Housing Bubble or Mortgage Crisis Repeat?

A recent report says that 12 facts point to higher home price expectations as a fundamental reason why credit expanded during the housing boom, which eventually led to a mortgage crisis:  

• Fact 1:  Resets of adjustable rate mortgages did not cause the crisis 
• Fact 2:  No mortgage was designed to fail 
• Fact 3:  There was little innovation in mortgage markets in the 2000s 
• Fact 4:  Government policy did not change much from 1990 to 2005 
• Fact 5:  The originate-to-distribute (OTD) model was not new 
• Fact 6: MBSs, CDOs, had been widely used for decades 
• Fact 7:  Mortgage investors had lots of information
• Fact 8:  Investors understood the risks 
• Fact 9:  Investors were optimistic about house prices 
• Fact 10:  Mortgage market insiders were the biggest losers 
• Fact 11:  Mortgage market outsiders were the biggest winners
• Fact 12:  Top-rated bonds backed by mortgages did not become toxic

The availability of mortgage credit expanded during the housing boom and many people received mortgages for which they should not have qualified.  The report concludes that the housing bubble occurred because people believed that home prices would keep going up, the defining characteristic of an bubble. People were willing to take a risk if lenders were willing to loan the money. As long as the current loan underwriting remains in place, it's doubtful that a similar mortgage crisis would happen again. 

Mortgage Payments as a Percentage of Income

The number of working households that spend more than half their income on rent or mortgage payments appears to be growing. 

The Center for Housing Policy issued a recent report saying that many home owners are having a hard time paying to keep a roof over their heads while still paying for other expenses. This situation may be become even harder for renters who have been seeing monthly rental payments rising because of increasing demand.

Many personal finance experts say that people should generally spend no more than 30 percent of their total income on rent or mortgage payments. The housing report estimates that approximately twenty two percent of working homeowners are spending more than 50% of their income on a place to live compared to almost twenty six percent of renters.

This trend could affect the economy in general because higher housing payments can divert disposable income which would normally be available to purchase durable goods and other items. 

Demand Up for Home Loans - Mortgage Lenders Set on Credit Scores

The demand for home loans has increased, but according to the Federal Reserve's mortgage loan officer survey, mortgage lenders have not relaxed tight credit scores and home loan qualifying requirements.

Over 90% of the mortgage lender respondents to the survey said there was no change in the past 3 months in their qualifying standards for home loans with relatively high credit scores and well-documented financial statements. 

The survey did show that mortgage lenders eased standards for most other types of consumer loans. And demand for all types of consumer loans rose, with car loans having the biggest increase.

Lenders said they were less likely to approve home loans with credit scores of 620 and a down payment of 10%. Even for credit scores of 680 and a 10% down payment, about 79% of mortgage lenders said they were likely to approve a loan.

FHA Mortgage Loans for Rehab or Home Improvement

A 203(k) type of FHA mortgage can provide a single, fixed rate loan on a refinance mortgage or purchase of a home, plus money for property rehabilitation, or home improvement.

FHA 203(k) loans cover the purchase or refinance and rehab of a home that is at least a year old. A portion of the mortgage proceeds is used to pay the seller, or, if a refinance, to pay off the existing mortgage, and the remaining funds are placed in an escrow account and released as repairs are completed.

The cost of the property rehab must be at least $5,000. The value of the property is determined by either (1) the value of the property before rehabilitation plus the cost of rehabilitation, or (2) 110 percent of the appraised value of the property after rehabilitation, whichever is less.

FHA mortgage lenders may charge additional fees, such as a supplemental origination fee, fees to cover the preparation of architectural documents and review of the rehabilitation plan, and a higher appraisal fee.

Condominium units may be insured if they are in projects that have been approved by FHA or the Department of Veterans Affairs, or meet certain Fannie Mae guidelines.

The extent of the home rehab covered by FHA loans 203(k) can range from relatively minor to virtual reconstruction: a home that has been demolished or will be razed as part of rehabilitation is eligible.

Types of home improvements allowed with an FHA refinance or home purchase:

• structural home alterations and reconstruction 
• functional modernization and improvements
• elimination of health and safety hazards
• changes that improve appearance and eliminate obsolescence
• reconditioning or replacing plumbing; installing a well and/or septic system
• adding or replacing roofing, gutters, and downspouts
• adding or replacing floors and/or floor treatments
• major landscape work and site improvements
• enhancing accessibility for a disabled person

Real Estate Markets Improving - Mortgage Rates Remain Low

The number of improved real estate markets has grown since the National Association of Home Builders started their tracking index. Pent up housing demand, consumer confidence, and low mortgage rates seem to be driving more real estate sales.  

The NAHB index identifies metropolitan areas that have shown improvement from their respective troughs in housing permits, employment and house prices for at least six consecutive months. While 83 metros held onto their previous places, and 17 new ones were added to the list in May.

100 markets in 34 states represented on the improved housing market list shows that real estate is local, and that national statistics often don’t apply to a specific metropolitan area. Some of the factors still weighing down real estate sales continues to be qualifying for mortgage loans, and the difficulty of obtaining value on appraisals.

Mortgage Refinance Loans May Cost Less

Mortgage refinance activity could see a big jump if some legislators have their way. 

A bill has been introduced that would allow borrowers who are current on their payments to refinance mortgage loans to a lower rate, and eliminate all up-front fees and appraisal fees.

This would apply only to mortgage loans held by Fannie Mae and Freddie Mac, which may cover as many as 17.5 million home loans guaranteed by the government.

However, a sweeping mortgage refinance program like that could violate agreements with bondholders and amount to taking money from from investors without adding any new money to the housing market,which would not help to stimulate the economy.

Also, mortgage administrators may not have the power to break contracts with banks, pension funds, mutual funds and other investors in mortgage-backed securities.

An alternative plan is aimed at reducing mortgage refinance rates and the loan term for those who are current on their payments but their home values are less than their loans,which could build equity faster and potentially reduce loan defaults.

Short Term Refinance Popularity Grows with Low 15 Year Mortgage Rates

With incredibly low mortgage rates, it's no surprise that in the first quarter of 2012, more than 95% of mortgage refinance loans were fixed rates.

What is interesting is that over 30% of refinance loan borrowers chose a short term refinance mortgage. 

When refinancing, people usually choose a lower payment with a 30 year fixed mortgage instead of a shorter loan term. However, if you can afford the higher monthly payment, low 15 year mortgage rates can make it easier to eventually become mortgage free.

In the meantime, you could be saving thousands of dollars in interest, compared to a 30 year mortgage. For example, on a $200,000 loan, there's somewhere around $120,000 less interest paid on a 15 year mortgage, compared to a 30 year loan term.

What are the benefits of a short term mortgage?

• Provides a strategy to eventually eliminate your monthly mortgage expense
• Incorporates the retirement of your mortgage into your overall retirement plan
• Long term investment that guarantees a rate of return by reducing your debt 
• A future with less financial stress and the security of really owning your home
• 15 year mortgage rates are usually a little lower than 30 year mortgage rates
• Save a large amount of interest expense on a 15 year term instead of 30 years