Advertisement
  1. Business

Climbing mortgage rates could jump even more with loan-giant wildcard

Published Aug. 9, 2013

The halcyon days of bottom-dollar home loans now seem to be a gift of the past as shifts in Federal Reserve policy and a reviving market push up mortgage rates.

But President Barack Obama's support last week of plans to drastically limit the government's support of the mortgage market added a worrying wild card that could further spike loan payments.

House and Senate reformers from both parties want to shrink Fannie Mae and Freddie Mac, the federal giants that guarantee almost every new home loan.

Estimates show that could push up typical mortgage payments by more than $100 a month — on top of recent interest rate surges that brokers already fear could flatten the market's rebound. Mortgage rates are still close to historic lows, and bargains for qualifying borrowers abound. But every uptick makes homes harder to afford and bumps out low-income buyers. Over the last three months, rates for 30-year fixed loans have made their biggest one-week jump in 26 years, leaping a full percentage point to 4.4 percent.

"This is one of the more volatile times I've seen in 20 years," said Andy Wood, owner of Tampa-based Titan Home Lending. "When it went up a percentage point, I don't ever remember it going up that fast."

• • •

In the wake of the housing crisis, the Federal Reserve spent billions of dollars each month to keep interest rates low to lure hesitant home buyers.

The heavy-hand approach worked — home sales and prices have rebounded — but it was never planned to last. Just talk of the Fed ending its economy-stimulating binge has spurred interest rates to climb.

Bipartisan support for scaling back Fannie and Freddie adds a new complication. Obama said the housing market should have "a limited government role," with private lending serving as "the backbone" of the nation's home economy.

For decades Fannie and Freddie were two boring federal firms (technically government-sponsored enterprises) charged with helping more people buy homes. They bought loans from banks, guaranteed them against default and sold them to investors, taking risk away from banks and giving them more money to keep lending.

But during the freewheeling years of the housing bubble, Fannie and Freddie joined many other lenders in loosening the rules for acceptable loans. When defaults and foreclosures burst the bubble, the giants themselves needed a big taxpayer bailout and are now the biggest player in America's $10 trillion mortgage market. Once having backed less than 40 percent of new loans, they now set the rules, front the cash and hold the bag for losses on nine out of 10 new mortgages.

Downsizing the federal giants would reduce risk to the taxpayers and shuffle it back onto lenders. They in turn would undoubtedly charge higher rates to cover their potential losses. If proposals from the Senate and House took effect, a $200,000 loan with a 20 percent down payment would cost a borrower $75 to $135 more a month, Moody's Analytics estimates show.

Climbing interest rates have already made housing affordability, which compares the typical family's income to what it would need to qualify for a loan, drop every month this year, Realtors data show.

A fully privatized market, Realtors say, might make popular loans like 30-year fixed mortgages hard to come by for middle-class buyers or force borrowers into riskier adjustable-rate loans.

National Association of Realtors president Gary Thomas warned this week that could lead to "potentially dramatic rates increases" and "payment shocks that rattle (homeowners') financial stability."

• • •

Squeezing out Fannie and Freddie may face some opposition from brokers who already complain that banks and credit unions have overcompensated in raising loan requirements. Fannie and Freddie set guidelines for which loans they'll buy, though lenders often add their own rules on top.

Brokers said hopeful buyers with good down payments and credit are being turned away for even small blips like a bank overdraft.

"The pendulum has swung way too far the other way," said Nate Davis, the president of Plant City Mortgage Corp. "I hear people say they feel like they're sending in the cavalry and the war's over."

Further, acting against Fannie and Freddie now seems strangely timed. Five years ago, it cost $187 billion to bail them out. But since then, as home prices climbed and defaults plunged, the companies have posted record profits, paying back more than three-quarters of their bailout.

Sen. Mark Warner, a Virginia Democrat hoping to shrink the federal giants, conceded their fat returns might complicate reform efforts. He told Bloomberg, "If they make too much money, there may be a sense of, 'Well, let's not mess with them anymore.' "

Under the proposals, private lenders could still get their loans backed by taxpayers, but they would need to pay an extra insurance fee used toward borrower aid and affordable rental housing.

Taxpayer money would be used as a backstop only after the private money was exhausted, as a last resort against catastrophic losses. One plan would effectively privatize the loan market, flexing government support only for lending to low-income families.

