January 6, 2011 by Brian Summerfield ·
By Brian Summerfield, Online Editor, REALTOR® Magazine
One of the biggest obstacles for a recovery in housing has been — and will continue to be — mortgage lending. Although rates fell to historic levels in 2010 and will likely remain relatively low through a good portion of this year, credit still isn’t easy to come by, even for many borrowers who would be considered safe in a normal market.
With that in mind, what can we expect in mortgage finance during 2011? Here are a few predictions, with help from Tom Wind, managing director at J.I. Kislak Mortgage, former CEO of JPMorgan Chase’s residential mortgage lending businesses, and former president and COO of CitiMortgage:
1. Several proposals will be made to reform and reconstitute Fannie Mae and Freddie Mac, but no new plan will be implemented this year. The U.S. Treasury Department is expected to offer recommendations to Congress this month on how to restructure the mortgage market, and incoming GOP representatives have made Fannie and Freddie reform a top priority for its agenda this year. However, Wind expressed some reservations about a speedy resolution to the issue. When some sort of reconstitution — or even replacement — of Fannie and Freddie does come, though, it will probably include an overt guarantee of government backing, he added.
“Government support is essential to a well-functioning market,” Wind explained. “There may be times when the market can function without it, but long-term, ensuring the liquidity of mortgages is essential.”
2. FHA will continue to be the prime mover in the secondary mortgage market. Because Fannie and Freddie are still in limbo, the FHA will remain the most important institution in the mortgage space during 2011. And while Wind sees its role diminishing somewhat as the secondary mortgage market settles into some as-yet-undefined new normal, he says it will probably remain the primary driver of home loans for first-time buyers for the foreseeable future.
3. Refinances will go down, purchases will go up. Overall, Wind expects U.S. mortgage lending activity to be way down in 2011, due almost entirely to a severe drop in refinances. (Wind predicts that the refi market will fall more than two-thirds, from $1 trillion to $350 billion.) This decline — along with changes to compensation caused by new rules from the Federal Reserve and the Dodd-Frank Wall Street Reform and Consumer Protection Act, which could mean 30-40 percent less in earnings on each loan — will drive many loan officers out of the business this year.
The silver lining here is that with favorable affordability conditions, improving economic fundamentals, and moderate interest rates, mortgages for home purchases will likely go up. “Any way you cut it, it’s going to be a smaller market,” Wind says. “But purchases will probably grow.”
4. Jumbo loans will remain hard to come by. Although Wind sees private investors and financial institutions easing back into jumbo mortgage loans, there’s still substantial concern about high-end homes holding their value over the next couple of years. He predicts this will be the last strata of mortgage loans to recover: “For a healthy jumbo market, we need a healthy housing market [first].”
