Mortgage giants Fannie Mae and Freddie Mac have languished in financial limbo for years. In the latest push to set a long-term path for Fannie and Freddie, a politically powerful trade group calls for restructuring the mortgage companies into a utility owned by shareholders.
Fannie and Freddie are mostly invisible to homeowners, but they play an important role in the mortgage market. By acting as a backstop for private lenders, Fannie and Freddie keep borrowing costs low and mortgage money flowing.
The National Association of Realtors supports the utility-like arrangement. Under NAR’s proposal, Fannie and Freddie would operate as regulated monopolies, the housing sector’s equivalent of Commonwealth Edison or Florida Power & Light.
“The structure we propose promotes competition, but it also promotes stability,” says Susan Wachter, a University of Pennsylvania Wharton School economist who has been working with NAR on the proposal.
The Realtors trade group is calling attention to its proposal at an uncertain moment for Fannie and Freddie. The Trump administration had hoped to return the entities to private ownership but lost power before achieving that goal. President Joe Biden seems less eager to pursue privatization.
What Fannie and Freddie do
Fannie and Freddie don’t lend directly to homebuyers. Instead, the two “government-sponsored enterprises” buy mortgages from lenders, then package loans into securities that are sold to investors. Fannie and Freddie back about half the $11 trillion in mortgages outstanding in the U.S.
While they usually fly below consumers’ radar, their underwriting policies occasionally become apparent to borrowers. For instance, last year Fannie and Freddie tightened rules for self-employed borrowers. In another response to the coronavirus pandemic, Fannie and Freddie in December began imposing a new “adverse-market fee” on mortgage refinancings.
While Realtors, lenders and consumer advocates criticized the fee, the regulator overseeing Fannie and Freddie said the charge was crucial to shoring up the nation’s mortgage market.
“It is critical to remember that this fee covers losses that are the result of policies that have helped millions of Americans stay safe in their homes during a global pandemic,” Mark Calabria, director of the Federal Housing Finance Agency, said last year.
The collapse, rebound of Fannie and Freddie
During the housing bubble of 2004 to 2007, Fannie and Freddie engaged in risky lending. That strategy soured when U.S. home prices collapsed.
Rather than let Fannie and Freddie fail, the U.S. government took them over in 2008, an arrangement known as conservatorship. In the years since, home prices have bounced back, and mortgage markets have returned to health.
Still, the fates of Fannie and Freddie have been uncertain. Calabria, former chief economist to former Vice President Mike Pence, took over in 2019 as director of the Federal Housing Finance Agency. His mission was to privatize the two lending giants.
For Calabria, the lessons of the crash loomed large. He said last year that Fannie and Freddie were “not close to safety and soundness.
“In their current condition, Fannie and Freddie will fail in a serious housing downturn,” Calabria said.
Those concerns drove the FHFA to establish new capital rules for Fannie and Freddie. The companies had been allowed to hang onto just $45 billion in profits, with any amounts above that going to the Treasury. In November, the FHFA raised that amount to $280 billion.
A flurry of ideas, but no solution so far
It’s unclear exactly how a restructuring of Fannie and Freddie would affect consumers. But creating a more stable structure for Fannie and Freddie will set the entities up for long-term success, says Ken Fears, NAR’s policy expert on mortgage finance. While mortgage borrowers have enjoyed rock-bottom rates and reasonable fees, Fears says uncertainty looms below the surface.
“It isn’t clear that what we have today can survive over the long term,” Fears says.
The utility concept is just the latest proposal to gain traction in Washington. Don Layton, the former chief executive of Freddie Mac, says mortgage giants have been in a “policymaking hothouse” since the Great Recession. Policymakers and mortgage experts have floated a variety of proposals. Among the ideas considered and dismissed were an industry cooperative, permanent government control and the creation of a number of competitors to Fannie and Freddie.
“We’ve gone through a lot of gyrations,” Layton says.
Not everyone thinks the structure needs to change. Ed Golding, the former head of the Federal Housing Administration and now executive director of the MIT Golub Center for Finance and Policy, says the current scheme functions well.
“People say conservatorship can’t go on forever,” Golding says. “I say why not?”
At any rate, Golding says it’s unclear how a utility-style structure will benefit consumers. He says the proposal’s proponents should hone their pitch.
“I think they can make a better argument on why this lowers the cost,” he says.
Wachter, for her part, envisions the new-look Fannie and Freddie attracting investors by promising a steady dividend. “There are investors who prefer stability, and they’ll pay up for that,” she says.
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Mortgage rates fell ever so slightly this week, according to a Bankrate survey released Wednesday. The dip might reflect intensifying competition among lenders, or investors’ recalibration of the path of the U.S. economy.
Whatever the reason, the average cost of a 30-year fixed-rate mortgage fell to 3.00 percent from last week’s 3.01 percent in Bankrate’s national survey of lenders. The 15-year fixed also fell, edging down to 2.39 percent from the previous week’s 2.45 percent.
