The likely dominant product in a mortgage market without a government-backed guarantee will be a three- to five-year adjustable rate loan with a prepayment penalty, according to one industry official speaking at the Mortgage Bankers Association's annual convention in Chicago.
Alan Boyce, the CEO of Absalon, said homeowners would take on a lot more of the interest rate risk under such a scenario, and that 30-year FRMs would no longer be available. Also, rates would be 100 to 250 basis points higher.
Speaking on a panel discussing the future of the secondary market, he said the costs to society would be higher. Without a secondary market, there will be more risk to banks holding such loans, and thus taxpayer bailouts would be more expensive.
There will be lower rates of homeownership too. Those seeking to move for job-related reasons will have less mobility, Boyce said.
Michael Fratantoni, MBA's vice president for single-family research and policy development, said without some type of government support 30-year FRMs likely would not exist at all.
Separately, he has heard anecdotally that the piggyback mortgage is returning – but not so the borrower can avoid paying mortgage insurance, but to bring the loan amount down to the new $625,000 GSE limit.
If this is the case, it's a sign that some lenders are taking on more risk, he said – and that's a good thing.
