Demand for Mortgage Loans Increases

According to a survey conducted by the Federal Reserve this summer, approximately three out of five U.S. banks said that the demand for mortgage loans is increasing as the housing market becomes stable and mortgage rates decline to record lows.

However, even though there is an increase in mortgage demand, lenders are still strict when it comes to mortgage borrowers and small business loans as well.

The report discovered a large increase in demand from borrowers. 57 percent of banks reported an increase in demand for home-purchase loans during the last three months, which is up from 38 percent during quarter one.

Peter Newland, economist at Barclays Capital, said that the increase in loan demand proves the housing sector is gradually recovering.

In addition, the report discovered that the credit standards of banks are still tough for mortgage borrowers or small businesses. In fact, 93 percent of the loan officers surveyed said that standards for approving mortgages to borrowers with good credit were the same with the previous quarter, and 95 percent said that standards were the same for firms with lower than $50 million annual sales.

Moreover, it was stated in the report that loan terms improved for medium and large companies, commercial real estate deals, auto loans and credit cards.

According to Millan Mulraine, analyst at TD Securities, the improving credit conditions is one of the signs that the economy is recovering.

The respondents of the Fed survey included 64 domestic lenders and 23 U.S. branches of foreign banks from July 3 to July 17.

Based on the survey, banks have been careful in terms of applying the Home Affordable Refinance Program, which is an effort by the Obama administration to encourage refinancing. However, the majority of banks have restricted their participation to loan they already hold. Most banks said that they were getting more refinancing applications than they could handle.

Analysis of Reverse Mortgages

According to Shirley Krohn, a member of the California Senior Legislature advocacy group, reverse mortgages are attracting a lot of people even when other types of loans are much better. As a result, the Consumer Financial Protection Bureau said that it is important to understand the possible consequences of a reverse mortgage.

Recently, the federal watchdog gave a report before the Congress about reverse mortgages, stating that seniors need to be more aware of what loans they are taking on.

Megan Thibos, the primary author of the report, said that it is an essentially confusing mortgage product. A reverse mortgage has a negative amortization, which means the balance on the home loan decreases rather than increases. This is just one example of the many confusing features of a reverse mortgage.

A reverse mortgage is marketed for borrowers aged 62 or older who have paid off their homes are have large equity in them. That equity is used as a bank account, where the senior can draw mortgage principal in monthly payments, as a line of credit or as a lump sum.

Christina Clem, spokesperson for AARP of California, agrees that reverse mortgages can aid seniors, but they are supposed to be a last option when the rest of the options have been exhausted. Moreover, reverse mortgages are intended for people who are rich in terms of equity but poor in terms of cash. However, reverse mortgages can charge high fees and interest.

In addition, Clem said that due to the recession, it is highly possible that there will be more foreclosures based on reverse mortgages. In fact, more or less 46,000 reverse mortgages are in default in the United States. There are a lot of people who, when they took on reverse mortgages, were not aware they still have to pay property taxes and home insurance.

Mortgage Rates are Now Increasing

For a 30-year fixed mortgage, the average U.S. rate increased this week following the decreasing to its record lows in the last four weeks.

According to mortgage buyer Freddie Mac last Thursday, the rate on the 30-year loan increased to 3.55 percent from 3.49 in the previous week.

For a 15-year fixed mortgage, which a common refinancing option, the average rate increased to 2.83 percent from 2.80 percent in the previous week.

Less expensive mortgage rates has aided in a moderate but irregular housing recovery this 2012. Sales of new and occupied homes in the past declined in the month of June from May but it was higher than the same period in the previous year. Moreover, home prices have begun to increase in most of the cities.

Meanwhile, low mortgage rates can aid the economy if the number of people who refinance increase. This is because people pay less interest and this increases their money for spending. An increase in spending helps in the growth of the economy.

Unfortunately, the speed of home sales is still under healthy levels due to the fact that a lot of people are having problems in becoming eligible for home loans or do not have a large amount of money for down payments asked by banks.

