With the recovery of the housing sector appearing sustainable for the moment, big changes are expected in the New Year. People are most likely aware that housing prices should continue to rise. However, what else can we expect to happen in 2014? For starters, mortgage costs are predicted to rise for borrowers that are unable to come up with a large down payment and have less-than-perfect credit scores. This, of course, may be attributed to regulations impacting both Fannie Mae and Freddie Mac.
These mortgage-finance companies, which currently dominate the market, are going to be increasing fees. The higher costs will be the result of new mortgage regulations, expected to start in the spring. The new rules are more costly to enforce, as they are stricter and require a more significant amount of time and energy to process. Therefore, Fannie and Freddie will be charging institutional lenders more. Unfortunately, increased mortgage costs will eventually impact borrowers. To combat the higher mortgage costs, lenders will increase mortgage rates.
In a recent update to its website, Fannie Mae indicated just how much more certain borrowers can expect to pay after the fee hikes take effect.
A borrower with a credit score of 735 making a 10% down payment will pay fees totaling 2% of the loan amount, up from 0.75% right now. An upfront fee of 2.5% can raise the mortgage rate by around 0.5 percentage points over the life of the loan. This, of course, was calculated for a standard 30-year fixed-rate mortgage.
For borrowers making a 10% down payment with credit scores of 750, fees will increase to 1.5% from 0.5%; and for those loans with a borrower credit score of 775, the upfront fee will rise to 1% from 0.5%.
Borrowers with larger down payments could also see higher fees. For borrower with a credit score of 690 and a 25% down payment, fees will rise to 2.25% of the loan amount, from 1.5%.
The impending changes have been a collaborative effort between these government mortgage-finance agencies and the Federal Housing Administration (FHA). However, despite their enormous profitability since being taken over by the government, the FHA wants to raise fees in order to make non-government-backed lending more competitive. This theory goes double for riskier loans.
A senior FHFA official acknowledged that even with the latest changes, Fannie and Freddie will be charging less than what the regulator believes a private investor would require to meet a traditional rate of return. According to a recent release, the changes are needed to further the progression of the recovery.
Housing analysts said a combination of higher fees, rising interest rates and new mortgage regulations could further constrain mortgage credit next year. “It’s another headwind for housing on top of other headwinds that, individually, might have been manageable,” said Ivy Zelman, chief executive of Zelman & Associates, a housing research and advisory firm.