For the past few years, would-be homebuyers were faced with a frustrating paradox: Home prices had taken a beating and mortgage rates were at rock bottom, but without near-perfect credit and a hefty down payment, lenders wouldn’t go near your application.
What a difference a few years makes. Home prices are staging a modest recovery in most of the nation, with a few in-demand pockets bouncing back so fast people are using the phrase “seller’s market” again. They’re still cheap compared to the peak of the bubble, but steals of a lifetime are few and far between anymore. And after hitting a trough of just over 3.3% last fall, mortgage rates have gone on a tear, rising roughly an entire percentage point since spring.
This has slammed the brakes on the brisk trade banks had been doing in mortgage refinancing — the higher the rates go, the less attractive the prospect looks, given the investment of time and money required. According to the Mortgage Bankers Association, the number of refis just hit a four-year low.
To make up the shortfall, banks are trying to make new mortgage loans, but those are also on the wane, with sales of newly-built homes hitting a nine-month low in July.
Banking consultant Ken Thomas says the industry is also bracing for the “perception of further rate increases” if the Federal Reserve scales back its bond-buying, which has kept rates low.
Reuters reports the sharp drop in refinancing is prompting Bank of America to cut “thousands” of workers. In February, JPMorgan Chase & Co. said it will cut up to 19,000 jobs in mortgage and community banking through the end of next year.
“If lenders continue to weaken approval guidelines, credit score guidelines and debt-to-income requirements, then the industry could be looking at bigger credit problems down the road,” Focardi says.
But we’re not nearly there yet, he adds. Conversely, requirements that are a little less strict might help both banks and for borrowers.
“I do think the loosening is a good thing because underwirting has been tightening so much over the last five years,” he says. Compared to the anything-goes mentality that reigned in the run-up to the market crash, Focardi says the degree to which banks are relaxing their standards is still modest.
“If you make that comparison, there’s still room for mortage lenders to conintue loosening,” he says.
This is likely to be welcome news for would-be buyers who had been stuck on the sidelines. “For consumers, they might see rates going up but in some cases credit might be easier to get,” says Jed Kolko, chief economist at Trulia.com.
“When rates go up, that hurts housing demand, but if they’re easier to get, that could help,” he says. “The hope is it will help offset the impact of rising rates.”