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2011 vs. 2012 in the Mortgage Market

By Rick Cirelli

We enter 2012 with a higher degree of optimism than the previous few years. Let’s start the New Year by taking a look back at the major factors that shaped last year’s mortgage market and discussing what’s in store for 2012.

By Rick Cirelli

The Highlights of 2011:

Interest rates: Ranged last year between 4.96 percent near the beginning of the year to 3.99 percent at year-end according to the weekly Survey by Freddie Mac of a sample of lenders. The average for 2011 was 4.45 percent with 0.7 points. These rates are a national average of 30-year fixed rates offered by a sample of lenders for loan amounts of $417,000 or less.

Lenders: The winners and losers have been decided. Many lenders exited the business or merged with others, and others have re-entered the market. In general, the big banks failed at providing customer service levels to satisfy their customers. At the same time, mortgage brokers, once given up for dead, have survived and their market share grew in volume by 33 percent from the loan point of a few years ago. The market also saw an increase in the number of jumbo lenders where there once was none. Jumbo loans are readily available up to $4 million or more to those that qualify.

Loan Programs: FHA loans gained in popularity due to their minimal required down payment of only 3.5 percent on loan amounts up to $729,750. Adjustable-rate programs are more available and many with interest-only options.

Underwriting: Guidelines have stabilized and the seemingly daily changes have ceased. Loan originators should know what to expect and be better able to advise their clients.

What to Expect in 2012:

Interest Rates: We begin the year with rates at an all-time low of 3.91 percent + 0.8 points according to Freddie Mac’s survey. The mortgage industry’s largest trade organization, The Mortgage Bankers Association of America (MBA) expects rates to average 4.3 percent this year (you can see the entire MBA forecast on my website: The Fed vows to keep the Federal Funds rate low through 2013 unless the economy heats up too much. On a negative note, borrows will pay for the 2-month extension of the Social Security Tax Cut approved by Congress to the tune of about a .125 percent increase in cost over the next ten years.

Lenders: I predict that mortgage brokers will continue to increase their market share as they can provide more efficient, local service; can typically originate loans at a lower cost than the big banks; have more resources to choose from as more wholesale lenders are entering the market; and recent licensing laws require brokers to have more stringent licensing guidelines and knowledge than their unlicensed counterparts at the big banks.

Loan Programs: Fannie Mae and Freddie Mac lowered the maximum conforming loan limit from $729,750 to $625,500 while FHA kept their limit at $729,750 for the highest-priced markets such as Orange County. I expect FHA loans to be popular in filling that gap, although the higher cost of FHA mortgage insurance this year will force some to consider jumbo loans instead. Fortunately, more jumbo choices are available. The government has also issued improved guidelines under their Home Affordable Refinance Program (known as HARP-2) which should enable more underwater homeowners to refinance and take advantage of lower interest rates.

Underwriting: The perception is that underwriting guidelines are too tight. While I don’t expect to see a return to “no-doc” or “stated-income” loans any time soon, we no longer see the parade of changes that have made it impossible for loan originators to keep up. We should all now know what to expect and advise our clients accordingly. (I’ll be writing about this in more detail very soon).

The Most Important Factors to a Sustainable Recovery in Housing:

  • Will the recent signs of positive data continue? At the turn of the year we have seen an improving trend in employment data; an uptick in manufacturing; negligible inflation; an increase in home sales; and improved consumer sentiment.
  • The severity and the impact of the European debt crisis is still unknown, but the financial markets seem to be reacting less to the related events.
  • Politics and the outcome of the presidential and congressional elections will most likely have an impact. But, in which direction?
  • Employment, in addition to housing, is the key to recovery. Is the recent improvement in the unemployment rate an aberration or is it a trend that will continue?

Have home prices hit bottom? Many economists predict this year as the turning point where values stabilize and even increase moderately. Non-distressed home values are already showing signs of stabilization and distressed sales are accounting for a smaller percentage of overall sales in recent months.  The shadow inventory of foreclosures and its impact on housing will continue to be a topic of debate.

2012 is shaping up to be an interesting year. Lets’ hope it is the turning point for an overall improvement in the economy.