Obama looks to change mortgage industry
The regulatory reform that is sweeping across the financial markets could change the way consumers obtain home mortgages if President Obama gets approval on some new legislation he is proposing. The government has been moving aggressively over the past month to introduce new ideas on regulating the financial marketplace as they hope to prevent the possibility of a financial crisis that the economy suffered through in the fourth quarter of 2008. The basis of the regulatory reform for the financial markets centers around eliminating the potential that companies will ever again become to large to fail, such as the problems AIG and Bear Stearns created last year that sent the secondary financial markets in a tailspin.
The President is looking closely into the way that consumer financing is offered for perspective home owners who are applying for a new mortgage to purchase or refinance a home. The major implementation in the mortgage industry would alter the products and programs available to consumers in an effort to steer more consumers into taking fixed rate mortgage loans. The President seems to believe that lenders and banks were paramount in steering perspective borrowers into more exotic loan program such as adjustable rate loans, interest only loans and negative arm products, focusing the consumer on the short term rather than the long term dangers of these products. The new regulation would greatly impact the loan programs available to consumers and likely add additional regulation and disclosure to a consumer who is applying for a mortgage that is outside of the norm.
Central to creating the new regulations for the mortgage industry is the creation of the CFPA (Consumer Finance Protection Agency), a new regulatory arm that would be responsible for mortgage lending oversight amongst its key responsibilities. There will be major resistance in getting the proposed reforms pushed into law. The banking industry and financial markets will both protest to the radical changes. They will likely argue that consumers are more likely to be harmed through the proposed changes by limited finance options and higher prices as opposed to being protected. The banking and mortgage industry have seen a dramatic change over the past twenty four months as mortgage brokers have been increasingly forced out of business. Mortgage brokers have been blamed for a large part of the crisis, as they often were paid larger premiums to push consumers to refinance into adjustable rate mortgages or negative arm loans. Many states implemented new licensing regulations and policy changes to attempt to make it more difficult for brokers to operate and increase the oversight of these organizations. Lenders who have been to weather the regulatory storm have benefited from the low mortgage rates this year as consumers refinanced into fixed rate home loans. The market could be dramatically different next year if the President is successful with implementing his proposed changes.
Refinance rates climb a half of percent in the last two weeks
Mortgage refinance rates have climbed over a half of percent in the past two weeks and are up nearly one full percentage point from their low point of the year. The mortgage markets have seen a significant change in the secondary bond markets, resulting in significant pricing pressure, which is driving up long term mortgage rates. The average rate for a thirty year fixed rate loan was at or below five percent for most of March and April, similar thirty year fixed rate loans today will range between five point five and five point seven five percent. The dramatic jump with interest rates will be directly reflected in the mortgage bankers weekly productivity reports as their will certainly be a drop with applications as more home owners are priced out of the market.
Interest rates for mortgage loans are not set directly by banks or mortgage lenders, rather they move up and down based on the yields from mortgage backed loan securities or mortgage bonds. Mortgage bonds received an unprecedented endorsement from the Federal Reserve in December of 2008, which allowed for rates to drop to their historically low levels. Today, the market for mortgage bonds appears to be focusing on the future growth levels of other investments, such as equities and the potential of future inflation in the market as commodity prices increase (oil/energy). These are only two of the factors that are driving mortgage rates upward. The bond market has been under pressure from investors that have grown concerned that the U.S. debt levels are growing at a pace that will drive future inflation and could lead towards economic challenges in the future.
Refinance rates are not likely to move from the mid five range to eight percent any time soon. There are too many unknown variables with the current economy and too many stakeholders who need to help keep rates at attractive levels to help the housing market recover. Refinance rates are likely to range between five and six percent for the balance of 2009. The economy has shown signs of an improvement, but it will take many months for growth to occur. The job market continues to show signs of weakness, but the pace of decline is slowing. The national unemployment rate will likely reach 10-11% at some point in the next 90 days as the market rebalances, and this will be a factor with helping to keep rates from jumping up too quickly.