It’s becoming clear that one of the largest casualties to the collapse of the housing bubble has been easy access to mortgages. A number of changes to lending procedures has and will be restricting the ability for new borrowers to qualify for a mortgage. For the generation of young adults now saddled with personal loans for bad credit and unemployment, being unable to get loans to buy a home might be the next shoe to drop.
Think your average credit score will be enough for a mortgage? Ever since the housing bubble burst, banks have been raising credit score requirements. Most banks require a FICO score of over 600 for an FHA loan. Over the years, the largest banks have increased its minimums as high as 640. The higher standards have cut out an additional 15% of borrowers who would otherwise qualify for an FHA loan.
While commercial banks are looking for higher credit scores, the government has been changing policies that also curtail new lending. A few years ago HUD dramatically reduce the maximum amount of allowable seller concessions for FHA loans from 6% down to 3% of the property’s assessed value.
It may not sound like much, but this restriction has a huge impact on those looking to buy a home. Seller concessions are commonly used to help finance a home buyer. For example, prospective buyers can use seller concessions to help pay closing costs, down payments and escrow as part of the sale agreement. This helps cash poor home buyers overcome the large upfront costs. These new restrictions translated into thousands in lost funding to potential homeowners in areas where housing prices are high.
The new Consumer Bureau, set up by Frank-Dodd, is eying ways to make mortgages more restrictive. One option for consideration is setting a 20% down payment requirement. Any borrower looking to forward a smaller chunk of cash would face higher fees as a deterrent. Since closing costs are already a large obstacle to many potential home buyers, any increase could price consumers out of the market.
Who can complain about mortgage rates today? They are at record lows and rates have been suppressed for nearly a decade. It only means one thing; they are about to go up. It’s hard to say when, but there are a number of economic variables that are signaling that a shift to higher rates is at our doorstep.
The first indicator being that inflation has been making a comeback over last year. Energy, food and clothing are all leading the way to a needed interest rate cool down.
The other variable would be public debt. While Treasury bonds have remained stable regardless of looming US public debt and economic turmoil, it could be a temporary anomaly. As public debt crisis spreads across Europe there is nothing preventing a potential run here in the US. Although, I think it’s safe to say government debt won’t have much of an impact in the short-run.