Also, the slow job market could hinder some people from purchasing homes this year. Based on the data from Labor Department, the unemployment rate increased for the month of July to 8.3 percent, despite the increase in jobs offered by employers, from 151,000 to 163,000 jobs.

Last Wednesday, the Federal Reserve said that the economy is becoming weak and promised again to take actions if the job market continues to weaken. The Fed also recognized the fact that economic activity weakened during the first six months of the year, unemployment increased, and consumer spending declined.

Increase in Mortgage Applications

Based on the information from Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey, there was an increase in the mortgage application by 0.2 percent last week.

The Market Composite Index, which is a gauge of the number of mortgage loan applications, was up by 0.2 percent to its peak level since June 8 this year on a seasonally adjusted basis. Similarly, it was up by 0.2 percent from last week on an unadjusted basis.

The Refinance Index was up by 0.8 percent from last week to its peak level since April 17 of this year. However, the slight increase in refinancing was only subdued by a 6 percent decrease in government refinance applications, although conventional refinance activity was up nearly 2 percent.

The Purchase Index decrease almost 2 percent on a seasonally adjusted basis from the previous week. In the same way, the unadjusted Purchase Index decreased from the previous week.

There was an increase in the refinance share of mortgage activity to 81 percent of all the applications from one week earlier to its peak level since January 20 of this year. In contrast, there was a drop in the adjustable-rate mortgage share of activity to 4.1 percent of all the applications from one week earlier.

For a 30-year fixed rate mortgage with conforming balances, the average contract interest rate was up from 3.74 percent to 3.75 percent, along with points increasing from 0.43 to 0.51 for 80 percent loan-to-value (LTV) ratio.

For a 30-year fixed rate mortgage with jumbo loan balances, the average contract interest rate was up from 3.99 percent to 4.01 percent, along with points increasing from 0.28 to 0.32 for 80 percent LTV loans.

For a 30-year fixed rate mortgage backed by FHA, the average contract interest rate was still the same at 3.52 percent from one week earlier, along with points increasing from 0.52 to 0.55 for 80 percent LTV loans.

Fannie Mae and Freddie Mac Still Will Not Forgive Mortgage Loans

On Tuesday, the regulator of Fannie Mae and Freddie Mac declared that they are planning not to forgive a part of the principal on delinquent mortgage loans they guarantee. In spite of the offer by the U.S. Treasury Department to give incentive payments for writedowns, Fannie Mae and Freddie Mac will still opt out of loan forgiveness programs.

The Federal Housing Finance Agency (FHFA) has control over both Fannie Mae and Freddie Mac, which are government-owned mortgage-finance companies. After doing months of study FHFA’s acting director Edward J. DeMarco said they verified that both companies will still be prohibited from giving loan modifications.

FHFA finally settled on decision after encountering pressure from activist groups and congressional Democrats to reserve the current regulation. Those who are against the decision said offering mortgage loan writedowns would allow more families to keep their houses from foreclosure.

In order to motivate FHFA to modify its policies on the loan forgiveness programs, the U.S. Treasury Department presented Fannie Mae and Freddie Mac a maximum of 63 cents per dollar of principal reduction. The money would be derived from the unspent funds of the Troubled Asset Relief Program (TARP).

However, DeMarco said during his statement that the possible merit was too little and doubtful in relation to unspecified costs and risks.

The main justification why FHFA refused the notion of loan forgiveness programs is because debt would accumulate for taxpayers. FHFA’s study revealed that, under most circumstances, taxpayers would lose money since the program would get funds from the Treasury Department. DeMarco said that the regulator has the task to evaluate how additional help would affect taxpayers.

In contrast, according to Treasury Secretary Timothy Geithner, DeMarco’s decision to advocate the existing policy on loan forgiveness is not the best for the United States. He added that the use of principal reductions would provide assistance to a large number of distressed homeowners.