The Outlook for Mortgages

Despite predictions to the contrary, mortgage rates have hovered at historic lows for three years now. After the Federal Reserve spooked the markets last summer over its intentions to stop propping up the mortgage and bond markets, the 30-year fixed rate spiked, to an average of 4.6%. But by late October it had fallen to 4.1%, according to Freddie Mac.

Improvement in the economy will boost rates, but probably not before midyear. Many forecast that 30-year fixed rates will be above 5% by then. However, Guy Cecala, publisher of Inside Mortgage Finance, thinks rates will bounce around 4%—give or take a quarter-point—for a while.

Lenders, still hurting from the easy-credit-fueled boom and bust of the past decade, continue to impose tough requirements on mortgage borrowers. “What you don’t have in this market is wild and crazy financing,” says Ron Stroble, of Umpqua Bank, which helped the Litkes refinance (see the accompanying article). Currently, borrowers with mortgages backed by Fannie Mae or Freddie Mac have an average credit score of 760 (out of 850), and FHA borrowers, 700. New federal rules for lenders that go into effect in mid January may provide greater clarity about what’s expected of lenders, but only time and more competition among lenders for mortgage business will get them to ease up on strict, self-imposed requirements for mortgage borrowers, says Cecala.

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Lenders are showing a little more flexibility. Many will “trade off” compensating factors—for example, you may qualify with a lower credit score if you have a larger down payment. Or if you have a good credit score, you can shop around for a better deal on a down payment, putting down as little as 5% on a Fannie- or Freddie-backed mortgage (FHA still requires only 3.5%).

Fannie and Freddie’s regulator, the Federal Housing Finance Agency, announced in late November that the conforming loan limit of $417,000 (and $625,500 in high-cost metro areas) would remain the same in 2014. Meanwhile, the jumbo market now is more competitive than it has been since the mortgage meltdown in 2007, says Cecala.