Homebuyers are about to learn that while the government giveth, the Federal Reserve taketh away. While it’s getting easier to get a mortgage, the Fed is warning rates will soon rise.
In a red-hot housing market, government-backed mortgage buyers Fannie Mae and Freddie Mac are accepting loans to borrowers with lower credit scores and Fannie Mae will now look at rent payments in assessing mortgage applications.
But the good news may not last for long for borrowers.
The Federal Reserve signaled on Wednesday that it plans to cut back on its billion dollar bond buying program, which likely will lead to an increase in mortgage rates. Lenders have also tightened their standards for jumbo loans, which banks tend to hold on their books because they exceed Fannie and Freddie’s price limits. The pandemic, meanwhile, has forced lenders to focus on other lines of business, according to Joel Kan, an economist with the Mortgage Bankers Association.
“Banks have had other priorities,” said Kan.
But for many Americans, the trouble is not getting a mortgage, but finding a home.
The U.S. has an undersupply of 5 million homes, while construction has reached all-time lows, hampered by rising material and labor costs, and supply chain disruptions. At the same time, a growing number of investors making all-cash offers are flooding the market, including a rush of private equity firms looking to snap up single family homes to turn into rentals.
“Because the housing market is so competitive, the seller may not choose you, they may want to go with the buyer that has all cash,” said Daryl Fairweather, chief economist at Redfin.
Homebuyers’ best hope for added supply may come with the end of the forbearance program, which allowed homeowners to skip mortgage payments during the pandemic. As the program ends, they’ll have to not only make payments again but also start to catch up on their accumulated debts. Many will sell, taking advantage of the hot market, and some will face foreclosure.
About 400,000 borrowers’ forbearance plans will expire this month. While 1.62 million borrowers are in the program, according to data from Black Knight, it’s not enough to solve the housing inventory shortage nationally, though it could have an impact on some local communities.
Mortgage availability
As the Fed began its massive bond buying spree in March 2020, pumping billions of dollars of liquidity into the financial system, lenders also began to tighten their lending standards.
JPMorgan, for instance, required borrowers to have a credit score of at least 700 and a 20 percent down payment to obtain a mortgage. Wells Fargo said it was restricting its jumbo loan program. Wells only allowed customers with at least $250,000 in liquid assets to refinance. Banks said these moves were only temporary to focus on serving existing customers.
The Mortgage Bankers Association Credit Availability Index dropped close to 2014 levels.
But then the housing market exploded.
Driven by record low mortgage rates and a desire for more space amid the global pandemic, home shoppers competing for the limited supply of homes drove up prices. At the same time, the lack of available credit didn’t keep up with the booming market, which led to many prospective homebuyers whose credit score was too low or who didn’t have a big enough down payment being left out.
Only 32 percent of survey respondents think now is a good time to buy a home, according to a September survey by Fannie Mae.
And while mortgage availability ticked up in recent months, it is still down substantially since the pandemic began. An index from the Urban Institute shows that mortgage credit availability was 5.1 percent in the first quarter of 2021, up from a historic low in the third quarter of 2020 of just below 5 percent.
The Urban Institute noted in its report that mortgage availability has been tight “for borrowers with less-than pristine credit.”
Under the Biden administration, the federal government has sought to provide some relief to new homebuyers. Fannie Mae is seeking to make mortgages more available to people who only have rental history, since this information is often not included in their credit scores.
Fannie Mae and Freddie Mac also are looking at using other ways to calculate borrowers’ credit scores when reviewing mortgage applications, potentially boosting lending to low-income and minority borrowers.
But while tight underwriting is less than ideal for homebuyers, for the overall housing market, it’s intended to prevent the housing bubble that led to the last financial crisis.
“Mortgage underwriting in general is tighter than historical norms which is why we are not in a “bubble” since the share of household income being paid for debt service is significantly lower,” said Jonathan Miller of Miller Samuel Real Estate Appraisers and Consultants.
Taper Tantrum
In a much anticipated two-day meeting, Fed officials signaled on Wednesday that its monthly purchase of $120 billion in Treasury bonds and mortgage-backed securities could be coming to an end as soon as November. Fed officials, however, don’t expect benchmark interest rates to rise until the end of 2022. Mortgage rates, meanwhile, will be set by the lenders, which are focused on limiting their own risks.
When the Federal Reserve previously reduced its bond-buying program in 2013, it caused mortgage rates to shoot up in an event known as a “taper tantrum.” The market did not seem to react as strongly this time around, with the S&P 500 Index up about 1.2 percent on Wednesday.
“We do expect mortgage rates to increase,” said Kan.
Even rising mortgage rates might not slow price gains if the inventory shortage isn’t solved. According to the Federal Reserve’s Economic Data, the monthly supply of homes for sale totals just six months, down from 13 months in 2008. Earlier this year, housing supply reached its lowest level in 30 years.
Burdened by rising supply costs of windows, vinyl and PVC, single-family home construction is at its slowest pace since 1995. Lennar, one of the nation’s largest homebuilders, missed its guidance on home deliveries in the third quarter because of these supply challenges.
The problem is that potential homebuyers not only have to compete with the individual investors, but also institutional investors such as Blackstone, which have poured billions into the single family rental market since the Covid-19 pandemic. A third of all U.S. single-family homes and condominiums sold in the second quarter were purchased with cash, up from 20.6 percent a year prior, according to Attom Data.
Given how tight the competition is for new homes, any initiatives around mortgage availability and foreclosure relief programs will only help the housing market so much, experts say.
“We need to build more houses,” said Fairweather. “It will take a long time to dig us out of this hole.”