the homeowner pays down the loan to 78% LTV.
So it’s not a cheap alternative by any stretch, and strengthens the argument to come in with more cash if at all possible.
[See: FHA vs. Conventional for details on that.]
Of course, there’s always the VA and the USDA loan program, both of which do not require any down payment. But these programs don’t work for all borrowers, only military families and those in rural areas, respectively.
Why Is Fannie Increasing the Minimum Down Payment Now?
Well, apparently they didn’t really want to offer the low-down payment loans to begin with.
Over the past several years, FHA loans became super attractive thanks to their low-down payment requirement and relatively low mortgage insurance premiums.
At the same time, private mortgage insurers had overlays in place that limited who could get financing with just 3% down.
So there probably weren’t too many conventional home loans with 3% down being originated over the past several years.
However, as previously noted, FHA loans aren’t very attractive these days, and private MI companies have since loosened underwriting guidelines.
All that said, former would-be FHA borrowers seemed to have made an exodus to Fannie’s 3%-down loan program.
This is evidenced by the fact that private mortgage insurers saw policies on 3%-down home loans nearly double over the past year.
In other words, it appears as if Fannie took note of this and decided to nip it in the bud before it became a “thing” in the mortgage world.
Aside from the down payment increase, Fannie is also banning interest-only loans and loans with terms greater than 30 years, which coincides with the Qualified Mortgage rule set to go live early next year.
Note: Fannie indicated that loans submitted via Housing Finance Agencies are subject to separate LTV ratios, so 3% down could still be a possibility for certain homeowners. Stay tuned.
Update: And just like that, you only need 3% down to get a mortgage again. That didn’t last long…
Banks serve two main purposes. They provide loans to consumers who need a helping hand, and they provide a place to store cash, also known as a deposit.
The two actions aren’t independent of each other, and are actually very much interconnected.
For example, banks lend money out a certain rate and pay customers a certain return if they keep their money at the bank.
The two rates rely on one another to ensure the bank makes money. The short version of the story is that the bank must pay depositors less than what it charges to lend.
That’s why we see mortgage rates on the 30-year fixed around 4%, and savings accounts paying closer to 1% APY. This spread allows banks to make money and continue lending to consumers.
Low Mortgage Rates Are Bad News for Those Who Don’t Have a Mortgage
While everyone has been banging on about low mortgage rates for years now, many fail to mention that savers (and really anyone without a mortgage) are getting the short end of the stick.
As noted, when interest rates on loans move lower, as they have over the past several years, savings rates must drop as well, seeing that the two tend to move in tandem.
Before the financial crisis, it was actually quite common to see savings rates in the 3-4% APY range, which certainly wasn’t bad from a saver’s point of view.
Banks were offering great savings rates because they needed more money in the coffers to lend out to consumers, who were especially hungry for loans.
Remember, banks were going haywire making new loans during the housing boom, so they also had to attract depositors to ensure they had collateral.
Interestingly, the gap between savings and mortgage rates wasn’t all that wide back then, with the 30-year fixed ranging between 5-6%, compared to around 4% today.
Meanwhile, savings accounts were commonly in the 3% or higher range if you went with a bank that offered a more aggressive return.
Today, the gap between one-month CD rates (0.06%) and the 30-year fixed (4.5%ish) is the highest it has been since mid-2011, according to MoneyRates.com, which releases the so-called “Consumer’s Lost Interest Percentage (CLIP) Index.”
The company noted that the gap widened to 4.43% in September, up three basis points from August. It has increased by a staggering 1.15% so far this year thanks to rising mortgage rates and savings rates that “haven’t budged.”
The average gap between CD rates and 30-year fixed mortgage rates since 1971 has been 2.83%, meaning today’s gap is 1.6% above the norm.
So What Do You Do with Your Money?
With the gap so wide, it’s clear that those with the bulk of their assets in low-paying savings accounts are losing out.
At the same time, mortgage rates are at near-record lows, so one has to scratch their head a little.
