Derrick Bulaich locked in a home-loan rate of 4.6% last week, prompted by a surge in borrowing costs as investors speculated the Federal Reserve would pull back from bond buying. Bulaich, who said he wishes he’d acted sooner, still plans to complete the purchase today of the four-bedroom Sacramento home because values in the city remain 42% below their 2005 peak despite recent gains.
“I was hoping rates would come back down and then I realized they weren’t going to,” said Bulaich, 24, who works for a bank. “Homes are still affordable, so that takes some of the sting” out of it.
“If people believe house prices are going up, credit availability will evolve,” said Paul Willen, a senior economist at the Federal Reserve Bank of Boston. “There is too much money to be made lending to homebuyers. Lenders will find a way.”
Mortgage rates in the U.S., after increasing at the fastest pace in a decade, have jumped after Bernanke confirmed on June 19 that the central bank is ready to slow its purchases amid signs of an improving economy and housing market. Wells Fargo & Co., the largest mortgage lender, increased the rate on a 30-year mortgage to 4.5% yesterday from 4.13% on June 18 and 3.88% last month.
The average rate for a 30-year fixed loan climbed to 3.93% earlier this week from 3.35% last month and the record low 3.31% reached in November, according to Freddie Mac.
The prospects of higher rates and the ending of the bond-buying program have sent stock markets plunging around the world. U.S. homebuilders fell 7.1% yesterday after a 3.3% drop the prior day, the biggest two-day plunge in more than a year. PulteGroup Inc., the largest homebuilder by market value, declined 9.1% yesterday.
Higher borrowing costs so far haven’t held back the housing market, which is surging after the worst downturn since the 1930s. Sales of previously owned U.S. homes climbed more than forecast in May to the highest level since November 2009 and the median price jumped 15.4% from a year earlier to the highest in almost five years, the National Association of Realtors said yesterday.
Home prices are still 28% below the 2006 peak, and mortgage rates, still near historic lows, are down from 6.8 percent in 2006 and more than 10% in 1990. That’s spurring buyers like Bulaich, who is closing today on the $158,000, 1,300-square-foot stucco home.
“All these people are flooding out there to buy a house right when the rates are going up, but it’s still pretty affordable,” Bulaich said.
The rebound has helped rebuild household wealth, which jumped to a record in the first quarter, after falling in 2007 when the housing crash plunged the U.S. into the longest recession since the 1930s.
The credit pendulum swung from irresponsibly loose during the middle of the last decade when lenders granted mortgages even to people with no income, no job or assets—known as Ninja loans—to extremely tight after the 2007-2009 recession. Even as Bernanke resorted to unprecedented measures, including holding borrowing costs near zero, the central banker said at the start of last year that housing was being held back partly by tight credit.
It’s now tilted closer to the averages seen in the late 1990s based on a combination of factors, such as loan-to-value, debt-to-income and credit scores, CoreLogic Inc. chief economist Mark Fleming said.
While credit may be opening, the process of getting a new or refinanced mortgage remains frustrating, because lenders are making more meticulous demands for evidence of borrowers’ finances, Fleming said.
That didn’t matter much to lenders last year as reduced competition and low mortgage rates allowed them to charge high prices for selling home loans into mortgage pools. Loan originations totaled $1.75 trillion in 2012 and the four biggest bank lenders reported more than $24 billion of revenue from originations as homeowners replaced their loans to cut costs.
Rising rates have already quashed refinancing, which has fallen to 68.7% of the market from 76% at the start of May, according to the Mortgage Bankers Association.
Further increases will flatten the wave of refinancing and force lenders to compete more aggressively for homebuyers, said Doug Duncan, chief economist at Fannie Mae. In addition to easing underwriting standards, banks will also have to consider layoffs to cut costs and lowering margins to make up for lost refinancing revenue, Duncan said.
Lenders will see their refinance business fall to 45% of originations in the second half of this year and 35% next year, according to a Mortgage Bankers Association forecast.
“Companies, if they want to stay in business, they’re going to compete,” Duncan said.
Bank of America, which has hired 1,000 loan officers during the past year, plans to continue adding staff to aggressively go after home-purchase business as refinances slow, said spokesman Terry Francisco.
The company is doing more lower-downpayment originations because mortgage insurers are getting more comfortable with them as home prices rise, he said. The company is considering lowering its down-payment requirement for jumbo loans to 15% from 20%, he said.
“We would never change credit conditions due to market pressures,” he said. “Any changes would be based on economic factors.”
Vickee Adams, a Wells Fargo spokeswoman, said there are “lots of opportunities for refinancing and purchasing activity. The most important thing for prospective borrowers is to work with an experienced mortgage professional to identify their best loan option.”
Citigroup spokesman Mark Rodgers declined to comment. Tom Kelly, a spokesman for JPMorgan Chase & Co., couldn’t be reached for comment.
Lenders raised standards after the housing crash compelled the government to rescue Fannie Mae and Freddie Mac and bondholders forced them to buy back faulty loans. In all, poorly underwritten mortgages have cost five banks—Wells Fargo, Bank of America, JPMorgan Chase, Citigroup Inc. and Ally Financial Inc.—at least $94 billion in the six years ending 2012.
Mortgage originators remain concerned that the government-supported mortgage guarantors will force them to repurchase loans if they make underwriting mistakes.
Zillow Mortgage Marketplace, an online comparison shopping site for home loans, saw a 570% increase in the number of lenders offering conforming loan quotes with down payments of 3.5% to 5% in March 2013 compared with two years earlier, said Erin Lantz, director of the site, which received 15 million loan requests during the past 12 months.
“More lenders are willing to lend to borrowers with lower down payments—it’s an indication that they are able to extend credit more broadly,” Lantz said.
More buyers are also getting low-downpayment loans backed by government sponsored mortgage enterprises, Fannie Mae and Freddie Mac, said Credit Suisse Group AG mortgage strategists Mahesh Swaminathan and Vikram Rao.
In May, 20% of purchase mortgages in the U.S. were Fannie Mae or Freddie Mac loans requiring private mortgage insurance, up from 9% two years earlier. The share of Federal Housing Administration and Veterans Administration mortgages remained at about 40% in May from May 2011.
