July’s volatile mortgage interest rate environment ended up cutting demand, with lock volume declining for the second month in a row, Black Knight said.
Data from its Optimal Blue product and pricing engine found the conforming 30-year fixed rate mortgage at or above 7% for the first time since last November between July 6 and July 10.
“On both a practical and psychological level, that put further downward pressure on mortgage demand,” said Andy Walden, vice president of enterprise research and strategy at Black Knight. “Purchase loans continue to dominate the origination pipeline, but current housing market dynamics are just not conducive to boosting homebuyer origination volumes.”
The conforming 30-year FRM quickly pushed back down to the 6.7% range before starting to rise again at the end of the month. Since Aug. 1, rates have gone back above 7% again on three — albeit not consecutive — days, the Optimal Blue data said. (Black Knight has an agreement to sell Optimal Blue to Constellation Software as part of a way to win regulatory approval for its own agreement to be purchased by Intercontinental Exchange.)
The Mortgage Bankers Association’s Weekly Application Survey had the 30-year conforming FRM at 7.07% for the week of July 7. It went back above 7% in its Aug. 4 survey.
However, the Freddie Mac Primary Mortgage Market Survey, while getting close to 7%, has not gone over that point since last November.
Black Knight’s measurement of rate lock active, the Market Volume Index, was at 98 for July, down 6.9% from June’s 105 and 30.2% compared with July 2022, when it was 140. It is at its lowest point since April, when it was 93.
The purchase component made up 86 points of the MVI, down 7.4% month-to-month and 25.2% from one year prior.
Over the same time frame, the cash-out refinance index of 8 was 5.4% lower than the prior month and 59.3% from the same month in 2022.
The rate and term index was at 4, up 1.9% from June but 31.2% lower from one year prior. Refis, no matter what the purpose, made up 12% of July’s rate lock volume.
“It’s worth noting, however, that — in a ‘normal’ year — June typically marks the calendar peak of home prices on a non-adjusted basis, so you would normally expect to see a decreasing trend through year’s end and into February,” Walden said.
The inventory shortage has changed that, making the current market anything but normal.
“Rising rates may be tamping demand for homes at such record high prices, as evidenced by rate lock activity, but they’ve still yet to overcome an even greater deficit of supply,” Walden continued. “As a result, the purchase market is in a stalemate.”
After a few really good years, mortgage refinancing has slipped back to levels not seen since 2008, according to the first quarter refinance report released today by the Federal Housing Finance Agency (FHFA).
The FHFA noted that a total of 370,856 refinances were completed between January and March, including 232,484 via Fannie Mae and 138,372 via Freddie Mac.
That compares to 506,051 total refinances during the fourth quarter of 2013 and nearly 1.4 million during the same period a year ago. Yes, things have slowed down just a bit.
Rates Were a Lot Higher in 2008
Now here’s the scary part – 30-year fixed mortgage rates averaged 6.03% back in 2008.
During the first quarter of 2014, 30-year fixed interest rates averaged less than 4.40%, and yet activity remains at a six-year low. In other words, rates aren’t too high, they’re just not that useful anymore.
Mainly because most of those who could already refinanced, and home sales continue to trickle due to inventory constraints.
Obviously it’s a shame to see low mortgage rates go to waste, but there’s not much that can be done, barring new all-time lows.
HARP Refis Continue to Slip, But Market Share Remains Steady
The story was similar with HARP refinances, which totaled 76,930 during Q1. A total of 46,896 were directed through Fannie Mae and the remaining 30,034 passed through Freddie.
That brought the lifetime total to 3.1 million for the program that originated back on April 1, 2009, not bad, but not quite the 4-5 million originally envisioned.
The HARP share of refinancing was 21% in the first quarter, down from 23% in the fourth quarter but roughly the same as it was a year earlier.
Most of the HARP refinances occurred in the 80-105% LTV band (53,678), followed by the 105-125% LTV band (13,920), and finally the 125+ LTV band (9,332).
In Georgia, 41% of all refinances were completed via HARP, followed by Florida with a 38% HARP-share and Nevada/Michigan with a 33% HARP-share. They were also pretty popular in Illinois (31% share), Arizona (26%), and Idaho (24%).
This kind of illustrates how bad refinance volume would be without HARP available. These states would lose a major amount of business in a hurry.
And let’s be honest, the pool of eligible borrowers is clearly shrinking, so it won’t be long before HARP is absent from the refinance scene altogether.
The good news is that HARP seems to be accomplishing its mission of reducing mortgage delinquencies.
The chart above displays the percentage of loans that were ever 90 days delinquent after given dates based on whether refinanced through HARP or not, assuming they were eligible.
As you can see, loans refinanced through HARP are displaying considerably lower default rates across the board compared to those where a HARP refinance was available but not pursued.
And now that rates are low again, we might see another uptick in HARP activity. However, Mel Watt made it clear that there will not be a HARP 3, despite many pleas to expand the program further.
Read more: How to refinance when underwater on the mortgage.
The mortgage industry continues to be battered by negative headlines amid the slow in demand, the challenges of housing supply, and rising interest rates. It’s no secret that refinance (refi) volumes dropped off a cliff, and the number of homebuyers in the market has shrunk since 2022. That leaves you with a small pool of prospects in a sea that used to be teeming with more volume than you could handle. The change of pace is probably off-putting in more ways than one, but a slowdown in refi and loan volume can mean a chance to build a new pipeline of revenue through the non-qualified mortgage (non-QM) market.
