With the Federal Reserve’s ongoing statements that they may eventually “taper off” their Quantitative Easing (QE) investments in early 2014, mortgage rates have increased.
QE is the financial policy of creating money out of thin air by way of our “fiat money” (assets backed by nothing) supply primarily to purchase stocks, bonds, and mortgages in order to artificially boost asset prices.
What happens to our financial markets and asset prices when the Federal Reserve greatly reduces their various bailouts at some point in the future? Or, will it be “QE infinity and beyond“ with a seemingly infinite and endless supply of bailouts?
Our Upside-Down Financial World
Does the recent Dow Jones levels near 16,000 make any sense based upon the true state of the economy? In spite of a sluggish job market, the Dow Jones index is more than 9,000 points higher than the recent lows on March 9, 2009 when the Dow reached 6,547.
Compared with Dow Jones lows in August 1982, when it reached an insanely low 776 , today’s astronomically high Dow Jones numbers seem quite nonsensical.
Home prices have rapidly increased over the past year or two–as much as 25 to 35%+ in annual price appreciation in some regions partly related to QE. In some parts of the US, home prices may be back near their market peak prices just prior to the start of the “credit crisis” in 2007.
How is it possible that some home prices are back to near all-time highs?
Jumbo Loans vs. Conforming Loans
Strange as it may be, some jumbo mortgage loan rates may now be lower than conforming loans. In many cases, conforming mortgage loans are $417,000 or below. In some high-price regions, the conforming loan limit ranges may be up to $625,500.
In recent years, at least 97% of all funded residential mortgage loans were backed or insured by the U.S. government (i.e., Fannie Mae, Freddie Mac, FHA, VA, USDA, etc.), so conforming loans have really become primarily a government backed form of lending. The rising expenses associated with FHA loans are tied to increasing rates, fees, and insurance costs associated with these very popular highly leveraged residential loans.
On the other hand, there are much fewer secondary market options for their funded “jumbo loans,” which are typically above either $417,000 or $625,500, depending on the region. Before the start of the credit crisis, a high percentage of funded “jumbo loans” were no-income-verification adjustable loans that almost completely disappeared after 2008.
Many private banks, investment banks, and other more flexible and sophisticated financial, insurance, and investment firms have tried to make larger jumbo mortgage loan amounts available for their preferred clients. Since many of these same banks may be borrowing their funds at 1% or below, they still earn a nice profit spread when making 4% to 5% jumbo mortgage loans to their banking customers.
Due to the increasing supply of seemingly more efficient capital sources (like these banking, investment, and insurance firms), the costs, rates, and overall fees have been much lower than the government-backed conforming loan options today.
Decreasing FHA Loan Limits in 2014
As of January 1, 2014, the Federal Housing Administration (FHA) no longer allows borrowers to qualify for loans as high as $729,750 in the so called “high-cost loan limit” regions, such as in coastal cities. Due to these FHA loan limit changes, the maximum qualifying loan amount will revert back to $625,500 for all FHA loans.
According to the Department of Housing and Urban Development (HUD), these new reduced “high-cost loan limit” changes may affect 650+ U.S. counties. Since a very high percentage of funded mortgage loans have been backed by FHA, these reductions in high-end property loan amounts may adversely affect pricier regions.
New “Qualified Mortgage” Rules
The new “qualified mortgage” (QM) rules are scheduled to begin on January 10, 2014. The QM regulations were designed to create “safer” mortgages for consumers. These rules may limit the amount of mortgage points, fees, and related costs on various residential loan products.
These QM rules may also reduce the amount of certain types of loans, such as adjustable rate mortgages. Additionally, the qualifying debt-to-income ratio levels for borrowers may be limited at 43% or below.
Will the new QM policies make it more challenging to qualify for a residential mortgage? Or will the majority of people who qualified in recent years still be able to qualify in 2014? Some financial analysts suggest that these new QM policies may reduce smaller conforming amounts being offered (such as under $100,000) due to the mortgage cost limits. Other financial analysts, however, say that possibly upwards of 95% of the borrowers who qualified for mortgage loans in 2013 should be able to qualify for QM loans in 2014.
We’ll see how potential QE tapering, QM loan qualifying guidelines, increasing private money and non-government backed money, reduced FHA loan limits and increased fees will affect housing in 2014. Let’s hope for continued improvements in our housing markets and economy, regardless. Leave your comments below.