Do you pay down the mortgage early, which has an ultra-low rate that will probably never be lower? Or do you throw your money into a savings account that is paying next to nothing?
Or, do you say to heck with savings accounts and try your luck in the stock market, which also happens to be sky-high currently?
It’s certainly not an easy decision, and it’s clearly not good news for renters and those who have already paid off their mortgages.
But perhaps the best option is to tackle other high-APR debt, such as credit cards, which tend to have interest rates in the teens and higher.
If the only debt you have is mortgage debt, there are plenty of ways to pay down your mortgage a little quicker, including going with a shorter-term mortgage, such as the 15-year fixed. That will reduce the gap as well, seeing that rates on 15-year loans are lower than those on 30-year mortgages.
But you might regret locking that money up a few years down the line if both savings and mortgage rates go up, especially if inflation rears its ugly head.
As I’ve mentioned numerous times before, there were a number of problems that led up to the current mortgage crisis.
One was the explosion of subprime lending, which saw production spike during the end of the housing boom between 2005 and 2007, before ultimately coming to a standstill.
As illustrated by the graph above (data courtesy National Mortgage News), you can see that subprime lending volume was relatively modest in 1995 and 2000, but surged in 2005 and 2006, before easing in 2007 and completely dropping off this year.
Subprime originations, defined as A- to D loans, including some other “non-prime” mortgages, totaled just $35 billion, or 5.48 percent of the $639 billion in total residential mortgage production in 1995.
Five years later, subprime loan origination volume grew to $134 billion, but still only accounted for 12.56 percent of the $1.1 trillion in total residential production.
In 2005, subprime lending shot up to $795 billion, representing 24.13 percent of the $3.3 trillion in total residential home loan lending volume.
A year later, production fell to $674 billion, but still accounted for more than 20 percent of the $3.3 trillion in originations.
However, conditions changed quite abruptly in 2007, as subprime lending volume totaled just $182 billion and accounted for only 6.95 percent of residential production.
It’s forecasted that 2008 subprime originations will total just $10 billion, making up a mere 0.58 percent of the estimated $1.7 trillion in total residential lending volume.
Plenty of strange things happened after the latest housing boom and subsequent bust, but this is perhaps one of the most interesting byproducts.
An insurance company named AmTrust Financial has come up with an innovative insurance policy known as “Underwater Mortgage Protection,” or UMP for short.
Put simply, it protects you financially if your home goes down in value and you need to sell at a loss.
Over the past several years, scores of homeowners have been forced to sell short or simply walk way because their mortgage balance exceeded the depleted value of their home.
A UMP policy is designed to cover the shortfall a homeowner in this position might encounter when selling after a significant home price decline.
How Underwater Mortgage Protection Works
If you need to sell your home
But your outstanding loan balance exceeds the sales price
Underwater Mortgage Protection can cover some or all of the shortfall
In exchange for a paid premium
Assuming you need to sell your home when underwater on the mortgage, you’ll complete a claim form.
AmTrust will then assist in the sale of your home by “guiding the listing and the closing of the home sale to maximize the price and minimize the marketing time in a down market.”
This entails having an “asset management specialist” obtain a market value for your home and determine a listing price with a real estate agent.
For the record, they also use an AVM to obtain the appraised value of your property when you originally take out a policy.
If for some reason your home doesn’t sell within a short period of time, the company could offload the property via auction as well.
Once the property is sold, a check will be written on your behalf that covers the full payoff of your home loan, along with customary seller closing costs and transfer taxes.
At that point you can walk away as if the sale were standard, without any damage to your credit score that might otherwise be assessed when going the short sale or foreclosure route.
AmTrust provides a few common scenarios that would lead a homeowner to sell when underwater, including divorce, relocation, and unemployment. The UMP policy would mitigate any losses related to selling under these circumstances.
Just like other forms of insurance, the premium cost is based on the corresponding risk. For homeowners with higher LTV ratios and larger loan amounts, the premium will likely be higher.
It’s unclear what all the underwriting parameters are, but it’s possible that it could be more expensive in areas where home price fluctuation is more common.
