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."
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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.
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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."
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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 firstname.lastname@example.org.