0 Mortgage Forecast for 2013

In 2013, the mortgage industry has the potential for change for lenders, brokers and consumers.

The Financial Services Authority (FSA) and the lenders and intermediaries in the mortgage market are closer to establishing a workable set of guidelines with an emphasis on affordability and solid underwriting standards.

Lenders, not brokers, under the proposed guidelines, assume the role of assessing whether a consumer qualifies for a home loan. Credit is issued only under the circumstance when a borrow demonstrates a strong probability of meeting payments without dependence on rising housing prices.

Future fluctuations in interest rate are also considered when determining affordability. Borrowers are discouraged to enter agreements where they assume low interest rates will exist infinitely.

Customers who undertake interest-only mortgages must prove credible resources to meet the repayment schedule as well, outside of considering potential rising property values.

The institution is also working on establishing guidelines for business owners who raise capital via home equity loans to fund their entrepreneurial ventures.

Chairman of the FSA, Lord Adair Turner, believes these measures ensure enhanced lending practices in the future when memories of the past crisis fade and the temptation to engage in more risky credit practices reappears.

The FSA encourages the implementation of these new guidelines for 2013, enabling them to be established prior to future growth in the economy.

Mortgage industry leaders like Paul Broadhead at the Building Societies Association believe these measures protect the consumer, while also giving lenders proper discretion in determining credit-worthy customers.

Others remain skeptical, like Charles Haresnape, managing director at Aldermore Residential Mortgages, who is concerned why intermediaries have been given a pass to determine affordability in giving counsel.

Grenville Turner, chief executive of Countrywide, favors the measures to clarify which party is responsible for determining affordability, but he thinks the timing of the new standards is questionable.

He fears that the current market climate inhibits 39 of 40 potential customers from qualifying for  mortgage loans. To prevent further market sluggishness, he argues lenders need to become more flexible in assessing affordability for new applicants notwithstanding a solution for the self-employed and current homeowners trapped in negative equity.

The timing aside, the FSA seeks ways to facilitate the process for consumers navigating the mortgage application process. To reduce a daunting abundance of information, the organization has streamlined its prescribed disclosure requirements for lending institutions. These entities are mandated to share 'key messages' with the potential customer at the appropriate time, instead of using the Initial Disclosure Document (IDD).

Independent firms, according to the new FSA guidelines, are no longer mandated to offer their customers a ‘fee only' option. They must disclose to consumers whether they are mining direct-only agreements. Should these intermediaries desire to propose a direct-only deal, the FSA wants to eliminate the mandate to disclose a Key Facts Illustration, thereby streamlining the process for the intermediary.

In addition, lending firms must consider whether rolling fees into a credit agreement is suitable. Should the customer desire this method, the lender must move forward with the loan in this matter.

For non deposit taking institutions, the FSA seeks to implement capital requirements for these types of lenders. Non-bank institutions must abide by a more risk-based criteria, where the capital requirement is augmented. Subsequently, these firms will have to establish protocols and controls to manage their liquidity risk judiciously.

The FSA seeks to streamline processes for niche markets in lending as well, thereby galvanizing the entire industry. Under consideration are equity release products like lifetime mortgages and home reversion plans, high net worth lending, sale and rent back, home purchase loans, business lending and bridging finance. The FSA desires to establish clear guidelines for the niche markets as it does in the conventional mortgage arena, ultimately providing a consistent, straight criteria for its affordability standards, income requirements and other pertinent factors in determining credit worthiness.

0 Mortgage Rates Trends

Nowadays, home mortgage rates are moving steadily lower. The 30 year fixed mortgage rate is hovering near the 3.375% region and it is expected to stay below 3.5% for a long period of time. Lenders are also extending credit at reasonable rates, with most lenders charging an interest rate of 3.5% and some at 3.25%.

Mortgage rates are heavily influenced by the prevalent interest rate and the 10-year treasury auction is a good indicator of the performance of interest rate. While mortgage rates are not directly based on Treasury rates, the underlying securities (also known as mortgage backed securities) tend to trade in the same direction as Treasuries. A big move in the 10-year Treasury yield can result in huge volatility on the mortgage rates.

Inflation does have an impact on mortgage rates as well. It is an early indicator of the behavior of mortgage rates. With increasing real estate values and a period of very low inflation, interest rates have remained on an all time low. Many economists feel that mortgage rates will remain fairly low in the future because inflation rate is running extremely low at the present moment.

Most mortgage lenders offer a combination of interest rates and points, for instance 6% and 2 points or 7% and no points. Points consist of a one time upfront payment made to the lender at the time of the closing of the mortgage. It is an additional fee on top of the mortgage payments and it is not part of the down payment. A sharp reduction in mortgage rates will result in a reduction in the cost of borrowing and an increase in prices in markets where money is borrowed by most people to purchase a home. In this scenario, the average payment will remain constant.