As a purchase product, non-QM can be a great addition to your options when it comes to serving homebuyers. Not only does it allow you to expand your pool of prospects, but it also gives you an opportunity to replace lost volume and potentially stave off that revenue compression we are seeing across the industry.
Evolving with non-QM expertise
The first step to taking advantage of this sector is continuing education on non-QM loans and their unique features. As more borrowers fall outside the conventional lending parameters, the demand for non-QM loans increases. It’s crucial to start educating yourself, your team, and your clients about non-QM loans.
In the non-QM market, there’s a myriad of product offerings tailored to serve various borrower demographics. For instance, self-employed individuals have long been underserved by traditional lenders due to income documentation requirements. We often hear stories of self-employed borrowers who get rejected by their bank because the bank doesn’t understand how to qualify their situation. Non-QM bank statement products, which verify income based on bank statements rather than tax returns, can serve this population effectively.
Education is not to be confused with complexity. These loans are not as complicated or as time-consuming as you may think. The reality is that when you work with non-QM professionals, you will find that these loans can be done as seamlessly as Agency loans. Experience will only make the process faster.
Selecting the right non-QM partners
The non-QM world is different from the conventional mortgage space, so it’s essential to have reliable partners by your side. Plugging numbers into a black box and getting a yes or no answer is not how non-QM works. As I mentioned, though, choosing a trusted and experienced lender who specializes in non-QM loans can make the difference between a deal that closes and one that doesn’t. These professionals have navigated the non-QM landscape many times over and can guide you through it, identifying and answering pertinent questions that can impact your borrower’s chances of loan approval and providing support when needed.
Non-QM as the solution to the refi vacuum
With the refi market having dried up, it’s clear that the future for originators lies in diversifying their portfolio of loan products. Non-QM loans are not just a stopgap but a long-term strategy that can redefine your business model. These loans cater to an untapped audience and can sustainably replace the volume lost to refinancing.
The shift to non-QM may seem daunting, but by marketing yourself as a non-QM expert, partnering with trustworthy lenders, and leveraging a variety of non-QM products, you can not only survive in this new landscape but also thrive. The market always moves, and the most successful originators move with it.
Tom Hutchens is the executive vice president of production for Angel Oak Mortgage Solutions.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story: Tom Hutchens at [email protected]
To contact the editor responsible for this story: Tracey Velt at [email protected]
President Obama and the Treasury Department today unveiled a much anticipated foreclosure prevention plan that will rely heavily on mortgage financiers Fannie Mae and Freddie Mac to assist at-risk borrowers.
The so-called “Homeowner Affordability and Stability Plan” will attack foreclosures on a number of different fronts, depending upon the borrower’s situation, while providing incentives to participating homeowners, mortgage lenders, and servicers.
For those looking to refinance their mortgage that have Fannie and Freddie owned or guaranteed loans, but are unable to do so because their loan-to-value exceeds 80 percent, guidelines will be eased to facilitate such refinancing.
This measure alone is expected to help between four and five million homeowners obtain more affordable and sustainable mortgage payments.
To ensure the government-sponsored entities are able to continue to support the mortgage market, Treasury will provide up to $200 billion in capital to the pair via preferred stock purchases.
Additionally, the Treasury will continue to purchase Fannie Mae and Freddie Mac mortgage-backed securities in an effort to keep interest rates low and improve liquidity in the secondary market.
Under the agreement, the GSEs’ retained mortgage portfolios will be increased by $50 billion to $900 billion.
Another three to four million homeowners will receive assistance through a $75 billion “Homeowner Stability Initiative.”
Borrowers would receive loan modifications that lower the housing debt-to-income ratio to 31 percent, via both voluntary lender reductions and government subsidies.
In some cases, government-sponsored modifications would provide below-market mortgage rates for five years, after which they would adjust upward at a moderate pace until reaching the average rate for a conforming loan during the time of the modification.
Once a modification is complete, borrowers will receive $1,000 per year, for up to five years, in incentive pay that will go towards the principal balance of the mortgage, if they continue to make payments.
Loan servicers will receive an upfront fee of $1,000 for each completed loan mod, as well as incentives of up to $1,000 each year for three years if the borrower stays current on the new loan.
Additionally, an incentive payment of $500 will be paid to servicers, and an incentive payment of $1,500 will be paid to mortgage holders, if they modify at-risk loans before a borrower becomes delinquent
Lenders would be encouraged to modify loans thanks to a partial guarantee program, which would create an insurance fund at a size of up to $10 billion.
“Holders of mortgages modified under the program would be provided with an additional insurance payment on each modified loan, linked to declines in the home price index,” Treasury said on its website.
Treasury will develop uniform guidelines for the loan modifications, which will be used for the Administration’s new foreclosure prevention plan, and mirrored by lenders participating in government aid programs.
Other measures to reduce foreclosures include principal balance reductions during bankruptcy, $2 billion in neighborhood stabilization funds, and improved flexibility of Hope for Homeowners and other FHA loan programs.