UMP Requirements:
– The property must be your primary residence (and owner-occupied for the entire policy term) – It must be owned by the insured as of the policy date – You must hold a fully-amortized mortgage from an institutional lender – You cannot be underwater on the mortgage – You can only have one policy in force – It must be in an eligible state
From that list, I’d say Arizona homeowners would benefit most, given the tremendous price swings that have occurred there over the past several decades.
Coverage is offered for both fixed-rate mortgages and ARMs, but isn’t available for interest-only mortgages, reverse mortgages, HELOCs, or loans with a negative amortization feature.
The policy term is 12 months and guaranteed to be renewable for an unlimited number of additional periods until you pay off your mortgage, refinance, modify your loan, or release the mortgage in some other way.
Does Underwater Mortgage Insurance Make Any Sense?
Insurance never seems like a good deal until you actually need to use it
The same principle probably applies to UMP
The difference is it’s entirely optional coverage unlike say auto insurance
And buying a home is also a choice, so if you think there’s a good chance you’ll be underwater you may question the home purchase to begin with
Insurance always seems like a raw deal because it only protects you if something goes terribly wrong.
The same is kind of true with UMP. If your home doesn’t lose a lot of value, and you don’t need to sell when it does, you’ll simply pay premiums for nothing more than peace of mind.
And this type of coverage probably only makes sense for those who put very little down on their homes, seeing that these will be the first people to slip into an underwater position.
Unfortunately, these same individuals tend not to have much left over to pay for extraneous costs like underwater mortgage insurance.
If a homeowner suspects they overpaid for a home or bought near the top, and doesn’t want to be trapped if home prices plummet, paying a small premium for price protection could make sense.
But then you have to question why you’re buying a home to begin with. If you can’t absorb a price decline, or thinks prices are inflated, maybe you shouldn’t go through with the purchase.
These policies may also be limited in how much they pay out in the event of a claim. And we all know home prices fell a lot more than 10-20% in a lot of areas of the country during the most recent crisis.
So you could still be left hung out to dry.
Read more: Do I need mortgage protection insurance?
While the exact numbers will vary depending on where you live, the latest survey of real estate experts forecasts that home prices will end 2016 up 4.5 percent on year-over-year basis.
And the bad:
Looking forward, they also expect the annual pace of home value appreciation to slow to 3.6 percent in 2017, 3.2 percent in 2018, 3.1 percent in 2019 and to 2.9 percent in 2020.
America’s two housing markets
House prices have always varied greatly by location, but never more so than during the current housing recovery. Prices are—and have been—rising at very different rates in major markets.
Since the housing boom and bust gave way to recovery, the U.S. housing market has seemingly split into two unequal parts: Middle America, and coastal America. Home values are growing rapidly in markets on both East and West Coasts as hot job markets help keep demand for housing high, and more slowly in the Midwest and Heartland, where negative equity is still pervasive and job growth scant.
As a result, Americans—especially younger millennials—are moving away from Middle America and to the coasts in large numbers, whether for jobs, lifestyle preferences or both.
This June, home prices in San Francisco were rising 9.5 percent on a year-over-year basis while prices in Chicago rose only 1.4 percent.
How long will this trend continue?
More than half of those experts in the survey said they believed this trend has either already begun to reverse or will reverse in coming years.
Another 11 percent said this trend was actually an illusion, and that coastal markets are no more or less popular now than they’ve always been relative to Middle America. Just 25 percent of experts with an opinion said the coastal/Middle America split was likely to be permanent.
Of those experts who said the trend was likely to reverse, a majority (56 percent) said job growth in the middle of the country—driven by companies looking for cheaper alternatives to the coasts in which to expand—would eventually lure residents back to the Heartland.
Similarly, almost a quarter (24 percent) said Americans would migrate inland in search of more affordable housing, and 13 percent said Americans would start to seek the most traditional lifestyle that the middle of the country has to offer. Only 2 percent said climate change is likely to force residents away from the coasts.
