People assume that mortgages will always be available but what if that’s wrong? Could there be a mortgage shortage in the near future, a time when financing shelves are bare?
Consider a new study by ComplianceEase which shows that next year “one in five mortgages would not qualify for safe harbor under Dodd-Frank.” Sounds pretty grim until you realize that many of the loans which would not pass muster only fail because lenders are now charging higher fees than the new rules allow.
In fact, the study suggests no mortgage shortage whatsoever. Instead, it shows that 80 percent of all loans originated today would be acceptable under the 2014 qualified mortgage guidelines, meaning that most loans by most lenders already meet future standards.
Figures from the Mortgage Bankers Association also explain why there isn’t a loan shortage today and why there won’t be one tomorrow: Originating mortgages is profitable under the new rules. MBA figures show that profits per loan increased from $917 before the passage of Wall Street Reform to $1,528 in the second quarter of this year. How many businesses have done as well since 2010?
What If Investors Keep Their Cash?
What about funding? Could investors worldwide turn away from mortgage-backed securities and seek other investments, thus reducing the cash available for home loans in the U.S.?
In theory it could happen but in practice a cash shortage is unlikely for two reasons. First, the U.S. marketplace is soaked with cash. Second, we’re in a rate slump.
“Big banks are flooded to the gills with deposits that are costing them virtually nothing,” says the Los Angeles Times.
The marketplace is awash with so much capital that in early September the interest rate for jumbo mortgages was lower than the rate for conforming loans! How can there possibly be a loan shortage when lenders are dumping money into the marketplace at a discount?
But what happens if foreign investors no longer put their money into the U.S. mortgage system? That could certainly happen but such a move on a mass scale is unlikely for two reasons: First, investors would have to find an alternative market as large and secure as the U.S. Second, look at what happened to mortgage rates when the government was shut down in October and there was talk of not paying the U.S. debt: Mortgage rates fell, hardly evidence of less capital coming to the states.
While 2012 was a banner year in financing with mortgage rates as low as 3.3 percent, 2013 has seen rates rise above 4 percent.
Are the "higher" rates seen in 2013 evidence of a looming mortgage shortage? Not hardly. Standard & Poors notes that mortgage rates during the past 40 years averaged 8.6 percent. In fact, rates today are so low the Wall Street Journal reports that when home builders offer a choice of lower mortgage rates or upgrades such as better carpets or nicer kitchen cabinets it turns out that buyers prefer the goodies they can see and touch rather than cheaper loans.
The Mortgage Bankers Association says that in 2014 loan originations will drop 32 percent but fear not, such a reduction is not evidence of a mortgage shortage.
The MBA gets the 32 percent figure because while it “expects purchase originations to increase 9 percent, it expects refinance originations to fall 57 percent.”
The MBA projection, if correct, is extremely good news.
If purchase-money mortgages increase 9 percent it means that home sales will rise, something very desirable for both the housing sector and the national economy. The National Association of Realtors says it expects roughly 5.29 million existing home sales this year. Adding 9 percent to the total suggests another 475.000 transactions — very good news, especially if it means reducing the distressed homes inventory.
But what about that huge refinancing fall-off? Is that in any way tied to a financing shortage?
The answer is no. There will be less refinancing for the very simple reason that people trade-in their loans when they get a material benefit in return. For the past few years homeowners have been refinancing like crazy because mortgage rates have been at historic lows. Why would they refinance again when the MBA expects mortgage rates to reach 5 percent in 2014?
The MBA’s projected 57-percent refinancing decline simply means that borrowers are lucid and rational — and that lenders will have to compete harder to get the business that remains.
Of course, you could look at the possibility of mortgage shortages this way: The ComplianceEase study says 20 percent of all mortgages today will not meet 2014 guidelines while the MBA says mortgage demand will fall 32 percent. Rather than a shortage, this seems like a formula for a mortgage glut.
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