Complete details will be provided on March 4 when the program is launched.
Homeowners opt for ARMs instead of fixed mortgages for a number of reasons, but it’s mostly to save money.
After all, adjustable-rate mortgages are offered at a discount compared to fixed mortgages, and the level of discount varies based on how long the ARM is fixed.
The shorter the fixed-rate period on an ARM, the lower the interest rate. So if you want the lowest rate, you need to go with a one-year ARM as opposed to a 7/1 ARM.
Back in the mid-2000s, it wasn’t uncommon to see 1-month and six-month ARMs, which adjusted after just a month and six months, respectively.
Clearly this made for a lot of uncertainty, especially for less sophisticated homeowners who were often aggressively pitched such mortgages.
To make matters worse, lenders offered better pricing, or rather commissions, on ARMs with prepayment penalties.
Long story short, a ton of naïve homeowners wound up with short-term ARMs and three-year prepayment penalties, meaning they couldn’t refinance (or even sell in some cases) once interest rates went up.
As home prices tanked and monthly mortgage payments went up, the housing market imploded. The irony is that many of those who took out ARMs before the most recent housing crisis (to save money) lost their homes because of them.
Could We Repeat History Again?
But times have changed, right? Perhaps. The prepayment penalty is largely a thing of the past, and ARMs are a lot less popular these days thanks to ultra-low fixed rates.
However, the ARM-share of mortgages has been inching up lately, mainly because home prices are on the rise and borrowers see value in getting a discount for the first several years of their loan.
There also seems to be this belief that rates aren’t going to rise anytime soon, so why not go with an ARM and save lots of money?
Unfortunately, it’s that line of thinking that could land a lot of these borrowers in a tough spot a few years down the road, even if they qualify at the fully indexed rate today.
First off, payments can become unmanageable after a reset, especially if the borrower’s financial situation changes for the worse. And let’s face it; nobody’s job/income is set in stone.
Secondly, if rates do rise and you seek a refinance, you need to qualify. It’s never a guarantee to qualify for a mortgage. It’s also not cheap to refinance.
To alleviate some of these concerns, two financial literacy advocates have come up with a few ways to make ARMs safer.
Introducing the Safer ARM
John Bryant, the founder of Operation HOPE, and Robert Gnaizda, a founder of Greenlining Institute, have proposed a few ways we could make mortgages safer without impeding access to credit.
Their first suggestion is to require non-profit financial education before a low- or moderate-income family can take out any type of ARM, or interest-only mortgage for that matter.
Secondly, they believe no ARM should have a term that is less than the median time Americans own their primary residences, which is roughly seven to nine years.
In other words, you would only be allowed to take out a 7/1 or 10/1 ARM, and if you were considered a low- or moderate-income borrower, you’d have to complete a homeowner education class as well.
The pair also believes no institution should be able to offer interest-only mortgages to borrowers with less than a $5 million net worth. Don’ worry Mark Zuckerberg, you’re okay.
They argue that had these measures been in place a decade ago, the crisis would have never happened.
Reforming the QM Loan
Aside from taking issue with ARMs and IO options, Bryant and Gnaizda think the Qualified Mortgage rule could benefit from some tweaks as well.
They believe Fannie Mae and Freddie Mac should consider any 30-year fixed mortgage with a minimum seven percent down payment as a QM loan.
But only if the borrower’s income doesn’t exceed the median and the home is valued at no more than 90% of the region’s median price.
These loans wouldn’t require mortgage insurance either, though lenders would be able to charge a premium of 50 basis points for the first five years of the loan to compensate for risk (and even longer if the borrower fell delinquent).
Again, these borrowers would have to complete both pre- and post-financing education, though they could also receive a temporary waiver for up to six months of housing payments if unemployed or sick after five years or more of homeownership.
They plan to discuss these ideas with financial institutions, though similar warnings/suggestions thrown around a decade ago seemed to fall on deaf ears.
You may have watched a movie in which a character pulls out a fancy black credit card and brags about how he has access to unlimited money. The reality is that there is no such credit card. Some credit cards do come with “no preset spending limit,” but even those cards have some sort of controls and restrictions.
When you have a credit card with no preset spending limit, each purchase is evaluated on a case-by-case basis for approval. As long as you are using the card responsibly and regularly paying down your balance, you shouldn’t have any problems with purchases being declined.
Do No-Limit Credit Cards Exist?
While most credit cards do come with specific credit limits, there are cards that intentionally have no preset spending limit. Those card holders never have to worry about managing their available credit. Instead, the issuer will evaluate each purchase as it’s made to determine whether to approve it. The issuer may also provide a tool where you can check beforehand to see if a purchase will be approved.
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Where Does the Idea of No Limit Cards Come From?
To “average” people who stick to a budget and pay their bills each month, there is something aspirational about a magical no-limit credit card. If you have an average credit limit, you might wonder what it is like to not be encumbered with one. Pop culture plays into this common desire to know what it would be like to be obscenely rich and not have to worry about money.
The Myth of the Black Credit Card With No Limit
In pop culture, the no-limit credit card always seems to be black, and there are ultra-luxury black credit cards. For example, American Express has the Centurion Card, which is a black credit card that is only available by invitation. But while the Centurion card (and other similar cards) don’t come with a preset spending limit, that doesn’t mean there is no limit at all.