In addition to the coastal/inland divide, the housing market has also experienced a notable shift between urban and suburban communities. The suburban home – long a symbol of success, stability, and the American Dream—may be losing some of its luster as urban homes grow in value more quickly.
Local factors, like employment and income growth, transportation infrastructure improvements like new highways and mass transit, and new home construction will have as much or more impact on home prices in your community than national or regional factors.
What this means for you
So far, coastal markets have been doing well. Prices are up, and many have started to think they’re on their way back to pre-crash highs. However, thanks to all the possibilities discussed above, that may not be the case at all.
If you’re in a hot coastal market, this can mean three things for you:
Thinking about selling your home? 2016 might just be the best year to do so.
Just bought a home this year? Don’t expect your new home to appreciate as it has been, at least through the end of the decade.
Looking at buying a home as an investment? You’ll probably get a better rate of return in the stock market. However, these predictions will vary greatly depending on where you live.
In February 2020, Tenisha Tate-Austin and Paul Austin decided to erase all traces of their existence in the Northern California home the Black couple had created for themselves and their children.
They “whitewashed” their home by removing their family photographs and African art displayed around the house. They had a white friend place some of her own family photographs around the home and greet the appraiser as if she were the homeowner.
The couple wanted to see if they’d get a better home appraisal than the one they had received three weeks earlier.
The experiment worked. This time, the appraisal (by a different appraiser from the same appraisal management firm) was almost 50% higher. In three weeks, the value of their Marin City home, 11 miles north of San Francisco, had gone from $995,000 to $1,482,500.
In March, the Austins settled a fair housing lawsuit alleging race discrimination against the licensed real estate appraiser; they’d reached a settlement in October with the appraisal management company.
Sixty years after Martin Luther King Jr. delivered his most iconic speech calling for civil and economic rights and an end to racism, one of the biggest roadblocks to building wealth for Black Americans is still in place: The housing gap has widened from the time it was legal to discriminate based on race.
In 1960, eight years before the Fair Housing Act, which prohibits property owners, financial institutions and landlords from discriminating based on race, the homeownership gap between white (65%) and Black (38%) stood at 27 percentage points. In 2021, or 60 years later, that gap had grown: 73% of white households owned a home compared with Black homeownership at 44%, a difference of 29 percentage points, according to the Urban Institute.
“We missed out on a better interest rate because of the unfair appraisal we received,” Tenisha Tate-Austin said in statement through her lawyer. “Having to erase our identity to get a better appraisal was a wrenching experience. We know of other Black families who either couldn’t get a loan because of a discriminatory appraisal and therefore either lost the opportunity to buy or sell a home, or they had to sell their home because they had an unaffordable loan.”
Explore the series:MLK’s ‘I have a dream’ speech looms large 60 years later
Housing gap:‘We are a broken people’: The importance of Black homeownership and why the wealth gap is widening
King fought racist housing practices in ChicagoThough King knew housing was an important topic when he made his 1963 speech (it included the line “We cannot be satisfied as long as the Negro’s basic mobility is from a smaller ghetto to a larger one,” his focus was ending segregation in the South, said Beryl Satter, professor of history at Rutgers University in New Jersey and author of “Family Properties: Race, Real Estate, and the Exploitation of Black Urban America.”“The speech was about jobs and ending segregation of drinking fountains and restaurants, buses, trains, movie theaters and swimming pools to help pass the Civil Rights Act,” she said. Once that was accomplished, King trained his sights on housing in the North, particularly Chicago, where he focused on enforcing a pre-existing law on open housing, Satter said.The open housing laws in Chicago already forbade real estate agents from steering Black families into Black neighborhoods and dictated that housing should be made available regardless of race.“But like many such open housing laws, it was not enforced,” Satter said.In January 1966, King moved with his family into an apartment in North Lawndale on the West Side of Chicago to bring attention to the poor living conditions of Black families living without water, electricity and heat. He marched with Black and white supporters into segregated white neighborhoods to call for open housing.“And there he was met with the most violence he had ever been met with in any of his civil rights struggles. He said that the violence in Chicago made the whites in Mississippi look good,” Satter said. “He was hit with a stone while marching in Chicago, and he kept going.”Fair Housing Act became law after King’s deathFrom 1966 to 1967, Congress regularly considered a fair-housing bill, but it was ultimately defeated.“It was the first time that a Civil Rights Act had been defeated since the ’50s,” Satter said. “There was massive white resistance to any law or direct action that threatened racial segregation and housing. It was something that whites in the North fought to the death to keep.”After King was assassinated in 1968, President Lyndon Johnson pushed through the national Fair Housing Act as a memorial to King, whose name had become closely associated with the fair housing legislation.The undervaluation of homes in Black neighborhoods, decadeslong housing segregation, a systemic denial of loans or insurance in predominantly minority areas, a persistent income gap, and a historically limited ability of Black parents to leave their families an inheritance have contributed to the nation’s financial disparity, experts say.