Bankrate includes origination points and other fees in its figure. The 30-year fixed-rate loans in this week’s survey included an average total of 0.31 discount and origination points.
Mortgage rates have been in steady decline since the coronavirus recession struck in the spring of 2020, a trend that has helped drive the surprisingly strong housing market. The downward trend in mortgage rates reflects mixed signals from the economy. The latest spike in coronavirus cases undermined hopeful signs that COVID-19 vaccines soon will curb the pandemic, and the economic recovery so far has been uneven and incomplete.
In one sign of optimism, the 10-year Treasury yield, a key indicator for mortgage rates, has held above 1 percent. With Democrats taking control of the White House and Congress, the logic goes, a generous stimulus bill will follow. However, some think the stimulus has been overhyped.
“The push up in rate from the expected new stimulus plan was overdone,” says Joel Naroff, an economist in Holland, Pennsylvania.
Mortgage experts polled by Bankrate are evenly divided about the direction of rates. A third expect rates to rise in the coming week, while a third predict rates will fall and a third think they’ll stay flat. Some think the refinancing window will close soon.
“Janet Yellen is urging Congress to ‘act big’ and ‘big’ will absolutely impact the country and rates going forward,” says James Sahnger, mortgage planner at C2 Financial Corp. in Jupiter, Florida. “If you haven’t refinanced yet, it’s time to get going.”
FHA loans are still aimed at lower-income borrowers, but new limits are surprisingly high.
One of the more borrower-friendly mortgage options is available for a wider range of homebuyers in 2021 — so you might qualify even if you need a loan for more than $800,000.
Now, don't get the wrong idea: FHA loans are still primarily intended for low-to-moderate income borrowers and are still considered a good choice for a first-time buyer.
But the Federal Housing Administration, which backs these low-down-payment mortgages, has raised its loan limits for this year to reflect today's incredibly low mortgage rates and the sizzling housing market they've helped cook up.
What's the deal with FHA loans?
Congress established the Federal Housing Administration in 1934, in the aftermath of the Great Depression, to help provide mortgages for borrowers who'd otherwise have trouble qualifying.
And that's still the mission of the FHA loan program today.
Though you might need a credit score of 620 to land the typical mortgage, you can be approved for an FHA loan with a score of just 500. And if you don't have much cash for a down payment, that's no problem because you can get an FHA loan by putting as little as 3.5% down.
The loans are issued by private lenders but are insured by the FHA, which steps in if a borrower stops making payments. That means less risk for the lenders and allows them to accept lower credit scores and down payments — and offer competitive mortgage rates.
At least one major lender, United Wholesale Mortgage, has been offering FHA loans with rates as low as 1.999%.
What are the new FHA loan limits?
The FHA's guarantee to lenders only goes so far: There are limits on FHA loans. And, the agency says on its website that it raised its ceilings by 7.4% at the start of 2021, partly due to "robust increases in median housing prices" across the U.S.
In late December, the median list price nationwide was up a stunning 13.3% from a year earlier, says Realtor.com, with record-low mortgage rates helping to stoke demand for houses and push up prices.
Here's how the FHA loan limits have increased:
FHA Loan Limits for Single-Family Homes in 2021
New limit (2021)
Old limit (2020)
In most U.S. counties
Throughout Alaska, Hawaii, Guam, and the U.S. Virgin Islands
In high-cost counties elsewhere
Why are the FHA loan limits for Alaska, Hawaii, Guam and the Virgin Islands so high? Well, because of high construction costs in the remote states and territories. It's expensive to get building materials to those places.
Is an FHA loan right for you?
Though FHA loans have lots of perks, there's a potentially expensive downside. To provide additional protection for lenders beyond the FHA's own guarantee, borrowers must pay the agency's mortgage insurance premiums, or MIPs.
There's a one-time upfront premium equal to 1.75% of the purchase price of your home, followed by annual insurance that's paid in monthly installments and ranges from 0.45% to 1.05%, though 0.85% is common.
The premiums never go away if you put down less than 10% when you take out your mortgage. If you make a down payment greater than 10%, you can shake your MIPs (yes, that does sound like a disease) after 11 years.
If you weigh the pros and cons and decide an FHA loan is the right choice for you, gather mortgage offers from at least five lenders and compare them — to find the best rate available to you.
Use those same comparison shopping skills when you buy your homeowners insurance. Review rate quotes from multiple insurance companies, to score the lowest rate on your coverage.
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See if it ever makes financial sense to turn your back on a home loan.
When most people buy a home, they expect its price will rise over time. But sometimes, the home falls in value, and in some cases the depreciation is so sharp that the amount owed on the mortgage becomes more than the home is worth.
This can make buyers question whether buying the home was a good decision. They may ask themselves: Does it make sense to stay in this home long term, or just simply walk away?
Answering that question can be difficult, but we’ll cover when it makes sense to walk away from a mortgage, how to do it, and other options to consider.
How to walk away from your mortgage
If you decide to walk away from your home, one of the most common options is to choose a strategic default. This happens when a borrower who has the means to pay intentionally stops making payments to allow the home to go into foreclosure.