Recommended: What Is a Luxury Good?
Pros and Cons of Cards With High Spending Limits
Here’s a quick overview of some pros and cons of high limit credit cards:
Pros
Cons
More convenient to pay for larger expenses
It may be tempting to spend beyond your means
Harder to go over your credit limit
If your card is stolen, you may be at a higher risk before you notice
A high credit limit can help your credit utilization ratio, when used responsibly
A higher credit limit could mean more debt to pay down
A higher spending limit may allow you to earn rewards like unlimited cash back
💡 Quick Tip: A SoFi cash-back credit card is a great way to earn rewards without a complicated redemption process. Even better, SoFi doesn’t place limits on the amount of cash-back rewards you can earn.
What Does It Take to Have a High Limit Credit Card?
Most credit card issuers use a variety of factors when deciding both whether to approve you for a credit card and what credit limit to extend. Here are a few factors that may come into play:
A Good Credit Score
Most cards that come with no preset spending limit are considered premium or luxury credit cards. That means that you will likely need good or excellent credit to be approved.
Recommended: 8 Tips for Maintaining a Good Credit Score
A High Income
Another factor that can help you to get a high limit on a credit card is a relatively high income. Banks generally use an applicant’s income as one factor in determining a credit limit for a card. If you have a low annual income, a bank may be hesitant to issue you a credit card with a high spending limit.
An Existing Relationship With the Bank
Many banks are interested in building a relationship with their customers, especially ones they consider to be high-value. Showing that you are a loyal customer can encourage a bank to extend you additional credit. Ways to build your relationship with a bank might include opening checking or savings accounts, taking advantage of their credit card rewards program, or responsibly using existing accounts with them.
The Takeaway
While some credit cards come without a preset spending limit, all credit cards have some limitations in place. There is no publicly available credit card that will allow you to spend and spend with no consequences. If you have a card with no preset spending limit, the issuer will decide on a case-by-case basis whether to approve each purchase.
Looking for a new credit card? Consider a rewards card that can make your money work for you. With the SoFi Credit Card, you earn cash-back rewards on all eligible purchases. You can then use those rewards for travel or to invest, save, or pay down eligible SoFi debt.
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FAQ
Is there a credit card that has no limit?
There aren’t really credit cards with no limit at all (like you might see in the movies). But there are credit cards that don’t have a preset spending limit. Instead, the credit card issuer will evaluate your overall financial information to determine whether to approve any purchases. This might include your income, net worth, relationship to the bank, and previous spending and payment history.
How do people get no limit credit cards?
Most cards that come with no preset spending limit are luxury credit cards, which means that you’ll need to have good or excellent credit. Having a high income is another factor that can improve your odds of being approved. You might also consider strengthening your relationship with the issuing bank, like opening a checking account or other credit cards.
What does no limit credit card mean?
A no-limit credit card generally does not mean a credit card with absolutely no limit at all. Instead, many times people are referring to a credit card with no preset spending limit. When you have a card with no preset spending limit, you won’t have a specific available credit or credit limit — instead, the bank will determine whether to approve each transaction based on your overall financial information and/or past spending history.
Photo credit: iStock/Delmaine Donson
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The Federal Reserve’s recent interest-rate hikes may be affecting your wallet more than you think.
The Fed funds rate influences mortgage, credit-card, and auto-loan rates.
This means when the bank hikes rates, it becomes pricier to get a car loan or pay off credit cards.
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waged a war on inflation for over a year, and while price growth has been slowing amid the central bank’s interest-rate hikes, those hikes could be hitting your wallet.
Michelle Bowman, a Federal Reserve governor, recently said that multiple interest-rate hikes might be in store to bring inflation down to target levels, after 11 hikes in the past 12 meetings. But for many Americans, what do these rate hikes even mean, and how do they affect adults buying a home or paying off credit-card bills?
The Fed funds rate, with a target range now at 5.25% to 5.5%, is the rate at which banks and credit unions borrow and lend excess reserves to one another overnight, set by the Federal Open Market Committee. While the Fed rate itself is mostly directly relevant to banks, it acts as a benchmark for most interest rates that matter to consumers and businesses, including mortgage and credit-card rates.
From April 2020 to March 2022, the Fed funds rate was in the 0% to 0.25% range, which was implemented to stimulate economic growth and inflation after the start of the pandemic.
But to get the economy in a stabler position after inflation began to take off in 2021, the Fed hiked rates to increase the cost of credit, making loans more expensive. With higher borrowing costs, banks, consumers, and businesses may borrow less money. Because less money circulates throughout the economy, inflation — and the economy at large — tends to cool.
The rate also influences the market, as hikes often lead to drops in the stock market as investors become wary about businesses’ ability to expand profitably in an era when loans are more expensive.
Bank prime loan rates, the interest rates banks charge creditworthy customers, are typically about 3 percentage points higher than the Fed funds rate. The prime rate is the basis for mortgages, personal loans, and other major consumer loans.
Take auto loans as an example. Interest rates for two-year auto loans tend to be slightly higher than the prime rate, meaning auto loans have been between 3 and 5 percentage points above the Fed funds rate. As the Fed hiked interest rates, auto loans jumped from a pandemic low of 4.6% in October 2021 to a 2023 high of 7.5%. More than 14% of drivers couldn’t secure a car loan in June, according to the Federal Reserve, as lenders worried about rising balances and higher delinquency rates — while high interest rates and monthly car payments hurt consumers’ wallets.
