Real Estate Market Impact of New Lending Guidelines for Exotic Mortgages... Real Estate Prices to Suffer?
Federal Banking Regulators are tightening the belt on the loan qualifying guidelines for exotic mortgages for various mortgage providers under the FDIC, NCUA and OTS. This impacts major banks like Washington Mutual, World Savings and Bank of America.
Many mortgage insiders and economist believe the explosive housing prices over the last four years has been due to these types of exotic mortgages and relaxed qualifying guidelines.
The new guidelines are designed to make consumers more aware of the loans they are applying for via disclosures but more importantly is that they make it more difficult to qualify. We already attempted to do this in the past on our own with this pay-option ARM / Pick-a-payment mortgage calculator.
The item that has the most impact in the new guidelines is that mortgage lenders most now qualify buyers at the fully indexed mortgage rate for interest-only and payment-option loans.
What does this mean to borrowers and real estate prices?
Instead of qualifying for a mortgage at the popular 1.00% start rate banks will now qualify the buyer at the fully indexed rate. What is a fully indexed rate?
Index + Margin = Fully Indexed Rate
Many creative mortgages are based on the 11th. District Cost of Funds Index or COFI. This index is currently at: 4.177 %
The "margin" is what the bank makes, it's usually between 2.25% up to 6.75% but for our example we will use: 3.5%.
So, take the index 4.177% + margin 3.5% = fully indexed rate: 7.677%
As you can see this is a pretty significant difference in mortgage rates and there is a dramatic effect on mortgage qualifying. Here is an example of the impact on qualifying based on our mortgage qualification calculator
We will use this example: Qualifying at 2.00% start rate or fully indexed 7.625% based on $8,000 gross monthly income and $800 in revolving debt.
Mortgage Qualifying Differences:
at 2% Maximum Mortgage: $432,878
at 7.625% Maximum Mtg: $226,055
Assuming normal qualifying guidelines regarding income to debt ratios of 30/40.
That is over $206,000 difference in qualifying. If a large percentage of home buyers over that last three years used these types of mortgages to qualify and their new loan adjusts to the higher rate.... they can no longer refinance. This will create some significant issues in the near future.
Some of this properties will go to foreclosure or the owners will need to do a real estate short sale. Either way these properties become comparable sales as far as appraisals are concerned and this will apply downward pressure on home prices.
Additionally, these changes in mortgage qualifying will affect current home buyers who can no longer for a mortgage large enough to purchase a home, which will force property values down.
What do you feel will be the impact if current home buyers can no longer qualify for mortgage loans? Are lot's of people going to lose their shirt?