A hybrid in your housing future?

A hybrid in your housing future?

Kenneth R. Harney Jan 31, 2014

WASHINGTON — Higher mortgage rates for 2014? Count on it. Could this be the year to check out hybrid mortgages, which haven’t been popular lately? Maybe.

You can count on interest rates going higher because:

1.The Federal Reserve intends to continue reducing its monthly purchases of mortgage bonds and Treasury securities, which will have the side effect of raising rates.

2.The national economy finally appears to be picking up steam, based on the latest quarterly data. Higher growth rates in turn will increase demand for available credit and likely nudge rates higher.

3. New federal regulations for mortgage lenders aimed at avoiding another bust take effect Jan. 10. Not only will loan officers and underwriters scrutinize applicants’ income, debt ratios and credit extra carefully, they’ll likely charge more for borrowers whom they see as a higher risk. Some mortgage economists predict that conventional 30-year fixed-rate loans could go to 5.5 percent before year-end.

So what does this mean for you if you’re thinking about buying a house or refinancing and you want to nail down the most favorable interest rate and terms? Should you shop primarily for a traditional mortgage product that guarantees you a specific rate for 15 to 30 years?

Or should you check out what’s also on the shelf in the way of hybrids — loans that provide you a guaranteed fixed rate for a predefined period of time, say five, seven or 10 years — then convert to a rate that can change annually?

The case for sticking with a traditional, fixed-rate mortgage is straightforward. Though 30-year rates are more than a percentage point higher this month than they were a year earlier, they are still not far off multi-decade lows. Bruce A. Calabrese, president of Equitable Mortgage Corp. in Columbus, Ohio, is adamant: “My advice for home buyers” in the new year, he says, “is to lock [early] into a 30-year fixed” while rates are still under 5 percent. “Take a 30-year fixed at 4.75 percent and be happy” because that’s still far below average rates over the past several decades.

Paul Skeens, president of Colonial Mortgage Corp in Waldorf, Md., agrees. “If fixed [rates] are under 5.5 percent and you are going to live in your home for five years or more, they are still a great deal,” he says. “I’m very partial to fixed rates since I remember when anything under 7 percent was a great deal.”

To illustrate Skeens’ and Calabrese’s historical point, consider these average annual 30-year fixed rates: In 1974, they averaged 9.19 percent nationwide, according to mortgage investor Freddie Mac. By 1984, they were at 13.88 percent. In 1994, fixed rates averaged 8.38 percent; and in 2004, 5.84 percent.

But what if you say: I don’t care about what rates were in previous decades. That was then. I’m here and now. I’m more concerned about being able to afford today’s housing prices on today’s income and household expenses.

Jeff Lipes, a lender in the Hartford, Conn., area and former president of the Connecticut Mortgage Bankers Association, believes that hybrids with fixed rates for between five and 10 years “are fantastic options for borrowers” in 2014, and can lock in rates that are one or more percentage points below competing 30-year fixed loans.

“Most first-time buyers purchase a home that will be sold when the family income increases or the family outgrows the house,” Lipes says. “That usually occurs in the first 10 years, so that is why a [hybrid] is a great option. The borrower saves a lot of money” — sometimes hundreds of dollars a month — “paying a lower rate.”

A check of Bankrate.com’s online rate monitor in late December found five-year hybrids averaging around 3.4 percent nationwide, seven-year hybrids at 3.81 percent and 10-year hybrids at 4.16 percent. Thirty-year fixed rates averaged 4.63 percent.

Ted Rood, senior mortgage consultant with Wintrust Mortgage in St. Louis, says he’s already seeing a shift in demand toward five- and seven-year hybrids. He just closed a seven-year at 3.5 percent on a house in Wyoming for a borrower who fully understood the risk that he could face higher rates at the conversion point in late 2020.

Bottom line for you if you’re in the market: Check out all the options on the menu. If you are comfortable with the potential risks, and the monthly savings advantages of a hybrid are substantial, go for it.

Some options for mortgage shoppers

Some options for mortgage shoppers

Kenneth R. Harney Jan 24, 2014

WASHINGTON — The verdict was nearly unanimous at a recent hearing on Capitol Hill: The new federal “ability to repay” and “qualified mortgage” regulations that took effect Jan. 10 will make obtaining credit tougher, not easier, this year, and potentially force large numbers of credit-worthy homebuyers to defer or cancel their plans.