During the housing boom of the early 2000s, Black Americans ages 45 to 75 disproportionately held subprime mortgages, loans offered at higher interest rates to borrowers characterized as having tarnished credit histories. Many of these mortgage holders lost their homes and have been unable to return to homeownership.
These trends will affect retirement prospects for Black Americans and their ability to pass down wealth to the next generation, making it not just one generation’s problems but an intergeneration disparity, experts say.
White wealth surpasses Black wealth
In 2016, white families posted the highest median family wealth at $171,000. Black families, in contrast, had a median family wealth of $17,600, according to the Federal Reserve. Homeownership has long been considered the best path to build long-term wealth, so increasing the rate of homeownership can play an important role in closing the wealth gap, experts say.
Over the past decade, the median-priced home in the United States gained $190,000 in value, making the typical homeowner 40 times wealthier than if they had remained a renter, according to a report released in April by the National Association of Realtors.
Some signs of hope emerged during the coronavirus pandemic, when mortgage rates were at historic lows.
During that time, Black homeownership rates increased by 2 percentage points, surpassing the white homeownership rate, which increased just 1 percentage point.
The historically low mortgage rates enabled high-earning, highly educated Black households to boost homeownership rates. Most high-income white households already were homeowners, which explains the smaller magnitude of growth, according to the analysis.
Black homeownership rate saw small improvements
From 2019 to 2021, the homeownership rate for Black households went from 42% to 44%; for white households it went from 72% to 73%.
After experiencing a continuous decline since the Great Recession, the Black homeownership rate finally made gains between 2019 and 2021. The reason was pent-up demand, said Jung Choi, a researcher at the Urban Institute.
“This suggests that affordability really matters,” Choi said. “Now, with the surge in interest rates, we are already seeing a sharp decline in Black homebuyers as well as younger homebuyers.”
Satter said King’s final book, 1967’s “Where Do We Go From Here: Chaos or Community?” cautions against complacency simply because there are laws on the books.
“He really understood that having a law in books was the beginning, not the end. Today we have the Fair Housing Act of 1968, and there are ongoing local, state and national laws that are supposed to stop housing discrimination,” Satter said. “I think King would have predicted that they would not be effective if there wasn’t a larger public will to enforce it and a strong political organization pushing to enforce it.”
Swapna Venugopal Ramaswamy is a housing and economy correspondent for USA TODAY. You can follow her on Twitter @SwapnaVenugopal and sign up for our Daily Money newsletter here.
MGIC Investment Corp., the largest provider of private mortgage insurance, said today it lost $273.3 million during the fourth quarter, compared to a quarterly loss of $1.47 billion a year earlier.
But though losses have decreased, the company doesn’t expect profitability during 2009, and worse, warned that it may need additional capital to continue writing new business.
Not that business is booming anyways. New mortgage insurance written during the quarter totaled just $5.5 billion, down from $24 billion a year earlier.
For all of 2008, new insurance written totaled $48.2 billion, off from $76.8 billion last year.
Meanwhile, 12.37 percent of the company’s insured loans were delinquent, up from 7.45 percent last year and 6.13 percent at the end of 2006.
