Changes Surfacing in Mortgage Offerings

Some significant changes appear to be surfacing this year in the mortgage industry. These changes could save money for homebuyers and owners who want to refinance their existing mortgage loan.

One change could be the elimination of formal appraisals that have long been an integral part of a mortgage or refinance application. Determining a reasonable estimate of the property’s value would still cost the consumer $50 to $200, but that’s a lot less than the $300 to $350 charged by a professional appraiser.

The idea of eliminating the need of a formal appraisal is being tested this year by Fannie Mae, the nation’s largest buyer of existing mortgages. They are testing the system by allowing certain mortgage lenders at strategic points throughout the country to submit loan packages without the appraisal. In most cases, a quick electronic check of sales prices of comparable homes is used to determine approximate value.

When the pilot program’s “property inspection waiver” is used, Fannie Mae charges the lender a $50 fee. About three-quarters of the home purchase mortgage applications now received by Fannie Mae use an automated underwriting system and do not require full, traditional appraisals, according to a Fannie Mae spokesperson.

The second largest buyer of existing mortgages, Freddie Mac, is involved in a similar program. But they have tougher guidelines for deciding what applications qualify. Down payments must be at least 20 percent of purchase price and the applicant must have a squeaky-clean credit record. Freddie Mac charges the lender a fee of $200 when this system is implemented.

Understandably, this concerns professional appraisers. In addition to losing business, they claim it can actually cost the consumer more in some cases. Without a full comprehensive appraisal, the home could be valued far above its realistic market value. This could result in the buyer paying thousands of dollars too much for the home, they say.
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Conventional home mortgage rates are having their ups and downs like temperature readings on a thermometer this winter. A few weeks ago they had risen to a bit over 7 percent. At this writing, they have dropped to below 7 percent again. And the number of mortgage applications continue to rise generally, but are also experiencing ups and downs.

The Meyers Group, a noted real estate research and consulting firm, made this prediction about the upcoming mortgage market:

“Looking ahead, we can expect mortgage rates to seesaw between current levels and slightly over 7 percent. That’s a very comfortable range for most homebuyers. With very little threat of inflation as the economy struggles to recover, there is a good chance the Fed will cut interest rates further to stimulate market and economic activity.”

The Meyers Group also had good news for homebuilders. “Despite deepening employment losses, homebuilders received a boost in January from increased sales and buyer traffic at new home projects,” the report stated. Supported by low mortgage rates, mild weather conditions and rising consumer sentiment, single-family home construction continues to improve to pre-September 11 levels.

“Pent-up demand and low inventory in locales where employment growth remains positive should allow most homebuilders to maneuver through the next half year or so without encountering significant difficulty. However, further declines in the national demand-supply and employment ratios indicate home sales will continue at a moderate pace over the short term, while home price appreciation (increases) show a slowing trend.”
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In mortgage lending, originations will be down from last year, many analysts now predict. But the market will remain healthy and robust.

“We expect originations to be down by about 25 percent this year, but it will still be a strong market,” said Joe Drum, executive vice president of Fidelity National Financial. “We anticipate this year will resemble the market of year 2000 which, I might add, was a very good one.”

Drum traces the downturn turn in the number of loan originations to a slowdown in the economy, uncertainty following the 9/11 terrorist event, and a lapse in consumer confidence that first showed up in October. He also cites an all-time high rate of unemployment and worries about the impact of the Enron collapse on both the financial markets and the cost of energy.

“Real estate dislikes uncertainty,” he noted.

Refinance transactions will drive the mortgage industry this year to a greater extent than last year. Typically, refinances comprise about 30 percent of mortgage loan originations. But this year they are expected to top 50 percent.

Even though mortgage interest rates have been edging up and down in recent weeks, they are still close to record lows. The slowly rising rates will motivate even more homeowners to take action if they are interested in purchasing a home or refinancing an existing mortgage.

There will be an increase in “bundled services” by loan providers this year. Competitive pressures will move lenders to increase their offering of integrated services to control costs and speed closings.

“Lenders want to make the process as smooth as possible, both for their customers and themselves,” said Donald Cole with FNS. “To do that, lenders will look for and work with one vendor that can supply a variety of services, from title work and surveys to appraisals and tax searches. They will not want to deal with a lot of individuals in the process.”

There will undoubtedly be major changes in the title industry. New programs and concepts were budding last year that can save a lot of money for consumers this year. And lenders will likely be looking to title firms for information services, including ways to expedite transaction closings.

During this year, there will probably be more acquisitions of related or ancillary real estate service providers, such as automated appraisal services and other modes of e-commerce to maintain their competitive edge in the marketplace.

This year’s title insurance policies will cover more risks than in the past. “Previously, owners did not get the extensive coverage in title policies that lenders had,” Cole noted.

“This year, that could change as title companies introduce products that cover survey matters, policy encroachments, building permit violations and property line encroachments. We’re now dealing with a much more savvy consumer who is demanding these changes.”

A major move toward electronic documents will also emerge to a higher level in the real estate business. The groundwork was made last year when the Mortgage Bankers Association and Fannie Mae announced they had created a committee to come up with standards for electronic documents. These are expected to include standards for formatting, transmission and security.

Uniformity is the engine that will make things move forward with the development of fully electronic documents. We don’t have that yet, but this year should see substantial progress in that area.

This may be another record year for the construction of new homes. Here’s a view expressed by Bruce Smith, president of the National Association of Home Builders:
“Our recent surveys have revealed increasing optimism among single-family home builders on the strength of solid market fundamentals such as continuing low mortgage interest rates, increases in house values and improving consumer confidence. Housing has been one of the few bright spots in the economy all last year, and the prospects for this year are very positive.”

The substantial gain in builder optimism we’ve recently seen, coming on the heels of an eight-point rise in December, indicates that builders confidence in the single-family home market has fully rebounded in the wake of September 11 and the signs of economic weakness that were emerging at that time, Smith concluded
Jim Woodard writes a nationally syndicated newspaper column on real estate news and trends, carried in about 230 U.S. newspapers. He also writes freelance features.

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