Mortgage Bankers See Uncertainty in the Housing Market

by 25 Oct 2012

(TheNicheReport) - A recent report by the U.S. Commerce Department shows new home sales at their highest levels since the first-time home buyer’s tax credit was still in effect in 2010. The median price of a residential new construction has jumped 12 percent since September 2012. These positive figures were not enough to hamper uncertainty among attendees of the annual Mortgage Bankers Association in Chicago. 

The uncertainty has to do with the rules proposed by the Consumer Finance Protection Bureau (CFPB), the government agency that has rulemaking authority as promulgated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. With many proposed rules still awaiting comment, review and approval, mortgage bankers are concerned that major lenders will choose to adopt an overcautious approach to home lending.

The Immediate Effect of QE3

When the Federal Open Market Committee (FOMC) announced the third round of quantitative easing a few weeks ago, mortgage rates immediately moved downward. This was largely expected as the Fed indicated that it would purchase mortgage-backed securities (MBS), but once it became clear that the large MBS supply will keep the Fed busy in this regard, mortgage interest rates crept back up.

This sudden increase of interest rates had an immediate effect on mortgage application volumes. Purchase applications fell by 8 percent and refinances by 13 percent. Any drop in purchase applications at this time will slow down projections of new residential construction projects, and this could be further hampered by stricter lending guidelines as a result of the CFPB proposed rules. 

Factors at Play

Some of the proposed rules could directly affect new home purchases in the form of down payment restrictions and lower risk thresholds for mortgage lenders. The most significant factor at play still consists of consumer credit scores. Only 32 percent of potential first-time homebuyers are qualified mortgage borrowers due to these restrictions. 

Even if the Fed does everything in its power to keep higher interest rates at bay, every rate increase from now on will play a major factor in the number of mortgage applications for new home purchases from now on. Home builders will be the most affected in this regard.

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