As home loans get harder to obtain, the number of renters increases, and so will rent

Come October 2011, buyers’ purchasing power is will reduce even further:

• The FNMA (Fannie Mae) loan limit will be reduced from $729,000 to $625,500, pushing more buyers into jumbo loans for which there are fewer lenders and consolidators.

• Jumbo loans require 6-12 months of reserves, which is more than FNMA requires.

• Interest rates will likely rise, making qualifying for a loan even harder.

• Mortgage insurance for FHA loans will increase by 30% in April 2011.

• Credit scores are on the decline.

• As home equity has vanished, buyers who want bigger homes will not have the equity from the sale of their current home to put toward the new purchase, which will likely require a 30% down payment.

What does this means?  More people staying in their homes, more people unable to qualify for a loan, more people renting instead of buying.  This is all true before we get to the conversation of the recurring suggestions in Congress that the mortgage interest deduction should be reduced or eliminated.  There are times when it’s good to be a landlord. This is one of them.  And, yes, we do investment property loans, too.  Give us a call.

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What we’re talking about here is loans over $730,000, which are those that are not bought by Fannie Mae and Freddie Mac.  Just because the loans are available doesn’t mean that everyone gets one.  You still have to go through the relatively stressful process that loan underwriting is these days and prove that you can pay the loan back (and then some, it seems).  Expect to produce documentation over and over again, expect your appraisal to come in low, expect the lender to want to see 20-40% in equity.  It’s a tedious process and potentially worth it.

These conditions are strict compared to five years ago, but the fact that more loans are being made is a good sign.  While perhaps not a loosening of credit standards to something more reasonable, it is a loosening of credit.  The reason that is significant is that it means the secondary market for mortgages is starting to show signs of life again.

To oversimplify (remember, this is a blog), there are two major “consolidators” of mortgages—(1) the government agencies that buy loans at $730K and below and (2) private consolidators that buy loans at $730K and above.  When these “consolidators” buy mortgages from lenders and securitize them, they infuse the lender with cash to make more loans.  Expand your geographical horizons for a minute to remember that there are far more loans in the country made for less than $730K than there are over that amount.  In the recovery from the “financial meltdown,” the under-$730K consolidators have had more opportunity to re-establish confidence in the buyers of these mortgage securities, so the consolidators have had an easier time loosening up money for loans at $730K and lower.

The larger-loan consolidators have lagged behind simply because there is less of a secondary market in which to sell these loans.  To see that more of these loans are being made suggests that there are more confident buyers of larger-mortgage securities, which in turn gives the larger-loan consolidators money, which in turn allows them to buy more loans from lenders, which in turn allows those lenders to lend again to someone else that needs a loan for $730K or higher.

While the days of getting a mortgage by putting a fog on a mirror are nowhere close to returning, this sign of life in the jumbo market is a good thing.  If you couldn’t refinance before, you might want to see if you should refinance now.