By Robert Nusgart
As 2013 takes shape, it’s time for a hard look at what the mortgage industry will be facing during the course of the year.
The obvious question is what interest rates will do. I think we got a hint this month as to how rates will react once the Obama administration and Congress continued to grind away at solving the country’s fiscal needs.
After Congress resolved the fiscal cliff and the Federal Reserve hinted that it might not buy as many mortgage-backed securities in the coming months, interest rates shot off their lows with the biggest uptick we have seen in several months, moving to about 3.625 percent for a 30-year fixed-rate term. Since then, the market has drifted lower, but it showed that it didn’t take much for rates to hit the up elevator.
In fact, the Mortgage Bankers Association in its forecast for this year stated that it expects rates by the end of the year to rise to 4.4 percent. That is a lofty jump considering that rates are about a point less than that expectation.
But just think what that means to a borrower.
On a $350,000 loan, today’s rate of 3.375 percent means a principal and interest payment of $1,547. If rates go to, let’s say, 4.5 percent by December, that payment moves to $1,773, a monthly difference of $226 a month. That is significant. What also is significant is the interest paid over the life of the loan. At 3.375 percent, the total interest paid over the 30-year period comes to $207,041; at 4.5 percent, that borrower will pay $288,423. And consequently, the MBA is expecting refinance activity to drop 75 percent in the last quarter of 2013 from the last quarter of 2012.
In the coming weeks, I would expect some volatility in the market as the debt ceiling issue and debate over federal spending cuts come to the forefront.
So the moral of the story is this: If you are thinking about buying a home or refinancing your mortgage, now is the time, because the likelihood of rates going down is less than the likelihood of rates moving higher.
As I remind people when they are contemplating rates and whether to lock or float a rate, today’s 30-year fixed rate not so long ago was the rate for a one-year adjustable rate mortgage. So put it in perspective.
Next, you will see continued tightening of mortgage guidelines as lenders continue to fine tune the qualifying process. The reasoning behind this is that lenders want to ensure that when they make a loan and sell it on the secondary market, there will be little chance that the buyer of that loan will find fault with it and declare that the originating lender must buy it back.
Therefore, the pressure remains on underwriters to request items from borrowers that might not be necessary to the file, but that strengthen it. When it doubt, get documentation. And that mindset is going to continue as more federal regulations come down the pike, ensuring that loans are being made to individuals who can afford the loan that they are being put into.
As for the housing market, there seems to be a sense that 2013 is going to be a good year for the real estate community. Inventory is low. The ensuing result will be simple supply and demand, and, therefore, sale prices will continue to rise.
If that happens, as values rise and appraisals start catching up with sales data, more homeowners who have been underwater the past several years finally might find relief, allowing them to either refinance a home that they previously could not or put their home on the market and avoid a short sale.
It is becoming apparent that the dynamics of the market finally are beginning to change. And if the housing industry is back on track, that likely is an indicator that the rest of the economy is following suit.
Robert Nusgart is a loan officer with Mortgage Master Inc. in Baltimore. He can be reached at 443-632-0858 or by email at [email protected]