DS News - U.S. Bank

42 THE COST OF GSE REFORM A new analysis by Zillow determined that proposed reforms to the GSEs, Fannie Mae and Freddie Mac, may increase monthly payments for borrowers by up to $400 a month. e changes being considered by Congress are intended to reduce taxpayer risk in the event of another market crash. Fannie and Freddie have been under government conservatorship since September 6, 2008, following the housing crisis. However, Zillow's analysis shows the changes may decrease housing affordability as borrowers face shorter loan durations and higher rates. "Some GSE reform proposals could lead to the end of the 30-year mortgage as we know it, which has long been the bedrock for financing homeownership in America," said Zillow Senior Economist Aaron Terrazas. "If monthly payments do rise and, more importantly, stay elevated, at some point we'd expect home prices to come down a bit in response to this decreased purchasing power, and some long-time owners could opt not to sell to preserve their smaller monthly payments." Borrowers seeking alternatives to the 30-year mortgage may face increases in their monthly rates by as much as $400 as they move from a 30-year loan to a 15-year fixed- rate mortgage. Additionally, 30-year non- conforming loans, which are not guaranteed by the GSEs, would cost borrowers around $20 more per month. "A shorter loan period would mean the lifetime cost of the home is lower, and some households may be able to absorb the extra monthly cost on their mortgage," said Terrazas. "But in the nearer term, first-time homebuyers or buyers on the margin could feel a real pinch as homeownership becomes significantly less affordable." Zillow notes that until these changes are officially signed into law, there is now way to know for certain how GSE reform will impact borrowers. HOW WILL RISING RATES IMPACT THE HOUSING MARKET? Rising mortgage rates could have minimal impact on the housing market according to a study by real estate consulting firm John Burns. e study, that surveyed over 300 homebuilders, found that 85 percent home builders said home sales would decline less than 10 percent if mortgage interest rates were to rise to 5 percent. For the study, John Burns asked builders how would their home sales get affected if rates increased by 1 percent and held steady for the remainder of the year if all other factors such as the economy remain unchanged. While 29 percent said that sales would not fall at all, 56 percent of the respondents said that rising rates would lower sales by 1 to 10 percent. Only 2 percent of the respondents said that rising rates would result in 21 to 30 percent lower sales. "Mortgage rates have risen 1 percent or more 10 times in the last 43 years, with little impact on home sales and prices when the economy was also strong," a whitepaper by John Burns had found. "Historically, rising confidence, solid job growth, and higher wages have more than offset reduced demand for housing resulting from higher mortgage rates. When rates rise during a weak economy, home sales and prices get crushed." However, the sentiment among homebuyers and owners is very different. Recent growth in home prices, coupled with low inventory and rising rates have made home affordability a key issue for buyers and homeowners alike. According to a survey by ValueInsured, confidence among first-time homebuyers in their ability to save enough for a down payment was down with only 35 percent saying they could afford a down payment, representing a 9 point drop in 12 months. In the country's hottest housing markets, only 25 percent of interested homebuyers were somewhat confident of being able to afford a down payment in the next 12 months. As far as homeowners were concerned, the survey found that 59 percent homeowners believed that people who were buying in their area were overpaying, while 30 percent homeowners considered the housing market as "unhealthy."

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