What nobody addressed at the hearing, though, was the elephant in the room: OK we’ve got a problem. But what, if anything, can buyers who find it difficult to meet the new standards do about it?

The testimony came from mortgage, banking and credit union leaders — even the head of a nonprofit Habitat for Humanity chapter. Though they didn’t dispute the good intentions of Congress or federal regulators in adopting the sweeping changes — banning or severely restricting most of the worst practices and loan features that facilitated the mortgage debacle of the last decade — they said the new rules amount to overkill.

By forcing creditors to offer mortgages within a tightly confined box of complex underwriting requirements and imposing crushing financial penalties for infractions, the new regulations are making lenders hyper-cautious about approving anybody, especially applicants who appear marginal or don’t quite fit the standard profile.

Bill Emerson, CEO of Quicken Loans, one of the country’s highest-volume lenders, said the new rules could “impair credit access for many of the very consumers they are designed to protect.” These people are all over the country — young first-time buyers with student debts, middle-income minority buyers, self-employed individuals and those whose incomes are not received at regular intervals, plus just about anybody with household debt that exceeds 43 percent of income.

But are there ways for folks like these to improve their chances to get a mortgage this year, rather than waiting the estimated 12 to 24 months it may take for regulators to assess the impact of their rules and loosen up? Yes. Here are a few practical strategies.

House Democrats Highlight New GSE Plan

House Democrats Highlight New GSE Plan

by Victoria Finkle JAN 16, 2014 5:16pm ET

WASHINGTON – Reps. John Delaney, D-Md., John Carney, D-Del., and Jim Himes, D-Conn., unveiled the outlines of a new housing finance reform plan on Thursday that would provide an explicit government backstop for the market, while requiring increased private sector participation.

The plan, which will be formally introduced this spring, would unwind Fannie Mae and Freddie Mac and be based on a mortgage reinsurance system organized around Ginnie Mae, with private companies pricing and sharing in the risk on mortgage-back securities.

“To ensure a stable housing finance system, we must move past the current state to a new system that engages more private sector capital and private sector pricing of risk in partnership with an explicit government role in the provision of stabilizing liquidity to the market – this bill does that,” Delaney said in a press release.

The Democratic plan comes at a time when mortgage finance reform has stalled in the House. The Republican-majority House Financial Services Committee approved a bill this summer down party lines that would get rid of Fannie Mae and Freddie Mac and remove any government backstop from the market, but it’s still unclear the plan has enough support to win a vote on the chamber floor.

Leaders on the Senate Banking Committee, meanwhile, are also said to be developing legislation that is likely to draw on earlier work by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., to remove the government-sponsored enterprises, but establish an explicit government guarantee for the market.

Supporters of the new proposal argue their plan takes attractive elements from both approaches – maintaining the explicit government guarantee laid out in the Corker-Warner bill, while adopting private sector pricing for the securities.

“Our proposal today doesn’t come in a vacuum,” Carney said in a meeting with reporters Thursday. “What we try to do, and I think we’ve done it well, is to try and strike the right balance.”

Issuers would be required to hold 5% first loss capital under the plan before they can securitize their mortgages through Ginnie Mae. The government corporation would separately contract with private reinsurance companies, locking in rates based on the private market assessment of risk and sharing the risk with the private entities. Ginnie Mae would assume 90% of the risk and the private companies 10%.

The lawmakers told reporters that they are continuing to reach out to numerous stakeholders and participants, including industry groups, the Obama administration and colleagues on the banking panel such as Rep. Jeb Hensarling, the committee’s chairman.

“I think the chairman wants the [Protecting American Taxpayers and Homeowners Act] to pass the House of Representatives and go to conference with the Senate – that’s his objective. We respect that, we understand that,” Delaney said. “What we’re trying to do is develop an alternative framework that can appeal to his principles and the principles of other people in his party . so we try to keep him in the loop in a very cordial and construct way.”

The legislation would also include support for affordable housing, popular with Democrats, that is similar to the provisions laid out in the Corker-Warner bill. Ginnie Mae would charge a fee of 5 to 10 basis points on each security that would be used to fund the Housing Trust Fund and the Capital Magnet Fund. Any government profits derived under the new system could also potentially be used for additional programs, the lawmakers said.