You should buy a home now!
Feb 2011 15

I only report the news, I don’t make it.

With last week’s major changes proposed by the President, some are saying that buyers should act now, prior to enactment of any new legislation.

The government is proposing some major overhaul of the mortgage loan industry but what they talked about last week was skimpy in detail. Who knows what will end up happening, if anything.

At some level, changes will come to the government’s relationship with Freddie Mac and Fannie Mae, the quasi-private companies that provide (or attempt to provide) financial stability in the mortgage loans market.

The companies are privately-owned (or, were) but it was always implicit (or, explicit) that the US government would step in if they encountered any financial difficulty. Which, they did, which, it did. So, because everyone counted on the government stepping in, that meant that all the lenders were free to make crazy-ass loans and to offer these loans at lower interest rates than they would if they had to back them up on their own. So, if the government guarantee goes away in the future, expect higher interest rates on loans, since lenders will have to harbor more of the risk.

What’s guaranteed to go up are fees associated with taking out mortgage loans. Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA) are all increasing fees during the next several months, in order to protect themselves, and us, too.

Conventional mortgage loan limits are scheduled to come down. These are the loans that can be bought up by Fannie Mae and Freddie Mac. If you’re taking out a big loan, say over $625,000 (varies by state), your loan can’t be sold on the secondary market, so there’s more risk involved and, therefore, a higher interest rate attached. If the limit on amounts come down, more people will pay more in interest.

The government may also push for higher down payment amounts. As is, you can get away with just 5% down, if you take out mortgage loan insurance. However, the recent past has shown that those with little money at risk are more likely to bail out on their homes if/when values fall. If you’re putting up 10-20-30%, you’ll probably continue to do anything you can to keep your mortgage loan current. So, the government wants you to put more money up front when buying.

With all these changes, the future of the mortgage loan market looks a bit unclear. No doubt, for most of us, life will continue, as is, perhaps with mild price increases.

If you buy now, at least you’ll know what you’re getting into.

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