The Milwaukee-based insurer noted that the mortgage industry is experiencing material losses on 2006 and 2007 books, which could push MGIC’s risk-to-capital ratio beyond levels necessary to meet regulatory demands.
“Because we cannot predict future home prices or general economic conditions with confidence, we cannot predict with confidence what our ultimate losses will be on our 2006 and 2007 books,” the company said in its earnings release.
“Our current expectation, however, is that these books will continue to generate material incurred and paid losses for a number of years.”
“As a result, we are considering options to obtain capital to write new business, which could occur through the sale of equity or debt securities and/or reinsurance. We cannot predict whether we will be successful in obtaining capital from any source but any sale of additional securities could dilute substantially the interest of existing shareholders.”
The company made a series of underwriting changes over the last year and change to mitigate losses, but continues to experience painful losses on the high-risk loans it insured during the tail end of the housing boom.
Their outlook certainly doesn’t bode well for mortgage insurers, much less the industry as a whole.
Last June, mortgage insurer Triad Guaranty halted new business and cut jobs because of rising mortgage defaults and costly claims.
I wouldn’t be surprised to see a few more follow down that path this year.
You’d think that someone so heavily involved in the mortgage world would have a family full of homeowners, but that’s not the case with David Stevens.
Despite being the president and CEO of the Mortgage Bankers Association (MBA), and formerly the FHA Commissioner, his 27-year old daughter still rents her place, per Businessweek.
Sara Stevens is reportedly well aware of the favorable situation in housing at the moment, what with the near-record low mortgage rates, the increasing rents, and the ability to grow wealth through home equity.
But that’s not enough for her and fiancé to give up their 765-square-foot one bedroom apartment in Arlington, Virginia, which runs at a hefty $2,195 a month.
Sure, they’ve got some student loan debt, like most Millennials their age, but pops has already pledged to help her with the down payment if need be.
And with combined income of nearly $108,000, the couple could most likely afford to purchase a fairly nice home or condo, even with home prices in the D.C. area pretty steep.
The apparent issue is that they’re currently in a central location, close to a subway stop and within walking distance to popular bars and restaurants.
If they decide to buy, they’d likely need to forego those perks for a longer commute and a home/condo that isn’t as nice as their current digs.
Is She Like Any Other Person, or Is Dad Telling Her to Hold Off?
On the one hand, it appears as if Sara Stevens has seen a lot of ugly stuff during the latest housing boom and bust, which would clearly make her a lot more cautious about purchasing a property.
Ditto anyone else thnking about getting into real estate today.
She apparently had family go through “tough situations” with bad mortgages that her father tried to sort out over the past few years.
But at the same time you have to wonder if she’s just like any other young adult, wanting to live in an urban center and enjoy the relatively stress-free life renting affords.
Because at the end of the day, it’s a lot easier to rent than own a home. You don’t really have to worry about the place. You make your rent payment each month and if something goes wrong, you call the landlord. It’s their problem, not yours.
The downside to renting is that you miss out on potential home price appreciation, and forced savings via home equity building, but with what has gone on over the past decade, that’s no longer a guarantee.
Interestingly, Sara’s dad purchased a home in Denver back in 1984 at the age of 27 when 30-year fixed mortgage rates stood at 13.9%. Today, they’re closer to 4%, yet Sara is holding off. Does dad know something we don’t know, or is it purely her decision?
Now of course everyone has their own reason for buying or renting, but it does kind of speak volumes about the very strange housing market these days.
Interest rates are ridiculously low, home prices are still well off recent record highs, and rents are climbing, yet everyone seems really cautious about diving in.
But maybe that’s a good thing, because the moment everyone gets euphoric about housing again, we’re in big trouble. So I, for one, welcome the uncertainty.
Fitch Ratings’ recent downgrade of U.S. government debt pushed the 10-year Treasury yield to its highest level this year.
Mortgage rates track the 10-year Treasury: When that meter rises, so do 30-year fixed rates.
While the downgrade isn’t major cause for alarm, its ripple effects could keep mortgage rates elevated for the time being.
