Tuesday, April 20, 2010

MORTGAGE & FINANCE: Will higher rates halt housing recovery?

Real estate agent Thalia Tringo was not stashing eggs over Easter. She spent the weekend showing homes in the Cambridge area. Yes, she has been busy lately, and a couple of factors may help explain why.

The federal home buyer tax credit, worth up to $8,000, expires at the end of this month. And at the end of March, the Federal Reserve ended its program of buying mortgage securities to keep interest rates low and pump money into the housing market.

The prospect of an increase in rates, Tringo said, seems to serve as a trigger for buyers. “What usually happens is buyers talk and talk, but they’ll jump when they see interest rates going up,’’ said Tringo. “I think it’s a valid concern. Rates can’t stay this low forever.’’

And sure enough, right after the Fed stopped buying on March 31, mortgage rates did go up. In just a few days, average rates for a 30-year fixed mortgage rose close to 5.25 percent, after spending the better part of March at or below the 5 percent mark.

This comes as the state’s housing market is finally showing signs of a sustained recovery. But will interest rates keep climbing and will that, in combination with the end of the tax credit, be enough to push buyers back to the sidelines?

Unlikely, brokers and housing specialists said. Rates will probably remain low because investment companies are already picking up the slack from the Fed’s gradual exit. Mortgage-backed securities, of all things, have become attractive to investors again.

“There’s no indication we’re going to see a dramatic change in interest rates, and we’ve know about the end of the tax credit since it was extended in the fall,’’ said Kevin Sears, president of the Massachusetts Association of Realtors and owner of Sears Real Estate in Springfield. “From what we’re seeing so far this year, we expect a really solid spring market.’’

For example, Fannie Mae and Freddie Mac the national mortgage companies now controlled by the US government, estimate mortgage rates won’t rise more than an eighth of a percent over the next three months.

Still, the departure of the Fed removes a powerful bulwark that protected mortgage rates from economic variables that can send them up suddenly. Now, the stability and direction of rates will be less predictable.

“One would expect the yield on these securities was suppressed because of the Fed intervention,’’ said Nicolas Retsinas, director of Harvard’s Joint Center for Housing Studies. “I expect there will be some uptick’’ in rates. “How quickly that will take place depends on how you read the tea leaves.’’

The flip side to low rates is that loans are still hard to get for some borrowers because of tougher qualifying rules lenders imposed in the wake of the credit crisis, which was fueled by sloppy or fraudulent lending practices.

“Private investors are looking at a product that’s become squeaky clean,’’ said Art Lindberg, regional vice president of Sidus Financial, a wholesale mortgage company. “This reflects the strict requirements imposed on every borrower we touch today.’’

These days, without a good job and a down payment of 10 to 20 percent, a mortgage can be very hard to come by. Borrowers need a solid credit score, and they need to have their income and assets thoroughly documented. Only the highest-rated borrowers are getting the current low rates; those with, for example, lower credit scores can expect to be charged higher rates.

In other words, it’s back to basics. And don’t expect banks to loosen standards to win more customers as the federal programs end, Lindberg said.

“We’re struggling for products. You’re down to conventional 15- to 30-year fixed, an adjustable rate here and there, and you’ve got your jumbos, if you can find one,’’ Lindberg said, referring to loans above $523,750 around the Boston area, which remain difficult to get and generally require down payments of up to 20 percent. “There aren’t any niche products because no one wants to invest in them.’’

Qualified borrowers who want to make a down payment under 5 percent have options, most through the state agency MassHousing and the Federal Housing Administration. However, with the FHA, expect to jump through hoops and pay a little more in rates because of a host of restrictions and regulations from the cash-strained agency. For example, it recently upped the upfront costs borrowers must pay for mortgage insurance from 1.75 percent to 2.25 percent.

And in this conservative lending climate, even a slight increase in mortgage rates may make it harder for people to qualify for loans, especially first-time buyers.

But Bill Mullin, president of NE Moves Mortgage, insists there are plenty of qualified buyers, and he’s confident interest rates aren’t about to spike anytime soon.

“These are still low rates, even if we get to 5.5 percent,’’ he said. “I’ve been in the business a long time. I remember when rates were 16 percent. You’ve got to have some historical perspective.’’

Ted Siefer, Boston Globe April 11, 2010

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