Members of the Mortgage Industry are anxiously await the coming of Spring. Many signs indicate the approaching Spring could bring one of the most opportune housing market scenarios in recent memory.
With rates creeping up, inventory drying up and many potential homebuyers waiting on the sidelines for the market to stabilize, all signs point to go. The word on the street in the mortgage banking community is that this is going to be the year of purchases. Lenders and banks are investing heavily in new programs to ensure they remain competitive and take full advantage of the Spring market conditions.
So if you’re thinking about buying a home this year would be a great time. Here’s what you need to know about the 2014 home market.
What you need to know in 2014:
1. Interest Rates will be rising – I spend my days (and often nights) speaking with banks and mortgage professionals. In nearly every discussion, it has become nearly an inevitable assumption that interest rates will rise again short term, and continue to increase gradually over the next few years. The reality is the federal reserve fully supported US mortgage backed securities market for years, but has begun to withdraw from this position (even if only slightly for now). If you didn’t purchase a home in the past few years, the ability to take advantage of all time low rates has passed for the foreseeable future. The shift in Federal support made room for a group of mid level investors to gain market share in mortgage backed securities. As private entities, they will seek a greater return than their public counterparts.
As a consumer, you may wonder how this benefits you. The truth is, invigorating the global investment community and restoring the health of the US mortgage market will require rate increases. Higher rates affect your mortgage payment and ultimately purchase power, if you hedged your bets on rates falling further, you’ve waited to long. However, purchasing in spite of these hikes could prove lucrative long term.
2. Solar and energy efficient items will become relevant – I’ve anticipated this for years and the time has finally come. Energy efficient improvements such as solar panels and tankless water heaters will begin adding notable value to homes. In states like Texas, Colorado and Arizona homes with energy efficient items sell at a 10-20% premium when compared to traditional homes in a similar market. I believe this trend will spread steadily to other over the next few years. If you remain skeptical about the return on large scale energy efficiency projects, even more minor upgrades, including energy star appliances, LED Bulbs, programmable thermostats and weather stripping have begun receiving consideration in market valuation. The link below contains a post I wrote a few weeks ago which addresses this topic in detail:
3. You’re required to receive a copy of the appraisal – The Consumer Financial Protection Bureau (CFPB) amended the Equal Credit Opportunity Act (ECOA) to require lenders deliver borrowers any documents assigning value to the subject property prior to closing. This definition includes most valuation products lenders require during the loan process including, but not limited to, appraisal reports, desktop appraisals and automated valuations. Similar requirements existed previously, but compliance varied based on lender policies and interpretations. As this update so specifically detailed the lenders’ obligation to the consumer, as well as associated repercussions, you should expect very soon after the appraiser leaves the property.
When reviewing any valuation product keep in mind that although you’re listed as the borrower, you’re likely not the intended user of the report. It’s perfectly acceptable if you do not understand the codes and jargon commonly utilized in these products.Your lender maintains responsibility for interpreting the report and ensuring you clearly understand its contents.
4. Your local mortgage broker could be apart of a bigger company – Many local or regional mortgage brokers have experienced significant difficulty keeping up with recent compliance legislation.These changes effectively require a lender to maintain a full staff dedicated to adherence with these requirements.Compliance, to be frank, is expensive and time consuming. Many smaller organizations have sought the protection of a larger lender’s resources through merger, acquisition, and consolidation. This doesn’t mean your trusted loan officer or broker has left the business, but he’s likely changed the sign in front of his office.
5. Your hometown appraiser is being managed – Following the industry collapse of the mid to late 2000’s, regulators’ immediately focused on “cleaning up” the appraisal process as many considered direct relationships between lenders and appraisers a primary factor in unsubstantiated market inflation. The Federal Housing Finance Administration (FHFA) implemented Home Valuation Code of Conduct which essentially places a firewall between the appraiser and anyone who has an interest in the mortgage loan closing, including the buyer, loan officer and Realtor. HVCC, as well as its more recent counterparts, have increased lender use of appraisal management companies.These entities serve as an independent third party by managing appraiser assignment and handling potential violations in an unbiased manner. The days of your lender calling the local appraiser are all but past as regulators continue to emphasize independence with a capital “I.”
6. If you didn’t qualify previously for a mortgage you probably will now – Over the past 4 year, many borrowers experienced difficulty in obtaining a mortgage due to stringent underwriting requirements for credit, income, etc.. However, due to recent regulations and lending guidelines implemented by the CFPB, lenders have renewed confidence to expand qualification requirements. Both FHA and conventional investors have announced new programs with lower credit score requirements and greater forgiveness of past issues. I’m certainly not guaranteeing approval, but I’d encourage any consumer to revisit their options.
7. Home Values are beginning to rise again – Builders have been on the sidelines for past 4 years waiting for the market to stabilize and bring forth eager consumers. The demand has returned but in many markets, available properties either await construction or don’t exist. So now you have a shortage of housing which is estimated at about 1.3 million homes nationally. It will take some time for builders to plug these holes, but temporary shortages will bolster the market short term. This frenzy of (now regulated) activity will likely serve as the platform for an increasingly stable national market in the foreseeable future.
8. If you were underwater you might be able to refinance – When you see the index’s claiming a 20% rise in Las Vegas property values from last year, they likely don’t place the statement in context. This market maintained a median price of $300,000 in 2006, which bottomed out at $100,000, and recently rose $120,000. Although the 20% figure is technically correct in a limited time sample, it’s still a long way off for the homeowner who purchased in 2006 and hopes to move or refinance. However there are signs of hope for some markets, and although Vegas is not one of them, comprehensive market analysis coast to coast indicates some borrowers may recoup a notable (but likely not total) share of their initial investment.
9. You will pay a higher premium (for longer) with an FHA loan – FHA mortgage insurance premium has increased significantly over the past year. With Mortgagee Letter 2013-04, effective April 1st 2013, HUD announced increases to Monthly Insurance Premiums (MIP) for all loan amounts and loan to value ratios. Additionally, the letter revised the term which borrowers will be assessed MIP which, in many cases, effectively applies to the life of the loan. In short, FHA will take a larger insurance policy on all, and especially higher risk, loans at the expense of the consumer.
These changes have a direct affect on a borrower’s monthly payment, but FHA still offers some of the most accessible programs for civilian home buyers. See the full mortgagee letter in the link below:
10. Regulations will continue to increase, but they’re written with the consumer in mind – If you’ve read this in total, or just applied for a mortgage in the past few months, you may be thinking, “Geez, this is way harder than it used to be.” I can tell you from experience that lenders and service providers think the exact same thing.
One of the biggest issues that caused the recent mortgage crisis was the lack of regulations regarding the appraisal process and documenting the ability for the borrower to repay the loan. This has been addressed both by the Dodd-Frank legislation as well as the CFPB’s recent implementation of Qualified Mortgage (QM) requirements.
The questions asked or documents requested by your lender may seem intrusive, but they ensure the consistent funding of sound loans and subsequently prevent market instability by repeating past mistakes.
Thank you –