A bond rating agency’s downgrade of U.S. government debt roiled markets — and created just one more reason for mortgage rates to stay firmly near their highest level in two decades.
Fitch Ratings announced late Tuesday it had cut the U.S. government’s credit grade one level, from AAA to AA+. On Wednesday, yields on 10-year Treasury notes peaked as high as 4.1 percent. The 10-year Treasury is the benchmark most closely connected to 30-year fixed mortgage rates.
“That is not good news,” National Association of Realtors Chief Economist Lawrence Yun said of the downgrade and subsequent rise in Treasury yields. “That is going to make the mortgage rate a little higher.”
Mortgage rates already uncomfortably high
The average rate on a 30-year loan rose to 7.09 percent in Bankrate’s most recent national survey of lenders, nearing the 2022 peak of 7.12 percent. Rates haven’t been that high since 2002. During the depths of the pandemic, they fell below 3 percent — rock-bottom levels that spurred a housing boom and refinancing frenzy.
For borrowers, the jump in rates has been a budget-buster. Borrowing $300,000 for 30 years at 3 percent means a monthly payment of $1,265. Jack up the rate to 7 percent, and the payment becomes $1,996.
While economists have predicted a retreat for mortgage rates, the rating agency’s downgrade puts one more obstacle on the downward path.
“This could have serious consequences,” says Dick Lepre, a loan agent at CrossCountry Mortgage in Alamo, California.
Why was U.S. debt downgraded?
In its announcement, Fitch — one of the “big three” credit rating agencies in the U.S. — pointed to a cycle of partisan brinkmanship in Washington. The latest standoff came in June, when Congress flirted with a government shutdown before reaching a last-second agreement on the federal debt ceiling.
“In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025,” the rating agency stated. “The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management.”
Fitch also pointed to rising levels of government spending and to what it called the likelihood of a “mild” recession later this year — although many economists have begun to say it’s possible the U.S. economy will avoid a recession entirely.
Essentially, the rating agency believes U.S. government debt is riskier than previously thought. Investors, therefore, demanded a higher yield for holding the debt.
[This] is not good news. [This] is going to make the mortgage rate a little higher.
— Lawrence Yun, Chief Economist, National Association of Realtors
While sobering, the downgrade reflects mild concerns rather than a looming crisis. Fitch still considers Uncle Sam a “very high credit risk.”
“Everyone knows the U.S. government will pay those debts,” says Yun, who is holding out hope that members of Congress will take a hint from the downgrade and set aside political bickering.
“Maybe this is a wake-up call,” says Yun.
Sean Snaith, director of the University of Central Florida’s Institute for Economic Forecasting, likewise sees the downgrade as a call to action.
“This is a warning shot across the U.S. government’s bow that it needs to right its fiscal ship,” says Snaith. “You can’t just spend trillions of dollars more than you have in revenue every year and expect no ill consequences.”
Downgrade one part of bigger mortgage rate picture
The debt downgrade had an immediate effect on the 10-year Treasury, but that gauge is only one piece of the complicated puzzle that drives mortgage rates. The impetus for day-to-day rate movement, especially, can be murky.
While the Federal Reserve doesn’t directly determine fixed mortgage rates, the central bank does set the overall tone — and as it boosted its policy rate from zero in early 2022 to 5.25 percent now, mortgage rates rose sharply.
For 30-year rates, however, the most relevant benchmark is the 10-year Treasury yield.
That brings up a quirk of post-pandemic mortgage rates: The gap between 30-year mortgage rates and the 10-year yield is unusually wide.
This interval, known to economists as “the spread,” typically runs between 1.5 and 2 percentage points. If the 10-year yield sits at 4 percent, for example, the 30-year fixed mortgage rate should track close to 6 percent.
However, the spread has jumped to more than 3 percentage points — the highest level since the darker days of 2009, according to Bankrate research. That means that instead of a 4 percent yield translating to a 6 percent mortgage rate, borrowers are paying 7 percent for 30-year loans.
