Mortgage loan options available have significantly shrunk during the past few years of the crisis to the point that makes some worry creativity is almost impossible, or simply dead. A closer look at borrower preferences and market data indicate product variations may not necessarily be a dare banks need to stay away from. Rather it is a convenience for which both banks and borrowers should thank the Federal Reserve Bank.
To start, according to the Freddie Mac Quarterly Product Transition Report, fixed-rate loans in 4Q11 accounted for over 95% of refinance loans. The report finds borrowers “clearly preferred fixed-rate loans,” regardless of whether their original loan was an adjustable-rate mortgage or a fixed-rate, and shorter loan terms. The trend persisted throughout 2011 and is expected to continue in 2012. Freddie reported the same preference for fixed-rate loans and shorter loan terms during the first half of 2011.Up to 43% of borrowers who paid off a 30-year fixed-rate loan during 4Q11 chose a 15- or 20-year loan, “the highest such share since the first quarter of 2003.” That record was broken in the second quarter when 37% of the borrowers who paid off a 30-year fixed-rate loan chose a 15- or 20-year loan. In 4Q11 58% of borrowers who had a hybrid ARM transitioned to a fixed-rate loan, while the remaining 42% refinanced into the same type of product.
These choices are primarily driven by historically low interest rates. Freddie Mac fixed mortgage rates averaged 4% for 30-year loans and 3.3% for 15-year product during 4Q11. The Bureau of Economic Analysis has estimated the average rate on a single-family loan was about 5.2% during 4Q11.
Freddie's vice president and chief economist, Frank Nothaft, explained that “borrowers motivated to refinance by low fixed rates” can obtain even lower rates by shortening their term from a 30-year fixed-rate mortgage, the interest rate on a 15-year fixed. The interest rate on a 15-year fixed was about 0.7 percentage points lower during 4Q11.
Nothaft did note, however, that hybrid ARMs allow “for even a greater interest-rate savings” for those who plan to move in a few years. The initial interest rate on a 5/1 hybrid ARM was about 1.1 percentage points lower than on a 30-year fixed-rate loan.
Borrowers have spoken. Some of the nation's most respected economists are speaking out as well. In his February economic outlook, John Makin of the American Enterprise Institute defends the Fed's policy of keeping interest rates at levels critics consider “virtually zero,” arguing that while low rates hurt savers, they have helped stabilize the economy.
In his blog, “What if the Fed had done nothing when the U.S. economy tanked?” Makin plays the “consider alternative scenarios” card to disagree with the idea that by repeating “rounds of rate cuts and quantitative easing since the 2008 Lehman crisis” the Fed risks bringing “a nasty inflation hangover with no benefits for the economy.”
Beyond the “very doubtful outcome” of seeing prices somehow start to rise in the midst of an equity, housing, and economic collapse, he wrote, the country would face another Great Depression. “For better or worse, the Fed is stuck holding interest rates low and steady for at least another year, and probably longer.” In other words, at least for the near future, expect to see more homogenous mortgage loan portfolios.
Besides the fixed-rate GSE loans some medium-size banks are focusing on jumbo loans to make up for low loan origination volumes. Liberty Bank for Savings, a community bank based in Chicago, is expanding its home loan options for the area's homebuyers with a new alternative that exceeds the conforming loan limit above $417,000.
The bank will offer affordable rates “including special fixed rates” on jumbo mortgages from $417,000 to $850,000. Its chairman and CEO William Smigiel explained the move as an effort to meet customer needs and offer jumbo mortgages “designed to keep rates affordable in areas with high home prices.”
The option of hitting two birds with one stone and achieving multiple results through one concentrated effort is high up on the desirability scale of any financial services provider.
Lenders Clearing House LV plans to achieve that goal through the HOPE Home Foundation Employer Assisted Housing program, which can “put the brakes on steadily declining home values” and generate affordable, competitive housing solutions. Earlier this year the Las Vegas-based real estate reseller teamed with HOPE to introduce an employer-assisted housing option that includes homeownership, renting options and foreclosure prevention assistance.
The initiative brought together a task force of real estate professionals, elected officials, government agencies and ancillary services and employers in the Las Vegas area to educate their staff about mortgage programs, grants and other housing opportunities. LCH also participates in the Neighborhood Stabilization Program established by the Department of Housing and Urban Development to assist in reducing large inventories of REO homes in the Las Vegas market.