Auto loans are now at about their highest point since 2007, in line with the Fed funds rate. They also remained rather stagnant during the Fed’s zero-interest-rate policy.
Credit-card rates, though much higher than the prime rate, have a similar shape. Amid the Fed’s rate hikes, credit-card rates have increased roughly 6% since January 2022, while the Fed funds rate has risen over 5%. Likewise, as the Fed kept rates near 0% at the start of the pandemic, credit-card rates stayed roughly constant. An analysis by WalletHub found the most recent 25-basis-point rate hike could cost credit-card users about $1.72 billion in additional interest charges over the next year.
In the short term, the Fed funds rate also affects Treasury yields, or the interest rate the government pays on its debt obligations. These yields influence how much consumers pay on real estate and equipment, as they set a baseline for other interest rates. These yields are determined by economic stability, interest rates, and geopolitical conditions.
The two-year Treasury yield is nearly identical to the Fed funds rate. During the height of the pandemic, both curves had a similar shape, with the Fed funds rate lagging slightly.
The 10-year Treasury yield less closely parallels the Fed funds rate but still has a relatively similar pattern. Over the past few years, the 10-year Treasury yield fell and rose roughly in line with the Fed funds rate, which suggests the long-term economic outlook is more or less improving.
Ten-year Treasury yields serve as a proxy for fixed-rate mortgages, which have trended about 2% to 4% higher than the Fed funds rate over the past decade. Mortgage rates typically move with shifts in 10-year Treasury yields. The 30-year fixed mortgage rate also changes with inflation — Fed rate hikes are done to slow inflation.
This means if you’re looking to purchase a home, a rise in the Fed funds rate indirectly pushes mortgage rates up, as the 30-year fixed mortgage rate hovers just below 7%. Those looking for a new home now have less purchasing power because of the Fed decisions and inflation. A WalletHub analysis found homebuyers with a 30-year fixed-rate mortgage would pay $11,160 more over the course of the loan than if they secured the loan before July, under the condition that the average home loan is $426,100.
For those looking to save money, certificate-of-deposit rates are another metric closely tied to the Fed funds rate. Ninety-day CD rates track almost identically to the Fed funds rate, meaning these CDs have paid higher interest rates as the Fed hikes rates.
Large corporations also are directly affected by higher interest rates, as the cost of borrowing money also follows the Fed funds rate. The yield on corporate bonds, which are issued by corporations to raise financing, has somewhat mirrored the dips and spikes of the Fed funds rate, particularly with companies that have the highest credit rating from Moody’s. This suggests that as the Fed raises rates, investors get bigger returns on corporate bonds. However, those higher rates for corporate borrowing could lead businesses to curtail investments in their operations.
All this is to say, the Fed’s decision to hike rates 11 times in the past 12 meetings may not yet show up at the grocery checkout, though such hikes have major effects on paying off credit-card debt, buying a home, and purchasing a new car.
A new survey from TD Bank revealed that a large percentage of recent home buyers needed mortgage insurance to get the deal done.
The bank surveyed 2,000 Americans who purchased a home over the past 10 years and found that 37% financed their homes with the help of mortgage insurance.
If we consider just the past two years, the number was even greater, with 43% relying on MI to close their loan.
In other words, nearly half of recent borrowers are unable or unwilling to put down 20% when purchasing a home, which makes the cost of homeownership a lot costlier.
Are Home Prices Too High?
It’s kind of a testament to how expensive homes are these days, despite mortgage rates and corresponding monthly mortgage payments being somewhat affordable to many.
While the Fed has been able to drive down interest rates via efforts such as QE3, they haven’t been able to make the issue of large down payments magically disappear.
Yes, there are options for those with little cash set aside, such as FHA loans, which only require a 3.5% down payment, and conventional loans, which only require five percent down.
There is even 100% financing still floating around, thanks to the Rural Housing Service’s popular USDA loan.
But the down payment continues to be an issue for most Americans looking to buy a home, mainly because we have a tough time saving money. No wonder the typical renter needs an FHA loan in order to buy a house.
Unfortunately, we can’t turn back now because things have only really gotten better thanks to recovering home prices that are reaching new all-time highs in many areas nationwide.
This has allowed millions of homeowners to get their heads above water again, which is great.
However, it has also burdened future would-be home buyers, who must now contend with even higher home prices, and not necessarily any more income to come to the table with. Nor any more savings.
TD Bank Is Pitching Their No-MI Loan
Now it should be noted that TD Bank is making both an argument against FHA loans because most require mortgage insurance for the life of the loan now (and it’s expensive), and PMI, simply because it’s another monthly cost to worry about.
And they’re doing it because they recently launched their Right Step mortgage program, which only requires a 3% down payment without MI.
It’s a big deal because Fannie Mae just reduced their max loan-to-value to 95% from 97%. So they’re really one of the few places where you can get a low down payment loan these days without paying mortgage insurance.
