Lenders Learn From the Past

Freddie Mac and Fannie Mae, the nation’s largest purchasers of home loans, announced that there would be no change in the conforming loan limits for next year. This leaves the loan limit at $417,000 for single-family homes located in California. Loan limits for duplexes, triplexes and four plexes remained unchanged.

So, the question remains, where are fixed rates headed next year? A recent survey of mortgage brokers found pretty much of an even split between going up or down by 1 percent or staying the same. In other words, your guess is pretty much the same as anyone else’s. On the subject of adjustable rate mortgages, it was overwhelmingly perceived that these rates were headed higher. This prediction isn’t really crystal ball gazing as the indexes that control adjustable rate mortgages are up sharply over the last 6 months, and many mortgages that are controlled by these indexes are just beginning to react now. Lenders are beginning to issue new approval guidelines regarding adjustable mortgages and are underwriting to “worst case scenarios”. In other words, will the potential borrower be able to handle a much higher payment when rates adjust upwards. Lenders would much rather not make a loan then to have a foreclosure to deal with, and they hope these stricter guidelines will prevent foreclosures.

A wide perception of foreclosures is that it benefits lenders because they then profit by the forfeited equity by the homeowner. This is usually not the case in that if there were a large equity position held by the homeowner then the homeowners would have been able to sell the house and would have saved some of that equity. When lenders are forced to foreclose there is usually little difference between the loan balance and the house value which, when sales costs are added in, result in losses to the lender. The added benefit for this vigilance against foreclosures is property values will seldom crash. One only needs to look at the S&L crisis of the early ‘80s to see the effect of foreclosure on property values.

Fixed rates for conforming loans with 0 points as of 12/21/06 (a.m.) are:
30 year fixed: 6.00% (APR 6.07%) payments are $2,500.13/mo.
15 year fixed: 5.75% (APR 5.87%) payments are $3,462.81/mo.