Posted on: 13th Dec, 2012 09:12 pm
Since past few years, mortgage rates, on an average, have shown a downward tendency. This is mainly because of unprecedented use of monetary tools by the Federal Reserve. According to the data provided by the Freddie Mac, monthly average rate on 30-year fixed rate mortgages reached record low of 3.35% in November 2012. This is the lowest over past four decades. Mortgage rates are being recorded since 1971. Monthly average rate on 15-year fixed rate mortgages dropped to historic low of 2.66% in November 2012. All these really bode well for you, the prospective homeowners.
It is expected that record low mortgage rates will increase more home sales as well as refinancing. But, the reality is that many of you have not been able to take advantage of these record low rates. The main reason for this is the tight lending policies adopted by the lenders.
The Federal Reserve has also embarked on a series of quantitative easing (QE) policies. QE is the purchase of mortgage-backed securities so as to lower down the mortgage rate.
In spite of the concerted efforts by the Fed, many of you have not been able to take advantage of low borrowing costs. 2 reasons behind this are given below.
In the aftermath of the housing crisis, lenders ask for higher FICO score (http://www.mortgagefit.com/credit-scoring.html) from you. FICO score reflects your creditworthiness and it ranges from 300 to 850. Lower FICO score means that you have higher chance of default and vice versa. In August 2012, the FICO score of an average borrower approved by Freddie Mac and Fannie Mae was 769, 6 points higher than that of previous year.
The record low mortgage rates, have led to a surge in refinancing. This is indeed a good news for the homeowners as well as the economy as a whole. The money that you save through refinancing can be used for other productive purposes, which in turn is likely to boost the economy too.
It is expected that record low mortgage rates will increase more home sales as well as refinancing. But, the reality is that many of you have not been able to take advantage of these record low rates. The main reason for this is the tight lending policies adopted by the lenders.
Increased intervention by the Federal Reserve:
In the aftermath of the housing market crisis, the Federal Reserve started to intervene in the mortgage markets in a greater way. Its aim was to lower down the rate of interest and to push up the ailing economy. To do that, it purchased bonds worth of nearly $3 trillion since 2008. This actually helped in lowering down the rate of interest.The Federal Reserve has also embarked on a series of quantitative easing (QE) policies. QE is the purchase of mortgage-backed securities so as to lower down the mortgage rate.
In spite of the concerted efforts by the Fed, many of you have not been able to take advantage of low borrowing costs. 2 reasons behind this are given below.
1. Tightened mortgage credit:
Availability of mortgage credit has been tightened. Experts opine that the root of the housing market crisis was uncontrolled sub-prime mortgages issued to the borrowers. This ultimately snowballed into a gigantic financial crisis. This forced mortgage lenders to adopt tighter underwriting process.In the aftermath of the housing crisis, lenders ask for higher FICO score (http://www.mortgagefit.com/credit-scoring.html) from you. FICO score reflects your creditworthiness and it ranges from 300 to 850. Lower FICO score means that you have higher chance of default and vice versa. In August 2012, the FICO score of an average borrower approved by Freddie Mac and Fannie Mae was 769, 6 points higher than that of previous year.
2. Higher down payment and documentation requirements:
In addition to credit score requirements, there are now some other constraints to lend. Documentation standards have been made more stringent. In the past few years, down payment requirements have also been made tougher. Due to these constraints, obtaining a loan has become very tough these days, despite record low rates.Future implications:
The stringent lending standards are coming in the way of housing recovery. It is however likely that these tight policies will gradually ease out. With time and with more clarity on loan requirements, lenders will be willing to offer more loans.The record low mortgage rates, have led to a surge in refinancing. This is indeed a good news for the homeowners as well as the economy as a whole. The money that you save through refinancing can be used for other productive purposes, which in turn is likely to boost the economy too.