During the foreclosure process, the mortgage lender repossesses your home for failure to pay the debt. To recover some of the money owed, the lender then sells the home at an auction. For example, if you owe $150,000 on your home and it’s worth only $100,000, the lender may sell the house for $100,000 or less.
If you live in what’s known as a recourse state — a state that allows mortgage lenders to issue a judgment for the remaining balance — you’d be responsible for paying all or a portion of the $50,000 debt that’s outstanding.
By contrast, in a non-recourse state, where the lender has to accept the $50,000 loss, you wouldn’t be responsible for making any additional payments.
A dozen states are non-recourse, according to Credit Sesame:
Whether the remaining debt is forgiven or not, it is important to note that a foreclosure will affect your credit score negatively, and it will remain on your credit report for seven years.
For example, if you have a credit score of 780, being 90 days late on your mortgage could drop your credit score to 650, according to a report from the credit scoring giant FICO.
This could prevent you from being able to purchase real estate for years, so it’s important to do all your research before walking away from your mortgage.
When walking away makes sense
Walking away from a mortgage makes sense when you’re underwater and believe the housing market in your area won’t rebound.
For example, let’s say you’ve purchased a home worth $250,000, but a market crash reduces its value to $150,000. It could make financial sense to walk away if you don’t want to pay the lender more than the home is worth.
If you lived in a non-recourse state, this could prove to be a wise choice, since you wouldn’t be on the hook for the remaining $100,000. Before you decide to walk away, be sure to consider all of your options.
If my mortgage is underwater, what can I do besides walk away?
If staying put makes sense, consider these alternatives:
Stay in your negative-equity home and continue to make payments
If you think the real estate market in your area will eventually recover, it might make sense to continue making payments.
To reduce your overall borrowing costs, consider making extra payments. This way you’d pay off the mortgage faster and potentially save on interest.
Seek a principal reduction
Another way to avoid foreclosure is to ask your lender to reduce the amount you owe. In the past, some government programs have helped distressed borrowers accomplish this, but many of these programs have expired.
Still, it can’t hurt to ask your lender for a principal reduction so you can stay in your home.
Request a loan modification
Ask your lender to modify your loan. For example, you could request that the lender extend the term of the loan or reduce the interest rate. By doing this, you could lower your monthly mortgage payment.
If you have a loan that’s been sold to government-sponsored mortgage giants Freddie Mac or Fannie Mae, consider applying for their Flex Modification program, which is designed to help make your monthly payments more affordable.
Refinance your mortgage after building equity
Refinancing your home is another option, but you may have to wait until you have positive equity. Most lenders won’t allow you to refinance your mortgage with negative equity.
After you’ve built enough positive equity to refinance, you might be able to save money if the lender gives you a lower interest rate.
Sell your house through a short sale
A short sale occurs when you sell the home for less than the mortgage is worth. For example, let’s say you owe $130,000 on your mortgage, but due to a bad housing market its value has fallen 25% to $97,500.
Some mortgage companies will allow you to sell the house at or below its value.
As with a foreclosure, the same recourse lending laws apply. If you’re living in a recourse state, you’d be responsible for paying all or a portion of the remaining $32,500 balance. Speak with a real estate lawyer if you have questions regarding the laws in your area.
It’s also important to note that, like a foreclosure, this option has a negative impact on your credit score. A short sale without an additional balance reduced a credit score of 780 to the range of 655 to 675, according to FICO.
With an additional balance, the 780 score was reduced as low as 620.
Use a deed in lieu of foreclosure
Instead of allowing the lender to foreclose on your home, you could voluntarily give the title to the lender instead. When this happens, the lender agrees not to foreclose. If the lender agrees, you won’t be responsible for the remaining amount owed on the mortgage.
As with foreclosure and a short sale, it’s important to note that using a deed in lieu of foreclosure also will negatively affect your credit rating.
When first thinking about buying a home, the type of mortgage you should consider is a bit lower on the priority bar. The first decision is whether or not to buy the home in the first place. Once that decision is made, it’s time to get your preapproval letter from your mortgage company. Most agents today won’t even let you into their car without having first spoken with a lender. Further, when making offers, the sellers and the seller’s agent want to see that not only have you spoken with a lender but have been preapproved, meaning your income, credit and assets have been reviewed and verified. Next, you’ll need to find out which mortgage is best for your situation.
You might be surprised at the various options available when financing a home. You’ll need to decide if you want a fixed rate loan or a variable one. You will also need to select a loan term. The most popular loan term is 30 years but there are certainly others. Your loan officer will help you with this. Your loan officer will also review your situation and provide different options from which to choose. In general, though, there are some factors to consider when selecting the type of mortgage which is right for you.
The most popular mortgage is the standard conforming conventional loan. When you see 30 year mortgage rates advertised, it’s very likely the lender is referring to this type of loan. Most every single lender offers this product creating a more competitive arena. Lenders will compete on rates and terms but also service. The service portion is extremely important but often not considered. A mortgage company might offer the lowest rates on the planet but after you submit an application you can’t get a return phone call. You want competitive terms but also stellar customer service.