Sandy Garcia, a manager of Sierra Pacific Mortgage's Tampa office and vice president of the Mortgage Bankers Association of Florida, said today's loans are better qualified and less at risk of widespread default.

Florida's rate of homeowners who are more than two months late on mortgage payments, though still among the nation's highest, dropped 27 percent last quarter over the same time last year, a TransUnion report shows. And regulators have pushed for better loan practices with things like "qualified mortgages," which add risks for banks that grant too much debt compared to a borrowers' income.

So even though she hears rumblings of a sudden shakeup to Fannie and Freddie, she's not sure what to expect. "I don't see it happening anytime soon, but it's so tough to predict," Garcia said. "In this crazy industry, you can think we're headed down one road and suddenly there's a massive turn."

Whatever happens with Fannie and Freddie, brokers expect loan rates could continue their climb as the Fed eases off the gas. More than a decade ago, before homes and loans began to bubble, rates hovered around 6 and 7 percent with little resistance from home buyers.

Whether today's rates edge back to that level, or just how fast they might move, remains a mystery.

Though they worry the rate jumps could rip "the Band-Aid off right when the wound starts to heal," brokers say they see a silver lining in rates returning to normal.

"Do you want a terrible economy and a low loan rate?" Davis said. "I'll take a recovering economy all day long."

Contact Drew Harwell at (727) 893-8252 or dharwell@tampabay.com.

ALSO IN THIS SECTION

  1. A company called Flock Safety is selling automatic license plate readers to neighborhood associations to cut down on crime, and Tampa neighborhood Paddock Oaks is one of their customers. Pictured is a Flock camera on Paddock Oaks Dr. | [Luis Santana | Times] LUIS SANTANA  |  Times
    Atlanta-based Flock Safety has provided 14 area communities with high-speed, high-definition cameras for surveillance.
  2. An American Airlines Boeing 737 Max 8 aircraft approaches Miami International Airport for landing in March. Bloomberg
    The 60-year-old veteran airline employee told investigators he was upset that union contract negotiations had stalled.
  3. Lilly Beth Rodriguez, left, Laura Robertson and Linda Lamont work on a Habitat for Humanity house in north Pasco. [Times (2013)]
    The increase is expected to happen in the first half of next year. CEO hopes other nonprofits follow suit.
  4. The number of single-family homes sold in the Tampa Bay area during August rose 2.8 percent when compared with the same month last year, according to a monthly report from Florida Realtors. (Times file photo)
    The midpoint price in the bay area rose to $250,000, which is still lower than the state and national median prices.
  5. The Aldi store located on 1551 34th St N, St. Petersburg, Florida in 2018, features its updated layout. JONES, OCTAVIO   |  Tampa Bay Times
    The store will re-open after renovations on Thursday, Sept. 26
  6. Jessica LaBouve, a penetration tester for cybersecurity company A-LIGN, poses for a portrait in the A-LIGN office on Thursday, Sept. 12, 2019 in Tampa. Companies hire A-LIGN to figure out where their digital security weak spots are, and LaBouve is one of the "benevolent hackers" that finds them. ALLIE GOULDING  |  Times
    Jessica LaBouve of A-LIGN works with companies to make their applications and platforms more secure.
  7. Stephen A. Schwarzman, CEO of the Blackstone Group, speaks at the World Economic Forum in Davos, Switzerland, earlier this year. MARKUS SCHREIBER  |  AP
    The billionaire also talks trade with China in an interview with the Tampa Bay Times.
  8. The economies of Canada and Florida go together like, well, palm fronds and maple leaves, as seen outside the Sweetwater RV Resort in Zephyrhills. (Times file photo) KATE CALDWELL  |  Tampa Bay Times
    To qualify under the proposed Canadian Snowbirds Act, visitors would have to be older than 50 and would have to own or rent a home here.
  9. Tampa investor and owner of the Tampa Bay Lightning Jeff Vinik, right, speaks about his investments in the video game industry at the eSports Summit Wednesday in Tampa as Matt Samost, Vice President of New Ventures for Tampa Bay Sports and Entertainment looks on. LUIS SANTANA   |   TIMES  |  Tampa Bay Times
    A summit at USF brought together major players and explored the possibility of an esports arena.
  10. Neeld-Gordon Garden Center, open at this location since 1925, is closing on Sept. 28. MARTHA ASENCIO-RHINE  |  Times
    The development of Pinellas County and the arrival of the big box stores helped hasten the store’s demise.
Advertisement
Advertisement
Advertisement