But what some people may not understand is that just because there’s no MI doesn’t mean you’re not paying for it. It’s just built into the interest rate. So instead of getting a 4% rate on your 30-year fixed, you might be stuck with a rate of 4.5% or higher. Same goes for lender-paid MI.
That’s the tradeoff. And the problem with taking a higher interest rate on your loan is that it stays with you until you sell, refinance, or pay off the loan.
On the other hand, PMI can be removed once your LTV reaches 80%, which can happen sooner rather than later if home prices keep rising, or if you pay your mortgage down early.
So whether you “need” MI or not, you’re still paying for it whenever you come in with less than 20% down. You just may not realize it.
Many components of the capital rules that federal regulators proposed last month last month have elicited questions and concerns from in and around the banking sector, but none more than the treatment of single-family mortgages.
Trade groups representing banks and various parts of the mortgage industry have come out against the rules, as have housing affordability advocates. These groups say the impact of the proposed rule changes would be felt by the housing sector more so than the banks themselves.
“In the housing sector, which has just been in a sort of boxing ring getting punched, one after another, and getting exhausted from all that’s coming at them, this one is pretty incredible,” said David Stevens, a long-time mortgage executive who now heads Mountain Lake Consulting in Virginia. “We thought the current Basel rule made sense, but this one’s going to have downstream effects that are going to be very broad in the housing system.”
The change is expected to have at least a moderate impact on banks’ willingness to originate. While banks have been steadily ceding market share to independent mortgage banks and other nonbank lenders since the subprime mortgage crisis, they still play a key role in the so-called jumbo mortgage market, which consists of loans too large to be securitized and sold to the government sponsored enterprises Fannie Mae and Freddie Mac.
“The big, traditional mortgage lending banks have largely exited the field and that’s been going on for some time. This is the next nail in the coffin,” said Edward Pinto, director of the AEI Housing Center at the American Enterprise Institute. “This nail will make it harder for banks to compete with Fannie and Freddie, generally, and then take the one market they’ve had left to themselves, the jumbo market, and make it harder to originate because of the capital requirements.”
Some policy experts say the bigger impacts could come from the second-order effects of the regulation. In particular, they point to the treatment of mortgage servicing assets — the salable right to collect fees for providing day-to-day services to mortgages — as a change that could crimp the flow of credit throughout the housing finance sector and lead to higher costs being passed along to individual households.
“With potential borrowers already facing record high interest rates, steep home prices, and supply-chain issues, increased fees and scarcity of bank lenders could be another brick in the wall stopping Americans from obtaining meaningful homeownership and wealth creation,” said Andy Duane, a lawyer with mortgage-focused law firm Polunsky Beitel Green.
The proposal, put forth by the Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller on the Currency, notes that the rule change could result in second-order effects on other banks, but it largely focuses on benefits that large banks could enjoy relative to smaller banks as a result of the new rules. It notes that such risks are offset by a requirement that banks adhere to both the new framework and the existing one, to ensure they do not see their regulatory capital levels dip below that of the standardized approach.
Still, the regulators are aware that the change could have unintended consequences on the mortgage industry and housing attainability. Because of this, their proposal includes several questions about the subject.
“We want to ensure that the proposal does not unduly affect mortgage lending, including mortgages to underserved borrowers,” Fed Vice Chair for Supervision Michael Barr said while introducing the proposal in an open meeting last month. He added that housing affordability was one of “several areas that I will pay close attention to and encourage thoughtful comments.”
However, the proposal dismissed the idea that the new risk weights on residential mortgages would have a material impact on bank lending in that space. Citing various policy papers, academic studies and regulatory reports, the agencies assert that the risk-weight changes would lead banks adjusting their portfolios “only by a few percentage points.”
Stevens — who served as an assistant secretary in the Department of Housing and Urban Development in the Obama administration, a commissioner for the Federal Housing Administration and president of the Mortgage Bankers Association — said he is not convinced regulators have done sufficient analysis to rule out the type of sweeping, negative implications that he and others fear. He noted that the 1,087-page proposal includes fewer than 20 pages of economic analysis.
“I just don’t think they’ve thought through the downstream effects and the lack of analysis, in terms of actual financial estimates of the implications, is really concerning,” He said. “This will be a really big change, and that’s why you see everybody up in arms and the trade groups aligned against this proposal.”
Like other components of the bank regulators’ Basel III endgame proposal, the components related to mortgages would create standardized capital rules for large banks and do away with the ability for large institutions to use internal models. It also extends these requirements to all banks with more than $100 billion of assets, rather than only the largest, global systemically important banks.
The key provision in the package of proposed rules is the use of loan-to-value, or LTV, ratios to determine risk-weights for residential mortgage exposure.
The change could allow banks to hold less capital against lower LTV mortgages, though there is some skepticism about much of a reduction in capital that change will ultimately entail, especially for GSIBs that previously relied on internal models, said Pete Mills, senior vice president of residential policy for the Mortgage Bankers Association.
“Those risk weights aren’t published, so we don’t know what they are, but they are probably lower than 50% for low-LTV products,” Mills said.