Regarding the loan term, just remember the longer the term of the loan the lower the monthly payment but you’ll pay more in interest over time. A shorter loan term will result in higher monthly payments, but less interest is paid over the life of the loan. Speak to your loan officer and see what your principal balance would be five years into the loan with a 30 year term compared to a 15 year. You might be surprised.
Are you VA eligible? VA loans are the ideal choice for those who are eligible. VA loans do not require any sort of down payment, the buyers are limited from paying certain types of closing costs and rates are extremely competitive. In addition, there is no monthly mortgage payment required compared to other low-down payment mortgages. If you’ve served in the Armed Forces, active duty or served in the National Guard or Armed Forces Reserves this is probably the ideal choice for those wanting to come to the settlement table with as little cash as possible while still getting a very competitive program. VA loans also come with a government-backed guarantee should the loan every go into default.
FHA loans are another option. FHA loans are very popular with first time buyers because the minimum down payment is just 3.5% of the sales price. FHA loans also have a government-backed guarantee. These guarantees make it a bit easier to qualify as lenders are compensated for any loss should the loan default.
If you’re buying in a rural area and also want to come to the settlement table with as little cash as possible, the USDA program is likely your choice. USDA loans also a zero-down option. Many loan programs don’t like financing a home in a rural area as there are very few recent sales of similar homes in the area.
As you can tell, there are probably more choices than first imagined. But don’t let that confuse you. Your loan officer will help decide which program best fits your financing requirements.
With mortgage interest rates hovering around historic lows, 15-year loans have become more popular than ever. The low rates mean lower-than-usual monthly payments on these shorter-term mortgages, which make them more affordable for a larger share of buyers and homeowners looking to refinance.
1.You can afford the monthly payments
By far the biggest drawback to a 15-year mortgage is the higher monthly payment compared with a 30-year loan. Yes, 15-year mortgages tend to have lower interest rates than their 30-year counterparts, but because you have to pay off the balance in half the time, you wind up laying out more each month while you’re making those payments.
“That’s usually where everyone’s stress is. It’s not necessarily that they can or can’t afford it as far as the lender is concerned, it’s, can they deal with it in the family budget?” said Jeff Lazerson, president of MortgageGrader.
It’s important to do your homework and analyze all your costs. You’ll save a ton of money in the long run by paying less interest overall on a 15-year mortgage, but it may not be worth maxing out your monthly budget to get that savings.
“If thinking about it doesn’t keep you up at night worrying,” Lazerson said, you’re probably in a good position for a 15-year loan.
2. You can reduce your interest rate by at least half a percent
Lowering your interest rate is a great reason to consider a 15-year mortgage, but it can be an expensive proposition if you’re not getting a good enough rate.
So, make sure to shop around for the best rate and analyze every offer you receive. Currently, 15-year mortgages average 2.42 percent, versus 3.01 percent for a 30-year.
“If it’s just a little bit better than what you have, you can always wait and see, but if it’s significantly better, say, half a point or more in interest rate, don’t wait,” Lazerson said. “To me it looks like rates are headed a little bit lower anyway, but it doesn’t mean they will be going lower,” so you shouldn’t hesitate just because you want to find the absolute bottom of the market. You could miss out on good offers and significant savings if you wait too long.
3. You’re more than halfway through your 30-year mortgage and want to refinance
When you refinance, you start the repayment clock again as soon as you close on your new loan. If you’ve already been paying toward a 30-year mortgage for 15 years or more, you may not want to refinance into a new 30-year loan, because doing that would extend your repayment period significantly and you would have to pay even more interest overall.
However, by refinancing a 30-year mortgage into a 15-year one, you’ll keep your payment timeline the same and will reduce the amount of interest you wind up paying.
4. You can break even on your closing costs in three years or less
The breakeven timeline is a key thing to think about with any mortgage refi.
Refinancing comes with a variety of closing costs and other fees that eat into your savings at first. Lazerson said it’s not usually worth it to refinance if it’s going to take too long to recoup those costs.
“If you can recoup your costs in three years or less, it almost always makes sense to do it unless you’re going to sell in less than three years,” he said. “It’s really hard to look at your horizon beyond three years,” he added. “You might get a job transfer, you might end up hating your next door neighbor and you want to move. Maybe you want to do a room addition on your house and you’re going to refinance later anyway.”
Not recouping your costs soon enough could put you in a more precarious financial situation down the road if an unexpected expense comes up, or if you need to change your housing situation on short notice.
5. You haven’t refinanced in a while
Thanks again to the ongoing trend of low mortgage rates, most current homeowners stand to save by refinancing if they haven’t done so in the last year.
“Rates have gone down so much in the last 12-24 months even, if you did a loan a year ago, you’re probably in a good opportunity to save money,” Lazerson said. “If you did something prior to March or April of 2020, you should really look at it again.”
Interest rates are so low, he noted, that some mortgage holders who refinance old 30-year loans into new 15-year ones can actually keep their monthly payments pretty similar.
“People are able to shorten the amortization period,” Lazerson said, and the result is savings you don’t have to think about. “The beauty of the 15-year is the forced discipline,” he said.
6. You’d like to retire mortgage-free
There’s no better way to boost your retirement outlook than to have your mortgage paid off when you stop working. If you have a mortgage now that stretches many years into your expected retirement, you’d be wise to look at a new and shorter-term mortgage that can be paid off by the time your paychecks stop.
For people aged in their mid-40s to 50s, refinancing now into a 15-year mortgage guarantees you’ll have a lot more room in your monthly budget if you want to retire in your 60s. Just make sure your current budget can accommodate the higher payments. If you’re not sure, it might be best to make additional principal payments on your current mortgage so you’ll have the flexibility to cut them back if times get tough.
That said, if your current interest rate is a half-point or more above what you could get now, refi into a new 30-year mortgage and you’ll cut your interest costs. Then you can direct the savings into additional principal payments.
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The 30-year fixed-rate mortgage jumped to an average of 2.79% this week, increasing after last week’s record low of 2.65%, Freddie Mac reports in its weekly mortgage survey. Upticks over the last couple of weeks in 10-year Treasury notes—a key benchmark for mortgage rates—will prompt mortgage rates to rise, economists note.
“As Treasury yields have risen, it is putting pressure on mortgage rates to move up,” says Sam Khater, Freddie Mac’s chief economist. “While mortgage rates are expected to increase modestly in 2021, they will remain arguably low, supporting homebuyer demand and leading to continued refinance activity. Borrowers are smart to take advantage of these low rates now and will certainly benefit as a result.”
Freddie Mac reports the following national averages with mortgage rates for the week ending Jan. 14:
Freddie Mac reports average commitment rates with average points to better reflect the total upfront cost of obtaining the mortgage.
The National Association of REALTORS® forecasts that the 30-year fixed-rate mortgage will average 2.9% and 3% in the first and second quarter of 2021, respectively.
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COVID-19 conditions fueled acceptance and recognition of a global, distributed working model.
The mortgage industry has not traditionally been the vanguard of digital adoption, particularly in data intelligence and applied machine learning. Investments in proper infrastructure, an innate fear of losing process control, and converting the workforce to a digitally savvy “knowledge force” have contributed to “digital apprehension” in the past.
The COVID-19 pandemic served as a force majeure compulsion that has transformed delivery frameworks, perhaps inalterably, toward acceptance and recognition of a global, distributed working model. It has brought in interactive technology and cognitive business process tools as resiliency responses to the crisis.
The mortgage industry has been forced to respond to the massive and sudden work-from-home mandates. It has embraced virtual workforce models that were once considered “risky” or only applicable to trendy Millennial-dominated fintech cultures. It now seems the rank and file mainstream industry stalwarts have learned that there is immense untapped productivity scope to be unveiled from the process “digitization” and operations virtualization.
The sprint to accommodating business process delivery in response to COVID-19 has awakened a new interest in direct-to-consumer and direct business-to-business technology collaboration opportunities. It is no longer a means to experiment with a differentiating model. It is a new standard taking a more significant advantage of productivity tools and means awaiting mass scale adoption.
Below are seven realities that were exposed and highlighted from the mortgage industry’s response to COVID-19. These realities may have been known previously but the enduring changes were brought about by the pandemic.
1. Consumers can succeed as self-directed digital learners
In the past, the mortgage industry operated based on the assumption that customers needed to speak to somebody in person to help them understand the complex issues related to lending. When COVID-19 struck, several customers suddenly faced an uncertain situation and wanted to learn about things like unemployment benefits, impact on mortgage payments, and the optimum way forward.
Given that most mortgage companies did not have time to prepare for the onslaught of queries through one-on-one engagement, they set up communication portals equipped to handle these queries. With their high-quality multimedia content and chatbots, these portals were successfully able to engage with users.
The biggest revelation for mortgage companies was that customers were capable and willing to perform business process activities independently without much hand-holding. With newsfeed and push notification of bite-sized content similar to tweets, customers were encouraged to help themselves.
2. Paper is increasingly becoming a dirty word.
With COVID-19, paper was literally considered ”dirty” since it could transmit the deadly virus to anyone who handled it. As a result, all paper-heavy processes in the mortgage process, whether contract signing or reviewing, moved online overnight. Along the way, people suddenly realized how much simpler the process became in the bargain. The reliance on a physically present notary, a signing room and other such requirements as part of the mortgage process is migrating toward E-sign and notary standards.
3. E-Everything (e-closing and virtual transactions)
Asking customers to physically sign mortgage documents in the presence of an attorney or signing agent has been a long-standing norm. The pandemic proved that customers are apt to adopt e-sign for smart documents, with a preference for more convenient closing processes, even executing closing documentation in the comfort of their homes. It is reported that shifting to e-execution models reduced costs considerably, and eliminated the need to travel to a third-party office location.
4. Working from home may be a new preference for a majority of the workforce.
While several industries such as IT have been allowing and encouraging employees to work from home, lenders have been more old school in their approach to work. They took comfort in being able to ”see” their employees working to ensure their productivity. They placed greater emphasis on hours spent at the office rather than taking an outcome-based review process.
COVID-19 confirmed that not only do the majority of workers prefer to work from home; they are also more productive when they do so. Considering the time spent by the average worker in meetings, lunch, coffee breaks, water cooler chats, and commuting, working from home is more efficient. Besides, the lower overheads related to office maintenance and real estate costs could mean that most lenders may end up working remotely forever.
This model could also open up several opportunities for the mortgage industry to tap a much larger pool of skilled remote workers without worrying about geographical constraints.
5. Virtual operations are secure and reduces climate impact
Security is one of the top concerns cited by lenders when it comes to remote working. While there are always vulnerabilities, companies invested and moved from a minimalist approach to a maximalist approach to security despite the expense. This has given clearance for broader adoption of information security protocols that leverage automation, AI, analytics to deploy cybersecurity solutions with enhanced precision and faster responsiveness to threat vectors.
A robust security infrastructure not only makes virtual operations extremely secure, but remote working goes a long way in minimizing the climate impact.
6. Scale and capacity strategies cannot avoid the logic of the global workforce and automation solutions at scale.
Traditionally, most capacity models in the mortgage industry are extremely people-centric. Scaling during COVID-19 was immensely challenging and remains challenging because there is a significant workforce talent shortage in mortgage operations across all country regions. There were not enough workers when rates dropped at the very start of the peak production season in lending. Most lenders had to grapple with immense challenges of recruiting, screening, and training new hire workers in work from home “shut down” situation.
The result has been an incredibly long application-to-funding lifecycle turn times. The demand response to the dilemma has been a high adoption of production migration to offshore/nearshore work teams and a push to automate backend processes with microservices, API co-source applications, and an increase in process automation software.
Many lenders now see their workforce as a hybrid conception: some on-premise, some virtual; some onshore, some right shore; some human physical, some robotic or cognitive.
7. Loss mitigation efforts do benefit from AI and digital automation- it’s not just for origination sales
With automation, loss mitigation interventions such as qualifying decisions can be made far more effectively based on the rules-driven application of just in time data. Advanced algorithms have increased their role in the servicing of distressed borrowers.
Servicers have increased their utilization of intelligent insights and automated risk modeling to move away from human biases and decision variation when executing a loss mitigation intervention. They have also accelerated the use of Natural Language Processing, allowing consumers to ask questions and interact with the servicing data intake systems in ways that are less embarrassing, threatening, reducing the humiliation of “asking for help.”
Providing digital solutions for consumers has increased the rate at which borrowers ask for forbearance, loan modifications, or re-payment plans.
The coronavirus pandemic and the ensuing financial crisis have caused immeasurable hardship and pain across the U.S. Paradoxically enough, the crisis has also served as a turbocharged shot to the housing market. Feverish buyers rushed into the market just as COVID-19-shy sellers pulled their homes off—forcing buyers into bidding wars and pushing prices up to new heights. Recession be damned.
Now, as the long-awaited vaccines are being rolled out, home buyers and sellers are eager to take real estate's temperature. Will prices finally cool off? Will the big cities come back? And will more homes finally go up for sale?
Certainly, the vaccines aren't expected to be silver bullets, especially given the rocky rollout rife with distribution problems, inoculation concerns from the general public, and new strains of the virus circulating. Even when America reaches herd immunity, it's not as if the world—and the housing market—will instantly return to some semblance of pre-pandemic normal.
Spoiler alert: The housing market is expected to remain hot, but the frenzy that was a hallmark of the majority of 2020 is likely to die down.
“We’re going to settle somewhere in between where we were before COVID and where we were during COVID," says realtor.com®'s chief economist, Danielle Hale.
More homes to go up for sale, but buyers can expect competition
The good news for buyers is more homes are expected to go up for sale. So desperate buyers won't need to put in offers and waive contingencies before they've even finished touring the properties.
But inventory won't increase overnight.
"Some people will feel comfortable listing their home during the first half of 2021," says Ali Wolf, chief economist for Zonda, a real estate consultancy. "Others will want to wait until the vaccines are widely distributed. This suggests more inventory will be for sale in late 2021 and into the spring selling season in 2022."
Many sellers held off on listing their homes during the pandemic, particularly more vulnerable baby boomers. They didn't want to risk getting sick through an open house or having someone infected touring their home. Once they're vaccinated, they're more likely to go ahead with their moves.
"As the risk of serious illness declines because more people are vaccinated, we expect to see more sellers,” says Hale.
There's also expected to be more new homes going up this year, similar to how builders ramped up construction in 2020 despite the pandemic.
Builders could erect a million single-family homes and townhouses next year, predicts Robert Dietz, chief economist of the National Association of Home Builders. That could help to ease the crunch,
"The growth in single-family homebuilding will continue," Dietz says.
Prices won't go down—but they won't keep escalating as rapidly
While an increase in homes for sale will keep prices in check, buyers shouldn't expect they'll fall. However, median list prices are not anticipated to keep increasing by 13.4% nationally, year over year, as they did in December, according to the latest realtor.com data.
The increased supply will take some of the pressure off the market. There are likely to be fewer bidding wars as buyers have more homes to choose from.
“The very rapid home price growth that we have seen over the last few months should start to moderate," says Frank Nothaft, chief economist of real estate data firm CoreLogic. "I expect price growth to slow."
But high demand will continue to keep prices high. Estimates range from 2% annual increases to around 6%, depending on whom you ask.
As the economy picks back up and people are no longer afraid to be within 6 feet of one another, they'll get new jobs, promotions, and raises. That will give them the cash they need to become homeowners or trade up to a larger abode.
Many folks who remained employed were able to contribute more to their down payment savings since they weren't going out to eat or on vacation. Plus, there are simply more first-time buyers out there. The millennials are a larger generation than the previous one, and as they get older, they're settling down, having families, and buying real estate.
"Demand is up, particularly among first-time buyers and Generation Xers who are looking to trade up," says Nothaft.
Mortgage rates could rise
One big downside for buyers in 2021 is rising mortgage interest rates. Rates hit record lows as a response to the wounded economy. As hiring begins again in earnest and people begin spending again, the economy will improve and rates will likely tick up.
Those ultralow rates were the foil to the nation's highest home prices in history. They kept monthly mortgage payments at least somewhat manageable even as prices shot up. (Rates were an average 2.65% for 30-year fixed-rate loans in the week ending Jan. 7, according to Freddie Mac.)
That affordability calculation could change if rates begin going back up. While rates aren't expected to shoot up this year, they'll likely increase a little, moving back up around 3%. Combined with higher prices, that could price some would-be buyers out of the market.
The upside is that the increase in inventory coupled with rising rates could help to slow down the crazy, ratcheting up of home prices. It could also dampen demand, even just a bit, which could help to ease some of the competition in the market.
Will the big, expensive cities stage comebacks?
The pandemic helped ratchet up home prices in most of the nation—except in the largest, most expensive cities. Suddenly, it seemed like madness to pay exorbitant rents and mortgages to be confined to itty, bitty spaces when the reason residents pay those small fortunes—the nightlife and restaurants and cultural life of big cities—were all shuttered.
In addition, living on top of one another and sharing common spaces, such as lobbies and laundry rooms, suddenly felt unsafe with the virus spreading. Many residents who could work remotely, and had the money to move, relocated to more spacious, single-family homes with private, outdoor space in the suburbs and beyond.
That pushed real estate prices in some of the biggest, most expensive cities down to levels not seen since the bottom of the Great Recession. Now those low prices—and the promise of a vaccine—are luring people back.
"There's a dramatic reset in affordability," says Jonathan Miller, a New York City–based real estate appraiser. "It's starting to trigger interest from younger renters who were priced out and unable to enter the market."
In Manhattan, rents fell 22% year over year when adding in concessions, such as a free month's rent or other perks, says Miller. He's also seeing sales of condos pick back up again.
"Don’t write off city living," says Zonda's Wolf. "The return to a non-socially distanced life brings with it the draw to be around other people again, especially as restaurants, bars, sporting events, and concerts fully open. As the appeal of cities returns, so will strong demand for townhomes and condos near downtowns."
After 9/11, it took about three years for the city to recoup its population, says Miller. In the aftermath of the disaster, many New Yorkers moved away.
Post-COVID-19, cities are expected to attract more 20-somethings just starting out than older couples with kids focused on more space and good school districts. Gen Z and younger millennials are more likely to crave the excitement—as well as the nightclubs, dining, and social scenes that cities offer.
"A city is not just a place to work," says realtor.com's Hale. "It's a place to socialize and meet other people."
Will the suburbs remain the place to be?
Families are less likely to return to the cities. They can get more square footage for their money in the burbs, perfect for a home office or a spot to home-school the kids in, a yard for the children to play in, and a good school district.
That's why the suburbs became the place to be during the pandemic. Thanks to Zoom and other technology, they're likely to stay that way, at least for the foreseeable future.
Some form of remote work is likely here to stay. Most employers aren't expected to require white-collar workers, who will have been clocking in from home for over a year, to suddenly resume their five-day-a-week commutes once everyone is vaccinated. It's more likely that those who don't need to be at their desks to do their jobs, will come in a few days a week or go to a satellite office instead. That's if they don't go 100% remote.
That opens up farther-out real estate markets with more affordable homes. If workers are going to the office only twice a week, they may not mind a longer commute.
“Single-family homes in the suburbs will clearly be favored over the condominiums in downtown, city centers," says Lawrence Yun, chief economist of the National Association of Realtors®. “People may seek out more distant suburbs.”
Bigger is better when it comes to housing
This year, "bigger is better" may replace "location, location, location" as the housing market's new mantra.
If housing had a popularity contest, stand-alone, single-family homes would win in a landslide. Even once it's safe again to venture out into the world, buyers are expected to continue seeking out larger houses. And with working from home expected to endure, a property large enough to accommodate a home office or two will remain a housing must-have.
"They'll have lasting memories of the pandemic," says CoreLogic's Nothaft. "People will want to have more space between them and their neighbors."
The shift toward more spacious residences is reflected in construction trends. After years of shrinking square footage and smaller homes in downtown, urban areas being all the rage, builders are putting up larger residences.
The median square footage of a newly built abode was 2,274 in the third quarter of last year, according to U.S. Census Bureau data. That was compared with 2,262 a year earlier.
"The typical new-home buyer is looking for more space, and that trend will continue," says economist Dietz.
Mortgage rates spent the majority of 2020 on a steady decline, repeatedly hitting record lows late in the year. For many homeowners, it’s brought an opportunity to seize upon these low rates and refinance their mortgage.
“Perhaps one of the biggest takeaways we’ve learned from 2020 is the importance of reviewing and reducing spending and debts where we can,” says Brittney Castro, the in-house CFP for Mint. “For many people this year, that meant refinancing their mortgage.”
Rates are expected to remain low in the first few months of 2021, but experts predict they won’t stay there throughout the year. So, is now the right time to refinance your mortgage? Here’s what to consider.
Mortgage rates are historically low
The average 30-year fixed mortgage rate was 3.86 percent at the beginning of 2020, according to Bankrate data. By the end of the year, the average rate had plummeted to 2.96 percent. Rates continue to hover at record lows to start 2021, and they could fall even further in the next few months.
“It will be an especially volatile year for mortgage rates, with fixed rates falling to even lower lows early in 2021 on economic concerns but rebounding in the back half of the year as widespread vaccinations lead to a surprisingly strong surge of economic activity — and the inflation worries that come with it,” according to an annual interest rate forecast from Greg McBride, CFA, Bankrate chief financial analyst.
Meanwhile, the National Association of Realtors predicts mortgage rates will average 3.1 percent in 2021, up from 3 percent in 2020. The Mortgage Bankers Association says rates will average 3.3 percent in 2021. With rates predicted to increase in the second half of the year, homebuyers who can benefit from refinancing should aim to do it while rates are still at historic lows.
Derek Carroll, principal of High Peaks Capital, works out the math to demonstrate just how lucrative a refinance could be in today’s current climate.
“Comparing a $250,000 loan at the current (Freddie Mac) average rate of 2.67 percent versus just 3 percent, this new rate will save over $25,000 over the life of the new 30-year loan. Even with the new FHFA Adverse Market Refinance fee and new closing costs, a borrower will save considerably over the life of the loan.”
Keep in mind that the Federal Housing Finance Agency (FHFA) added a new 0.5 percent mortgage refinance fee that went into effect Dec. 1. Although the fee technically went into effect in December, many lenders had been factoring the fee into their pricing months earlier after it was announced. However, Carroll says that not all refinancers will be impacted by these new fees.
“With the market being so competitive, many lenders are willing to eat closing costs and pay them for new borrowers or at least significantly contribute towards them, helping to further make the case for refinance,” he says.
When refinancing your mortgage makes sense
The biggest question is whether refinancing makes sense for you.
Bill Packer, executive vice president and chief operating officer of eLEND, provides a quick tutorial on factors to consider. “Refinancing a mortgage is a factor of three key items: (1) the after-tax monthly savings (new payment compared to old payment after any tax-favored treatment); (2) the amount of time that I intend to be in the home; and, (3) the cost to obtain the new mortgage. Once you know these three things, you can then calculate your return and see if it is positive.”
Shelby McDaniels, channel director for corporate home lending at Chase Home Lending, offers a few scenarios where you could benefit from current market rates:
One important thing to remember: Refinancing isn’t free. Homeowners should calculate their break-even point to see how long it would take to recoup the costs of refinancing, says Jared Maxwell, vice president of consumer direct lending at Embrace Home Loans.
“The break-even point on a mortgage refinance occurs when savings equals costs,” Maxwell says. “If your refinance costs $4,000 in lender, title and third-party closing costs, and you are saving $200 a month, your break-even point would be 20 months. Every month after that, you are saving money.
“The one thing consumers also need to consider is the impact of shortening or lengthening their mortgage term,” he adds. “If you have already paid down your mortgage by eight years and you are refinancing to a 30-year term to save money, you have to consider when you would like your mortgage to be paid off and whether you have a plan to pay additional principal each month.”
The bottom line
If there’s one thing that our experts agree on, it’s that the decision to refinance is a personal one that should be based on your individual situation.
With mortgage rates at all-time lows, millions of homeowners would benefit from refinancing their loans. And with many industry experts predicting rates to increase later in the year, homeowners should do research now to see if they’re among those who would benefit from refinancing. If the answer is year, be sure to compare offers from multiple lenders.