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There have been some recent changes in the mortgage industry that could impact your client and prospect’s ability to receive financing for their new home. During October, Freddie Mac reported that the Federal Reserve would not be tapering its bond purchases for the remainder of 2013. Since the start of the New Year is right around the corner, the Federal Reserve has wasted no time in making these changes and has reported that they will be tapering their aggressive bond buying program beginning in January.
According to the most recent report, the Federal Reserve has decided to reduce their asset purchases from $85 billion to $75 billion each month.  Furthermore, if the economy continues to improve like the FED is expecting it could likely result in the bond purchasing program to end by late next year. According to a recent press conference with Ben Bernanke, the current Chairman of the Federal Reserve, “We are hopeful the economy will continue to show progress and return to a “more normal” path of growth”.
The tapering of their bond buying program wasn’t the only news that the Federal Reserve announced on Wednesday Dec 18th. The FOMC (Federal Open Market Committee) has also stated that they will lower its monthly long-term Treasury bond purchases to $40 billion and mortgage backed-securities, which we discussed in our last mortgage report, to $35 billion a month. Each of these changes represent a 5 billion monthly decrease.
What impact will these changes have on mortgage rates?
Unfortunately, Mortgage backed securities decreased by more than 50 basis points on Wednesday and caused a 0.125% increase in mortgage rates. The good news is that investors were expecting the Fed to taper its bond purchasing, so the reaction to these changes didn’t have as big of an impact on mortgage rates as expected. “I think the impact of this tapering is already reflected in the current rates and I do not see further worsening because of that, but continued tapering will have an impact in 2014.” says Homes.com mortgage expert Shashank Shekhar.
Mortgage rates will also be influenced by the new Guarantee fee (G-fees) that Fannie Mae and Freddie Mac will implement on all loans presented to them after April 2014, which may lead to a mean average increase of 22 basis points for Conforming Loans. These “G-fees” characterizes an effort by the Federal Housing Finance Agencies Strategic Plan for Enterprise Conservatorships to encourage greater participation in the mortgage market by private firms, which will cause higher costs for borrowers in the near future.
The FHFA also released information regarding their new Loan Level Price Adjustments (LLPA), a risk based pricing model for all Fannie Mae and Freddie Mac sponsored loans that will cause even more increases in their costs. For the most part, a 1% increase can be expected. A better explanation would be if you are applying for a $500,000 loan, even if the rates were constant the extra cost for a mortgage would be $5,000. Shashank also explains that most of the increase in cost is for high credit scores between 680 and 800. Over 800 FICO is apparently the new 740!
What you should share with your clients and prospects is that higher fees and the continued tapering of bond purchases will be something to look out for during 2014. It will be no surprise if they see a higher rate at the beginning of the year, but with any unforeseen economic news they can expect to see even higher rates through the rest of the year.
To find more mortgage related articles such as this one, check out all the articles from Homes.com’s mortgage expert Shashank Shekhar. Want more information on the nation’s housing market? Take a look at the Local Market Index and Rebound Reports to see how your local market compares to the rest of the nation.