During periods of low mortgage rates, most homeowners opt for greater savings via refinancing. Some of the benefits of refinancing at the right time include lower interest rate, consolidation of the second mortgage loan, lower loan terms, lower monthly payments and taking a substantial cash out from equity. Borrowers who refinance also have the option of reducing either their monthly payments or the length of the loan term. It is not impossible to reduce mortgage terms from 25 years to 15 years while maintaining the same monthly payments. In the event that mortgage rates move even lower, borrowers can take the opportunity to reduce it by another five years.

Taking cash out from home equity to pay off credit card debt is another benefit of low mortgage rates. Certain debt consolidation loans also allow borrowers to reduce payment on home mortgage so that the money can be channeled to repay credit card debts, which bear interest as high as 18 to 25%.

Many lenders have come up with their own perspective for the direction of mortgage rates. Mike Owens, a partner with Horizon Financial opines that mortgage rates will continue to slide from its present territory of 3.375%. According to him, it is a good sign because the economy has remained stable so far. Victor Burek of Open Mortgage notes that the 10-year Treasury rate will be kept under 1.87%. As long as the rate stays below 1.87, he will continue to float and only lock in within a few days of closing. On the other hand, Steve Chizmadia, a mortgage consultant with American Capital Home Loans, feels that the treasury and mortgage backed securities market have been very quiet for the past few weeks. The energy that has built up over the last few weeks could potentially lead to a strong movement in rates in either direction. Julion Hebron, a branch manager at RPM Mortgage, has a different opinion. From his point of view, a strong economy will keep the bid for mortgage backed securities healthy and it is less likely for mortgage rates to drop further from current levels.

Suffice to say, even though mortgage rate is close to its all time low, it has risen moderately and there is a greater risk of loss from the practice of floating. Unexpected events can cause rates to move strongly in either direction. Things to look out for this year would include legislative actions in response to US debt ceiling and the Fed's outlook regarding securities purchase.

0 Using Your Bank as a Mortgage Lender

A mortgage is probably the biggest financial agreement you will ever enter into. For that reason, it is understandable to be concerned with who you end up receiving that massive loan from – not the least because it is, by definition, secured by the building you and your family call home. One major decision budding homeowners face is whether to go with their own bank for their mortgage, or contact a specialty mortgage company who makes home loans the bulk of their business.

Mortgage brokers can be best compared to a local independent insurance agent, or even a supermarket. They maintain relationships with a pool of lenders and usually offer several different “brands” of mortgage with small, but notable, differences.

There are two main benefits of choosing a mortgage broker over a bank: first, because of the range of mortgages they offer and the increased number of lenders they do business with, they can usually find a solution for borrowers with substandard credit or who otherwise find it difficult to borrow. They also have a greater range of options for unusual properties that a standard bank may not choose to deal with. Second, this freedom of lending and the fact that mortgages are their sole focus means that they are often faster to process paperwork, speed up closing times, and can work on your behalf to find the best interest rate available to you.

This service absolutely does come with a cost. Brokers are middlemen by definition, and so will have larger closing fees than going to a lender (such as your personal bank) directly. The brokers are also compensated by the lenders for making the deal. In addition, any given mortgage broker will probably work with a customer once and only once. This leaves no space for relationship building that may otherwise have had a positive impact on the loan and interest rates.

This contrasts strongly with banks. Often, by the time you are seeking a mortgage, you have been with your personal bank for at least a few years, giving them an insight into your cash flows and how you seem to handle money. This is increased even more if you maintain checking, savings, and credit accounts all within that same bank, or have taken advantage of other financing and investing products offered.

If you are responsible with your money, that relationship can make the bank more comfortable giving you improved an improved interest rate on the mortgage. If you have a history of doing extra business with the bank like purchasing CD rates and other instruments, for example, they may give you a break in hopes that you remain a faithful bank customer.

Both mortgage brokers and banks almost always end up selling mortgage loans on the secondary market. For that reason, the language in almost every mortgage is standardized. Notably, this erodes a concern some might have with a mortgage broker leaving the picture as soon as the deal is done: in the end, the borrower works with a lender who has sold the loan no matter what.

The primary difference between any two mortgage contracts will be the interest rate. Considering the size of most mortgage loans, even a tiny difference in the interest rate can reflect a substantial amount of money over the life of the mortgage. For that reason, it should be the number one concern when shopping around for a servicer no matter what.

Rarely, you may find a bank that offers what are known as “portfolio mortgages,” which means they will not be packaged with similar loans and sold off as an investable security. In this scenario, the bank may end up being a better option because they do not have to worry about the marketability of your mortgage loan on the secondary market. A prime example is a borrower just out of college with substantial student loans: the secondary market sees a borrower with a huge amount of debt other than the mortgage, whereas a bank holding the loan for themselves might be more willing to look at the greater picture of financial responsibility the borrower presents.

In the end, the interest rate should still be the driving force behind deciding on a servicer. Tight competition between mortgage brokers might mean you receive a better rate using one, but using a bank might let you take advantage of relationship building and history not considered as strongly with a broker. If the interest rates are identical, stick with a bank.