Of course, any relief from rising mortgage rates would be welcome news for borrowers, especially first-time homebuyers, who are most affected by the combination of still-high home prices, higher mortgage rates and the shortage of homes for sale.
While we can expect higher mortgage rates for now, Yun and other housing economists say they could fall back to the low 6 percent range later this year — a forecast that hinges on inflation continuing to cool and the Fed hitting the pause button on rate hikes.
“If the data shows moderating inflation, I think it’s possible the Fed may stop raising interest rates for the rest of the year,” says Yun.
Dave Liniger has spent the last half-century living through the ups and downs of the interest-sensitive housing market.
Liniger, who co-founded real estate giant RE/MAX with his wife in 1973, doesn’t think mortgage rates are all that high today. After all, he recalls the early 1980s when the Federal Reserve’s war on inflation briefly spiked mortgage rates above 18%.
“Everyone has been spoiled by the past 15 years of low interest rates,” Liniger, now the chairman of RE/MAX, told CNN.
Interest rates plunged to historic lows early this decade as the Fed flooded the market with easy money in a bid to revive the Covid-riddled economy. The weekly average 30-year fixed-rate mortgage dropped to as low as 2.65% in January 2021, according to Freddie Mac.
Dirt-cheap borrowing costs, along with changes caused by the pandemic, set off an epic housing boom.
Mortgage rates near 7%
The days of easy money are long gone. The Fed has taken extreme steps to fight inflation.
Mortgage rates climbed to 6.96% during the week ending July 13, up from 6.81% the week before, Freddie Mac said Thursday. That’s’ the highest level since November.
Liniger said homebuyers may be “stuck” with these interest rates for the foreseeable future.
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“We’re just going to have to learn to live with 6.5% or 7% mortgage rates for six to 18 months,” said Liniger.
The RE/MAX co-founder dismissed the argument from some that the Fed is done raising interest rates because inflation has cooled substantially. “I don’t buy that,” he said.
‘This is the top’
Lawrence Yun, chief economist at the National Association of Realtors, is more optimistic about the direction of mortgage rates.
“This is the top,” Yun told CNN on Thursday. “It will begin to move down.”
Yun said he is “fairly confident” that inflation will continue to calm, aided in large part by easing rent growth, and this will free the Fed to halt rate hikes after moving one more time this month.
“By the end of the year, mortgage rates could be closer to 6%,” Yun said.
What happens next will have huge impacts for home buyers.
61% of mortgages are below 4%
That mortgage rate spike has frozen some housing activity by making purchases unaffordable for first-time homebuyers and unattractive for people who are locked into low-rate mortgages.
“It’s very difficult to give up your home if you have a 2.9% mortgage,” said Liniger. “Because of that, people are reluctant to be a move-up buyer — or even a move-down buyer.”
About 61% of all outstanding mortgages have an interest rate below 4%, including 23% that are below 3%, according to Apollo Group.
“The bottom line is that homeowners across America do not have any incentive to move and get a new mortgage,” Torsten Slok, Apollo’s chief economist, wrote in a note Friday.
That has prevented countless people from listing their homes for sale, limiting overall supply and keeping prices from falling much.
As of June, there were fewer than 800,000 housing units listed for sale across the country, down from nearly 1 million at this point in 2020, according to Realtor.com. At this point in 2018 and 2019 there were north of 1.2 million homes listed for sale.
“For buyers, it’s been a tough go,” said Yun. “Not only have prices not fallen, there’s not much inventory.”
Refinancing option
The higher rates are, the less home people can afford.
If mortgage rates were 4%, a buyer putting 10% down on a $500,000 home would face monthly mortgage payments of about $2,845, according to Zillow. But at the current mortgage rate of 7%, monthly payments on that same $500,000 home spike by $846 to $3,691.
For many potential buyers, that can make the difference between affording a house and not.
So, what should first-time homebuyers do?
Yun and Liniger agree that the smart move is to buy a home that you can afford at current rates, and then quickly take advantage of lower interest rates — whenever they arrive.
“One great thing about America is people can always refinance when rates go down,” Yun said.