When talking about the variables that affect the health of the broader mortgage market, none are more important than interest rates. Since the U.S. Federal Reserve had decided to cease its economic stimulus late last year, 30-year fixed-mortgage rates have returned to their hitherto low levels previously reached ahead of the taper-influenced “summer spike” of 2013. With rates having exceeded 4.5 percent due to that spike, many believed that 2014 would usher in the era of 5 percent 30-year fixed-rate mortgage rates, but that did not happen.
Now, it appears that many prognosticators believe that 2015 will see a substantial increase in rates by year’s end, with forecasts varying from 4.5 percent to 4.7 percent. In an op-ed from Credit.com’s Scott Sheldon, it was stated that it is not too likely that the market will see 5 percent mortgage rates for 30-year FRMs “anytime soon.”
According to Sheldon, this is due to several reasons, starting with tight credit. Using a simple example, he pointed out that consumers with a FICO score of 620 and an earlier foreclosure would be able to “easily” apply for a FHA-backed mortgage with 3.5 percent and get the thumbs-up from their lender.
But borrowers with pristine credit and payment history and a 40 percent down payment but a low 46 percent debt-to-income ratio would be considered higher-risk, due to the latter metric being just one percentage point over the maximum reading of 45 percent.
In the aftermath of the global economic recession of the late 2000s, the Obama administration made efforts to mitigate credit risk in the mortgage space. That has resulted in credit being relatively tight, even if standards are easing up in “small niche areas.”
The second reason given by Sheldon as to why 30-year FRMs will not reach 5 percent anytime soon was the paradigm that interest rates and credit move analogous to each other. Sheldon said that the housing market “could suffer another collapse” should people take out less mortgages due to higher interest rates. This would result in one of two scenarios, the first being the Federal Reserve launching a new quantitative easing stimulus, as it injects funds back into the mortgage space, the second being a hypothetical series of reforms to make qualifying for a mortgage much easier for consumers. “In short, the housing environment is likely too weak to be dealt the onslaught of 5 percent mortgage rates,” he posited.
Lastly, Sheldon talked about different tools the mortgage industry could use to mitigate the risk of reduced mortgage volume. For one, he said that lowering standards would be a good choice, albeit not to the permissive standards of 2004-2007 that led to the housing market crash of the late 2000s. This would be a sound move as opposed to another “QE” stimulus initiative.
He also suggested that it may be wise to allow slightly higher debt ratios on standard mortgages, given certain extenuating circumstances. Another tool would be to allow stated income loans for self-employed consumers, or allowing this segment to furnish other types of documentation, e.g. bank deposits as opposed to tax returns.