Easing Credit Standards May Help More Homebuyers
The new year may bring new opportunities for consumers hoping to get a home mortgage.
More lenders are reporting easing credit standards, according to Fannie Mae, and expect standards to ease rather than tighten in the near future. This could help affordability in the housing market, which has been suffering under both tight credit and tight supply of homes for sale.
The share of lenders who expect to ease standards for government-backed loans rose to 16 percent, and the share expecting to tighten fell to 2 percent, according to a Fannie Mae survey. This is across all types of loan products.
A total of 213 senior executives completed the survey from Nov. 4 to 13, representing 194 lending institutions.
“These current practices and expectations toward easing among lenders compares to a historically relatively tight mortgage credit standard base,” said Doug Duncan, senior vice president and chief economist of Fannie Mae.
“Lenders’ thoughtful easing of credit standards should help mitigate some of this affordability decline,” he said.
The potential for rising interest rates, which would narrow the field of customers for loans, may increase competition among lenders and force them to ease some of the extra safeguards they added after being sued by the government for billions of dollars over bad loans dating back to the last housing boom.
What Happened to Rates Last Week?
|Mortgage backed securities (FNMA 3.50 MBS) lost -29 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly higher from the prior week.
All the oxygen last week was consumed by the Federal Reserve and their first interest rate hike since June of 2006.
What can be confusing for consumers is the term “rate” is so generic, it can mean many different things. First of all, the Fed cannot change interest rates for consumers directly. What they did is increase their Federal Reserve Fund Rate to 0.50%. This is the rate at which depository institutions (such as banks and credit unions) lend their excess, reserve balances to other banks overnight through the Federal Reserve system.
The result is that now all the major banks have raised their Prime Lending Rate from 3.25% to 3.50%. Now, that prime rate is often used as an index to base other rates on and as a result, car rates, credit rates, etc will begin to tick upward. But fixed mortgage rates are not based upon Prime nor the Fed Funds Rate that just increased.
Conventional (Fannie Mae and Freddie Mac) mortgage rates are determined by the open market place based upon their bonds that are sold in the secondary market place. Of course, demand can be heavily influenced by anticipation of future interest rate hikes by the Fed but it is not a one-to-one factor. Actually, mortgage rates DECREASED slightly after the Fed raised their Fed Fund rate but that is likely only a temporary phenomenon.
As widely expected, the Fed gave us the rate hike BUT they tempered it by projecting rates would stay below 1.5% through the end of 2016.
Their dot plot charts makes it clear that we can expected Fed Funds to be well above the important 2.0% by 2017 and north of 3.0% by 2018..that is in just over two years! As a result, long-bond traders will gradually hedge towards increasing rates.
What the Fed projects: New projections show officials expect their benchmark rate to creep up to 1.375% by the end of 2016, according to the median projection of 17 officials, to 2.375% by the end of 2017 and 3.25% in three years. That implies four quarter-percentage-point interest rate increases next year, four the next and
three or four the following.
Yellen is Yelling: In the Fed Chair’s closely watched live press conference, she kept things very tight. In previous press conferences we have seen some volatility as the bond market changed course in direct response to one of her comments. But not this time as she had it locked down and tight as she repeated the mantra that the Fed is data dependent and that we will not see a “stair stepping” pattern of forthcoming rate hikes but rather that they would not be evenly spaced out.
|What to Watch Out For This Week: