Monday Morning Cup of Coffee: Will record low rates jumpstart mortgages?

Plus a new subprime wave, revised stress test, and housing metrics galore

October 27, 2014

Monday Morning Cup of Coffee takes a look at news crossing HousingWire’s weekend desk, with more coverage to come on bigger issues.

With mortgage rates down five weeks in a row to 3.92% last week, most in the industry are hoping for a new wave of refis and purchase applications.

But there are limits. A good portion of homeowners locked in good rates in 2013, and tight mortgage credit, rising – though moderating – home prices and stagnant incomes hamper housing sales.

Still, refi applications jumped an astonishing 23% last week.

But Nela Richardson, Redfin’s chief economist, tells theAssociated Press that she thinks that only homeowners with rates above 4.25% would benefit from refinancing, so there’s a top end to how much low rates can do for the industry.

Meanwhile, the not-so-foolish boffins at Motley Foolask if the new, easier guidelines from the Federal Housing Finance Agency opening the credit box for those with less-than-stellar credit will lead to a surge in mortgage lending.

Will this have the desired effect of boosting home sales? After all, loans with low down payment requirements are already available to low-credit borrowers through the Federal Housing Administration, or FHA. Also, isn’t it true that easy mortgages caused the mortgage crisis in the first place?

Critics of the new guidelines argue that looser lending standards could lead to another housing bubble and subsequent crisis. However, no matter how loose lending standards get, there is one key difference: documentation.

As long as lenders are required to thoroughly document borrowers’ income, assets, and other qualifications, the risk remains relatively low. As we know, during the mid-2000s’ lending bubble banks regularly would simply take the borrowers’ word regarding income and other qualifications.

Plus, even with the lower down payment requirements, it’s unlikely that borderline candidates in terms of credit and income will qualify for a conventional loan with 3% down anytime soon. The report said “mortgages with down payments of as little as 3% for some borrowers,” so until details become known when the official guidelines are released, it sounds like the lowest down payments will still only be available to those borrowers with the highest credit scores.

Subprime lending definitely has a place in a healthy real estate market — as long as it is done right. Hopefully this will give the real estate market a nice boost during the coming months.

The Federal Deposit Insurance Corporation on Friday released the economic scenarios that will be used by most financial institutions with total consolidated assets of more than $10 billion for stress tests required under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

The baseline, adverse, and severely adverse scenarios include key variables that reflect economic activity, including unemployment, exchange rates, prices, income, interest rates, and other salient aspects of the economy and financial markets.

The baseline scenario represents expectations of private sector economic forecasters. The adverse and severely adverse scenarios are not forecasts, rather, they are hypothetical scenarios designed to assess the strength and resilience of financial institutions and their ability to continue to meet the credit needs of households and businesses under stressed economic conditions.

The FDIC coordinated with the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency in developing and distributing these scenarios.

While there’s a brief pause in third-quarter earnings reporting the next few days, there’s no pause in key housing metric this week. On Monday we get the pending home sales index from the National Association of Realtors.

The pending home sales index decreased 1% in August. Year-on-year, pending home sales in August were down 2.2%. A lack of first-time buyers and strong demand for rentals remain key obstacles for home sales. A lack of distressed homes on the market is another negative factor.

Then on Tuesday comes the S&P/Case-Shiller home price index. The S&P/Case-Shiller 20-city home price index contracted sharply in July, down 0.5% for the third straight decline and the steepest monthly decline in Case-Shiller 20-city seasonally adjusted data going back to November 2011.

The year-on-year rate, which has been coming down steadily all year from the low doubled sharply from 8.0% in June.

Also Tuesday is the consumer confidence index which, while not housing centered, is a good measure of how consumers are thinking and how much they’re willing to spend on big ticket items.

Wednesday and Thursday give us the weekly reports from the Mortgage Bankers Association on mortgage applications and mortgage rates, respectively.

And on Friday we get consumer sentiment and personal income reports, both of which, like consumer confidence, offer good tea leaves when taken as a whole on what buyers are thinking.

The FDIC reports that one bank, the National Republic Bank of Chicago in Chicago, failed the week ending Oct. 24.

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