FHA loan volume could double
Over the past ten years the role of the Federal Housing Administration (FHA) a division of HUD has seen it’s role in the U.S. housing mrket diminish. FHA loans had shrunk to cover less than 10% of the entire mortgage market as lenders pushed clients into conventional or alternative A loans that were easier to underwrite and sell of to wall street. The fall out of the U.S. housing market now the same lenders that bailed out on FHA loans scrambling to regain their licenses.
FHA loans are likely to grow and could represent one in every five mortgages originated over the next 12 months. The days of home buyers purchasing a property with zero down are all but over, however with an FHA loan a home owner can buy with as little as three percent down, all of which could come in the form of a gift. Home owners who are considering a refinance and need to pull cash out of their home to consolidate other bills can turn to an FHA loan as it allows them to access up to 95% of the homes appraised value. Conventional loans cap home owners at 90% of the homes value.
FHA is certain to have a growing role in the turn around of the housing market. Lenders will more likely work with borrowers as the FHA provides a great insulation against foreclosure risk and a ready pool to sell loans against in todays tight credit markets.
Inflation heats up!
Inflation is on its way up as evidence in the recent government releases reports regading PPI and CPI. The core level of inflation in the PPI report has risen over six percent in the past twelve months and .4 percent for the month of April. Inflation is very dangerous for mortgage rates as this challenges the net return on a mortgage bond and typically results in investors wanting a higher yield, thus driving up mortgage rates.
The economy has slowed down considerably in 2008, but the market is clearly struggling with rapidly rising oil prices that are effecting everything from travel to food prices. As inflation continues to increase the pressure will mount on the Federal Reserve to begin considering lowering the rate on the Fed Funds rate. The Fed has been agressive in cutting the Fed Funds and Fed Discount rate this year in an effort to stabalize the credit markets and spur home buying. The dollar has fallen sharply over the past 12 months and this is also having an effect on oil prices and inflation. Mortgage rates for purchase and refinance home loans are firmly near six percent for long term fixed mortgages and these rates have held firm since the early February but could be on the way up with more pressure from inflation.
Housing market to be focus for stock market this week
The stock market has enjoyed a nice rally over the past month despite rapid rising oil prices. The national association of Realtors will report existing home sales for the month of April on Friday of this week. The market has written off the idea that the real estate market will recover significantly in 2008 and most economists, home builders and mortgage companies are now stating that they think it will be well into 2009 before the market begins a true correction.
The significance of Friday’s report is mostly about the psyche of the American home buyer, if the report shows a glimmer of home this may help to provide some long awaited positive pr for the real estate market. The number of potential home buyers sitting on the sidelines anticipating further price drops may decide that the market does not have much further to fall and begin the process of looking for a home. Mortgage rates remain very attractive and recent changes with both Fannie Mae and FHA are allowing home buyers to get into homes with as little as 3% down payment.
The market could use a lift, if the home sales figures are better that anticipated the stock market could rally and the only downside is this may pressure a rise with mortgage rates which remain firmly near six percent.
Arm rates resetting lower than current market rates
Home owners who have mortgages that may be adjusting in the next few months could be pleasantly surprised to find out their mortgage rates may actually be adjusting down. Their has been a great deal of speculation that the large number of arm’s scheduled to reset in 2008 would have a crippling effect on the housing market.
The Federal Reserve has worked agressively to try and restore the credit markes by reducing the Fed Funds rate down to 2%. While this has no direct correlation to mortgage rates, their is a correlation to other economic indexes such as the LIBOR. Most arms are now utilizing the LIBOR as the index of choice for future adjustments. This is good news for millions of home owners as the rates on the LIBOR have dropped in conjunction with rates on the Fed Funds rate. The LIBOR has several indexes including 1 year, 3 months, and 6 months. All three of these indexes are now under three percent. Most adjustabe rate mortgages have margins (amount added to index to determine new rate) of 2 to 3 percent. This essentially means that most home owners with arms will be adjusting under six percent if the market does not move significantly in the near future.
Long term fixed rate mortgage are still hovering around six percent so it would probably make sense to explore refinancing your mortgage if you plan to stay in the home beyond the next 12 months and want to have payment certainty for the long haul.
Consider a home equity line of credit
Yes, it is hard to imagine that lenders still offer second mortgages even after the mortgage crisis that has been seen within the market over the past six months. Their are a number of major lenders that will still offer home equity loans and fixed second mortgages, up to 90 or 95% of your homes value.
So who should consider a home equity loan?
Anyone who has equity in their home and may have a fixed mortgage rate lower than six percent should examine both refinancing their entire mortgage or applying for a second loan. A good way to analyze this is through a blended rate assesment. With prime hovering near 5% most borrowers should be able to qualify for a home equity loan with very favorable rates compared to first mortgages. The major advantage is that home equity loans often come with reduced fees and you pay only on the balance you owe. If you are consolidating debt or adding a home improvement and the loan amount is less than 20% of your overall loan balance than a second mortgage/home equity loan may make the most financial sense. A good lender should help you navigate all of your loan options to make the best financial decision based on both your short and long term goals.