It is going to be a lot harder for prospective borrowers to get a new mortgage or refinance their current mortgage in 2011. Regulatory changes and stricter underwriting standards resulting from the housing bubble and the subsequent collapse of the residential real estate market will increase borrowing costs for even those with great credit.
The following is a list of eight reasons that it will be harder to get a mortgage in 2011 than anytime in the recent past:
Fannie Mae and Freddie Mac greatly increased risk based fees for 2011. Only those with significant equity in their homes and the highest credit scores will be unaffected, but many borrowers, especially those with second mortgages, could be subject to risk hits that could increase rates up to a full one percent when refinancing. This will prove costly for many people.
High-balance conforming limits are set to decrease on September 30, 2011. The maximum conforming loan limit is scheduled to fall from $729,750 to $625,500 in high cost areas. This means that Fannie Mae, Freddie Mac, and the FHA will no longer be able to purchase loans in this cost bracket. Private investors will charge higher rates on these mortgages than the GSEs, and the cost of these loans will increase.
New risk-retention requirements under Dodd-Frank financial reform will require lenders to retain capital reserves equal to 5% of all but the safest loans. These safe loans are known as “qualified residential mortgages” (QRMs). While the definition of a QRM has yet to be announced, many suspect that a mortgage will require a 20% down payment to qualify. Anyone who cannot qualify for a QRM will be forced to pay a higher mortgage rate as a result of the increased risk-retention requirements.
In 2011 there will be fewer lenders. 297 banks failed in 2009 and 2010. Already 18 banks have closed in 2011. A reduction in mortgage lenders translates to less competition and less options for borrowers.
Negative home equity will continue to pose a problem to the market. According to a recent Zillow survey, an incredible 27% of American homeowners with mortgages owe more on their mortgage than their homes are worth. The vast majority of these people do not meet minimum loan-to-value ratios in order to refinance their homes.
The credit scores of many Americans have been decimated by the recession. According to a recent Wall Street Journal article, 85% of American homeowners have scores of less than 660. A Zillow report found that 30% of all Americans have scores of less than 620, which would likely preclude them from getting a new mortgage to purchase a home or refinancing their current mortgage given today’s increased underwriting credit score threshold.
During the recession, many people have seen their personal debts skyrocket, and their incomes stagnate or even decrease. As a result, the debt-to-income (DTI) ratio for these people has increased. Generally speaking, lenders will not issue a mortgage to someone with a DTI over 45%. These increased DTIs will preclude many Americans from getting mortgages in 2011.
Mortgage rates could be on the rise. While mortgage rates have declined lately, they are considerably higher than they were last fall. The Mortgage Bankers Association predicts that rates could hit 5.5% by the end of the year. If this prediction comes true, the number of borrowers who are willing or able to afford a mortgage will diminish.
About the Author:
John Walsh is the President of Total Mortgage Services, LLC, a provider of some of the lowest mortgage rates and an industry-leading direct-to consumer and wholesale mortgage lender. His company has funded over $6 billion in mortgage loans since 1997 and was included in the Inc. Magazines' list of America's Fastest Growing companies in 2010.