Higher rates will slow down mortgage lending, but refinancing demand will go on | VailDaily.com

Higher rates will slow down mortgage lending, but refinancing demand will go on

NEW YORK – When Nancy Petty took prospective home buyers around for home tours this summer, the Bel Air, Maryland based realtor found that her clients would have to move quickly to bid for homes, sometimes without really taking a thorough look at the properties.Often, even when Petty’s buyers were first with an offer, they lost out to a higher bid.Now, with interest rates on the rise, those days of bidding wars and escalating prices are a thing of the past. Sellers may also find they need to throw in a couple of extras like paying for the replacement of wallpaper or carpet that’s not to a buyer’s liking.”We’re not encouraging the seller to overprice the house. A couple of months ago, we listed it at whatever the seller wanted,” said Petty, who is with Prudential Carruthers Realtors.These changes in selling tactics hint at shifts in the way business is done by not only by realtors, but by mortgage bankers who saw record demand for their services in recent years.Next year, higher borrowing costs will slow home sales and mortgage lending, thinning the ranks of lenders. Some will either cut staff or merge to stay competitive, while others may be stuck with defaults by borrowers who took on too much debt.Much of the drop in home sales and lending expected next year comes amid 13 interest rate hikes engineered by the Federal Reserve in the last year and a half.Rates for 30-year mortgages – the most common home loan – today are at around 6.30 percent, up from 5.68 percent a year ago. Next year, these rates are expected to be at around 6.65 percent.Although the rise in rates will damp lending activity, some banks may get calls from borrowers looking to get out of mortgages with rising monthly loan payments.”There are a lot of exotic mortgage types in the market right now. As the market slowed down, lenders attempted to keep the game going by offering more and more alternative mortgage types that have the appearance of lowering the costs of a monthly loan payments,” said Dick Bove, banking analyst with Punk Ziegel & Co.The recent housing boom saw a massive jump in demand for a wide variety of adjustable rate mortgages that initially offered lower monthly borrowing costs and allowed borrowers to qualify for larger loans.If the rise in monthly loan payments is gradual the payment shock is not as great for a consumer, but some new loan products have such low initial monthly payments that the rise in borrowing costs is dramatic. There are concerns that some consumers, especially those who are less credit worthy, will not be able to manage the increase in borrowing costs.Among these exotic mortgages, option ARMs were “the worst of the breed,” said Bove who described them as “nuclear waste.”Among the different option ARMs, the mortgage that has caused most concern is one that allows borrowers to pay so little that he or she does not even cover monthly interest costs, according to Keith Gumbinger of HSH Associates, which tracks the mortgage banking industry.”In a sense, you are deferring the day of reckoning,” he said.By not paying the full amount of interest the money owed to a lender grows – a situation known among lenders as negative amortization – and the home buyer sinks deeper into debt.Option ARMs as well as mortgages that allow borrowers to pay only interest and forgo building equity in a home were designed for a real estate market in which sales were brisk and borrowers could readily leapfrog from house to house.Now that rates are higher and sales have slowed, some borrowers may live in a house longer than expected and face higher borrowing costs. Consumers unable to refinance out of that loan could then be late on a couple of payments or, worse, default.Analysts believe that the health of the overall economy – especially the employment picture – will be sound enough so there won’t be a large wave of defaults. But any notable jump in soured mortgages could be big problem for banks that retain adjustable rate mortgages in their own portfolios.”By summer, we’ll see significant problems in the sector. We’ll see some well publicized blowups occur,” Bove predicted, adding “we have got a serious problem here.”Vail, Colorado

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