Mortgage Moaning

“Woes Afflicting Mortgage Giants Raise Loan Rates,” screamed the front-page headline in the New York Times. Some people reacted with horror, believing that higher mortgage rates would further impede the housing market. True enough, but instead of seeing the negative, I thought, “sometimes the market itself takes better care of bad behavior than any Congressional policies.” We should see the shifts in the mortgage market as signs of healing and necessary prudence in the aftermath of one heck of a party.

One of the biggest shifts over the past eighteen months is that it has become more difficult to borrow money. While this may stymie a potential homebuyer’s efforts to find his “dream home,” another way of seeing it is to consider that NOT getting that loan may be the greatest stroke of luck that he may encounter. In fact, if lenders had applied similar, or at least somewhat tougher standards while the housing boom was at its height, there would not be so many people who are upside down on their homes or incapable of making their monthly mortgage payments.

The next, natural progression of the credit healing process nature is the change in the actual rate on mortgages, According to HSH Associates, a publisher of consumer interest rates, the average fixed rate for a 30-year conforming loan (one that Fannie or Freddie can purchase from the lender, or $417,000-$729,500, depending on where you live) was 6.71% on Tuesday. The average rate for a 30-year “jumbo” loan, which can not be sold to Fannie and Freddie, was 7.8%, the highest rate since December, 2000.

As predicted when the Fannie/Freddie mess erupted, mortgage rates are rising due to fears that without the government sponsored enterprises supporting the market, there will be fewer lenders available to make loans and those that survive are likely to charge higher interest rates. In essence, lenders are demanding more money (or “vig” as we used to call it on the trading floor) for providing borrowers access to their now-sacred capital. Who could blame them? They are struggling to collect on old loans that were extended, so they now must be extra-careful to only extend credit to borrowers who have sterling credit and are likely to pay each month for the life of the loan.

Now to the moaning part of the story: according to the Times, “for a $400,000 loan, the increase in 30-year rates in the last few days would add $71 to a monthly bill, or $852 a year.” Let’s think about this for a moment—the borrower in question is buying a $500,000 home, putting down 20%, or $100,000, and financing $400,000 with a conventional 30-year mortgage. Are we to believe that $71 per month might be the difference between being able to afford the $500 grand home and remaining a renter? If that’s the case, I have advice for our would-be buyer: you are too close to really be able to afford this house. And if he can only afford to purchase the house with an interest-only mortgage, then all bets are off—he is about to do something that could have significant long-term financial implications.

Ultimately, instead of moaning about the “negative” developments in the mortgage market, we should be applauding the self-regulating markets. These are the types of significant changes that will lead us out of the mess.