The Basel Committee’s latest regulatory accord, which was finalized in December 2017, envisions LTV ratios as a means of assigning risk weights. But Mills said many in the mortgage banking space were caught off guard by how much further U.S. regulators went beyond their global counterparts. The joint proposal from the Fed, FDIC and OCC calls for a 20 percentage point increase across all LTV bands, meaning while mortgages with LTVs below 50% are assigned a 20% risk-weight under the Basel rule, the U.S. proposal calls for a 40% risk-weight. Similarly, where the Basel framework maxes out at a 70% risk-weight for mortgages with LTVs of 100% or more, the U.S. version has a top weight of 90%.
Under the current rules, most mortgages in the U.S. are assigned a 50% risk weight, so loans with LTVs between 61% and 80% would see their capital treatment stay the same, and any mortgages with LTVs of 60% or lower would see a lower capital requirement. Loans with an LTV of 80% or higher, meanwhile, would likely see a higher capital requirement.
“For GSIBs, that’s probably an increase in capital throughout the LTV rank,” Mills said. “For the rest, it’s a higher risk weight for higher-LTV mortgages and maybe slightly lower in other bands, but, in aggregate, that’s not good for the mortgage market. It’s a higher risk weighting for most mortgages.”
Approximately 25% of first-lien mortgages held by large banks began with an LTV of 80% or higher, according to data compiled by the Federal Reserve Bank of Philadelphia. Roughly 10% have an LTV of 90% or higher, while half were 70% or lower.
Mark Calabria, former head of the Federal Housing Finance Agency, said he is not surprised by the proposed treatment of mortgages, calling it a “natural evolution” of where regulators have been moving. He added that some elements of the proposal resemble changes he oversaw at Fannie Mae and Freddie Mac in 2020.
Calabria said mortgage risk is an issue in the financial system in need of regulatory reform, but he questions the methods being considered by bank regulators.
“I worry that they’re making the problem in the system worse by driving this risk off the balance sheets of depositories, which is probably actually where it should be in the first place,” he said. “I’m not opposed to them tinkering in this space they just need to be more holistic about it.”
The proposal also notes that the new treatment of residential mortgages is aimed at preventing large banks from having an unfair advantage over smaller competitors.
“Without the adjustment relative to Basel III risk weights in this proposal, marginal funding costs on residential real estate and retail credit exposures for many large banking organizations could have been substantially lower than for smaller organizations not subject to the proposal,” the document notes. “Though the larger organizations would have still been subject to higher overall capital requirements, the lower marginal funding costs could have created a competitive disadvantage for smaller firms.”
Yet, while regulators say the proposed rules promote a level playing field, some see it giving an unfair advantage to government-backed lenders.
Pinto sees the proposal as a continuation of a decades-long trend of federal regulators putting private lenders at a disadvantage to the governmental and quasi-governmental entities. He noted that if securities from Fannie and Freddie and loans backed by the FHA and Department of Veterans Affairs, which tend to have very high LTVs, are not given the same capital treatment as private-label mortgages, the net result will be the government playing an even larger role in the mortgage market that it already plays.
Pinto said despite these government programs targeting improved affordability, their provision of easy credit only drives up the cost of housing even further. He added that he hopes regulators reverse course on their treatment of mortgages in their final rule.
“They should just back off on this entirely. It’s inappropriate,” Pinto said. “They need to look at the overall impact they’re having on the mortgage market, and the housing and the finance market, and the role of the federal government, and the fact that the federal government is getting larger and larger in its role, which is inappropriate.”
The other concern is a lower cap on mortgage servicing assets that can be reflected in a bank’s regulatory capital. The proposal would see the cap changed from 25% of Common Equity Tier 1 capital to 10%.
Mills said the capital charge for mortgage servicing rights is already “punitive” at a risk weight of 250%. By lowering the cap, he said, banks will be forced to hold an additional dollar of capital for every dollar of exposure beyond that cap. He noted that regulators had raised the cap to 25% five years ago for banks with between $100 billion and $250 billion of assets to provide some relief to large regional banks interested in that market.
If the cap is lowered, Mills said banks will be inclined to shed assets and shy away from mortgage servicing assets. Such moves would force pricing on servicing rights broadly, a trend that would ultimately lead to higher costs for borrowers.
“MSRs are going to be sold into a less liquid, less deep market, and there are consumer impacts here because MSR premiums are embedded in every mortgage note interest rate,” Mills said. “If MSR values are impacted by this significantly, that rolls downhill through the system. An opportunistic buyer might be able to buy rights at a depressed value, but that depressed value flows through to the consumer in the form of a higher interest rate.”
The proposal will be open to public comment through the end of November, after which regulators will review the input and incorporate elements of it into a final rule. Between the questions raised in the proposal, the acknowledgement by Fed and FDIC officials that the changes could hurt housing affordability, and the strong negative response to the proposal, there is optimism that the ultimate treatment of residential mortgages will be less impactful.
“Nobody seems to be pushing for this, and nobody other than the Fed seems to like it,” Calabria said. “If I was a betting man, it’s hard for me to believe that this is finalized the way it is now in terms of mortgages.”
If you’re like most people, credit card interest and taxes are two things you don’t want to pay. Luckily, paying one may help you pay less for the other. Credit card interest and fees are tax-deductible in some cases. That means every dollar you pay in credit card interest might reduce a dollar of your taxable income.
If that sounds too good to be true, there is a catch — credit card interest and fees are typically only considered tax-deductible if they are legitimate business expenses. If you don’t run a business, or the interest and fees were not incurred in the operation of a business, you generally won’t be able to deduct them on your tax return.
How Credit Card Interest Works
When you make a purchase with a credit card, you don’t have to pay for it right away. Instead, you are borrowing the money for the duration of your statement (usually one month). At the end of your statement balance, you must make at least a minimum payment. But if you don’t pay the full statement amount, you will be charged credit card interest on any outstanding balance. Charging this interest is one way that issuers fund credit card perks and benefits like credit card rewards.
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Is Credit Card Interest Tax Deductible?
Whether or not credit card purchase interest charges are tax-deductible depends mostly on whether it is personal or business credit card interest.
Business Credit Card Interest
Business credit card interest may be tax-deductible in certain situations. Generally speaking, in order to deduct any expenses, they must be incurred in the regular operation of the business. The IRS does not have requirements about what type of credit card is used, as long as the interest is incurred on business expenses.
You may be able to deduct credit card interest on a personal credit card used for business purchases. However, most credit card agreements prohibit the use of personal credit cards for business purposes on a regular basis.
Not surprisingly, you cannot typically deduct credit card interest on personal expenses charged to a business credit card. And if you pay for personal and business expenses with the same credit card, you may not be able to deduct the full amount of interest. Consult with your accountant or tax advisor if you have questions about what can and cannot be deducted.
Personal Credit Card Interest
Personal credit card interest is not tax-deductible under any circumstances. You cannot deduct interest that you pay for personal expenses on a credit card. That’s one more reason to always pay your credit card statement in full, each and every month. That way you aren’t charged any credit card interest.
Recommended: How to Do Taxes as a Freelancer
Are Credit Card Fees Tax Deductible?
Just like credit card interest, the deductibility of credit card fees largely depends on whether they are for business expenses.
Business Credit Card Fees
Credit card fees that are incurred as business expenses are generally considered deductible. This includes credit card annual fees, overdraft fees, foreign transaction fees, late fees, and balance transfer fees. As long as the credit card is used for business purposes, any fees charged by the credit card issuer will be tax-deductible.
💡 Quick Tip: When using your credit card, make sure you’re spending within your means. Ideally, you won’t charge more to your card in any given month than you can afford to pay off that month.
Personal Credit Card Fees
In contrast, personal credit card fees are not generally considered deductible. Any fees that you are charged by your credit card issuer that are not business expenses cannot be deducted from your taxable income.
Recommended: Can You Use a Personal Checking Account for Business?
Avoiding Interest and Fees vs Tax Deductions
While it’s important to understand that you may be able to deduct credit card interest and fees if they are business expenses, avoiding credit card interest may be the more prudent thing to do. If you are in a 30% tax bracket, that means deducting one dollar of interest will save you 30 cents. But if you pay your balance in full, you won’t be charged any interest and save the full dollar.
The Takeaway
Some credit card fees and interest is deductible on your annual tax return. Generally speaking, you cannot deduct personal credit card interest or fees. You may be able to deduct them if they are legitimate business expenses. Keeping your business and personal expenses separate can help you determine which fees and interest you may be able to deduct.
Looking for a new credit card? Consider a rewards card that can make your money work for you. With the SoFi Credit Card, you earn cash-back rewards on all eligible purchases. You can then use those rewards for travel or to invest, save, or pay down eligible SoFi debt.
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FAQ
Can you deduct credit card interest as business expense?
As credit card interest rates rise, the amount of interest that you’re charged each month on any unpaid balances also rises. So you may be wondering if you can deduct credit card interest from your taxable income. The good news is that as long as the interest is a legitimate business expense, you can generally deduct the interest.
Are credit card fees tax deductible?
It’s important to understand how different credit card-related items affect your taxes. Credit card rewards are generally not considered taxable, while some credit card fees may be tax-deductible. You may be able to deduct most credit card fees as long as they are considered legitimate business expenses. Personal credit card fees are not generally considered deductible.
Can you write off personal credit card annual fees?
No, in nearly all cases, you cannot take a tax deduction for personal credit card fees. Only credit card fees that are legitimate business expenses are tax-deductible. However, it’s important to understand that the IRS does not make any distinction between what might be marketed as a “personal” card or a “business” credit card.
Photo credit: iStock/Cameron Prins
The SoFi Credit Card is issued by The Bank of Missouri (TBOM) (“Issuer”) pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
SoFi cardholders earn 2% unlimited cash back rewards when redeemed to save, invest, or pay down eligible SoFi debt. Cardholders earn 1% cash back rewards when redeemed for a statement credit.1 1Members earn 2 rewards points for every dollar spent on eligible purchases. If you elect to redeem points for cash deposited into your SoFi Checking or Savings account, SoFi Money® account, or fractional shares in your SoFi Active Invest account, or as a payment to your SoFi Personal, Private Student, or Student Loan Refinance, your points will redeem at a rate of 1 cent per every point. If you elect to redeem points as a statement credit to your SoFi Credit Card account, your points will redeem at a rate of 0.5 cents per every point. For more details please visit SoFi.com/card/rewards. Brokerage and Active investing products offered through SoFi Securities LLC, member FINRA/SIPC. SoFi Securities LLC is an affiliate of SoFi Bank, N.A.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.