Buying a home will be more difficult in 2011 than in 2010, prompted by new government lending regulations and the newly-enacted Dodd-Frank Wall Street Reform and Consumer Protection Act.
In an effort to decrease the chances of an encore performance of the Great Recession, new federal legislation requires lenders to maintain at least 5% of the credit risk on the mortgages they originate. This retention of risk, instead of bundling the loans and selling 100% of them to the secondary mortgage market, eliminates this disastrous practice.
What these risk-retention changes mean for the homebuyer is that securing a mortgage will be more difficult going into 2011 compared to the relaxed years of the mid-2000s. Mortgage lenders will now be less inclined to originate a mortgage for borrowers who pose a risk of default – that is, those who lack a solid employment history and peak FICO scores.
Additionally, Fannie Mae and Freddie Mac will be imposing risk-based mortgage fees, dependent on homebuyers’ credit scores and loan-to-value (LTV) ratios. If the homebuyer is perceived as a risk, the increase in fees may result in thousands of dollars more out of pocket — potentially translating to about $10 extra on every monthly payment for a $200,000 mortgage. Thus, that homebuyer will need to wait a couple of years before buying a home to build up their credit score and save for a larger downpayment.
first tuesday take: The new consumer protection legislation is a double-edged sword. On one hand, lenders will be held accountable for their actions by fresh regulations aimed at defending homebuyers from exposure to unsuitable mortgages – particularly adjustable rate mortgages (ARMs). But in a collective and organized response, lenders have increased mortgage fees and are overreacting by making it more costly for anyone to obtain mortgage funding – for most, a requisite for purchasing a home. [For more information regarding Fannie Mae’s new lending guidelines, see the November 2010 first tuesday article, Fannie’s gift for the holidays: stricter lending guidelines.]
As brokers and agents adjust to lenders’ self-imposed tighter lending policies, loans will remain plentiful for all with a downpayment in hand, a better FICO score and a permanent job – fundamentals of lender underwriting in any market. The volume of sales transactions will not be affected by these developments.
However, these changes will leave the public believing loans are not available, and thus consumers will hesitate to buy a home. It is incumbent upon brokers and their agents to make potential buyers within their community aware that mortgages are in fact available, and the only issue is getting the lowest rate and fees by shopping at least two or three lenders for pre-approvals. This will cost the prospective homebuyer nothing but time and effort. [For more information regarding mortgage shopping, see the June 2010 first tuesday Form of the Month, A borrower’s mortgage worksheet: who has the most advantageous financing.]
Attitudes of lenders and consumers going forward will be much different, as both camps assert their influence and fight for favorable regulations. Lenders will not win the early battles, but in the long haul they have the staying power to move regulations in their favor. High-functioning brokers and agents will do their part to ensure their buyers succeed in the new real estate paradigm by guiding them to shop around for the best rates and most advantageous loan terms before signing on the dotted line.
So long as the mortgage rules remain level for all lenders, the competition imposed on them by homebuyers who shop several lenders and then take the best deal will keep mortgage lenders from playing games with the rates and fees they charge. But it is the brokers and agents as gatekeepers that have to gently push and guide their buyers to do the intuitive thing — shop. [For more information regarding the Dodd-Frank Act, see the October 2010 first tuesday Legislative Watch, TILA circa 2010; consumer protection enhancement and Section 32 consumer loans: TILA increases disclosures and tightens parameters; for additional commentary on the prudent practice of shopping around for a mortgage, see the May 2010 first tuesday article, Shop, shop, shop until you drop and the December 2010 first tuesday article, Homebuyers shop around for everything but their mortgage.]
Re: “Would-be homebuyers might encounter obstacles in 2011” from the Sacramento Bee and “Fannie Mae is jacking up mortgage fees” from the LA Times