New banking standards could disrupt mortgage market

January 12th, 2015

With mortgage rates remaining low, real estate might seem to be the ultimate buyer's market these days -- a combination of reduced housing prices and record low mortgage rates have made owning a home much more affordable than it was a few years ago. Behind the scenes, though, regulatory changes are being discussed that could make getting a mortgage much more difficult.

Compelling numbers scream affordability

On the surface, conditions seem ideal for would-be home buyers. Since 1971, 30-year mortgage rates have averaged 8.69 percent; as of early November, they were less than half that, at 3.40 percent. Meanwhile, housing prices are still greatly reduced from the peak levels of the housing boom. According to the S&P/Case-Shiller Home Price Index, the average price of a house in the United States is down by nearly 31 percent from the peak level reached in April of 2006.

Percentages can seem somewhat abstract, but running some numbers through a mortgage calculator helps spell out how dramatically the cost of owning a home has fallen. At the peak of the housing boom, mortgage rates were at 6.68 percent. A $200,000 mortgage at that rate would require a monthly payment of $1,288. Today, between the decline in housing prices and sharply lower interest rates, the same home could be purchased with a monthly payment of just $613. In other words, the cost of owning a home is now less than half what it once was.

What's the catch?

There may be a problem looming amid all this good news. Bank regulators are working on implementation of what are known as the Basel III bank funding standards. These are international banking standards designed to make the financial industry more stable. While that sounds like a good thing, the standards are so demanding that they have the potential to severely restrict the ability of banks to make new mortgage loans.

The Federal Reserve recently announced that it would delay implementation of the Basel III standards, which were originally due to go into effect on January 1, 2013. Still, the prospect of those new rules is a reminder that the housing and mortgage markets are sensitive to a variety of potential disruptions. The Fed's decision on Basel III standards could significantly change the ability of would-be home buyers to obtain a mortgage next year.

Posted By :

Richard Barrington has earned the CFA designation and is a 20-year veteran of the financial industry, including having previously served for over a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc. Richard has written extensively on investment and personal finance topics.

Why the GDP announcement already seems like old news

November 13th, 2013

Stronger GDP growth in the third quarter shouldn't have enough impact to change your mortgage plans....  Read More

A second bite at the refinancing apple

November 06th, 2013

With housing prices continuing to rise while mortgage rates fall, new refinancing opportunities are being created...  Read More

Poor jobs report dampens economy, reveals silver lining for borrowers

October 30th, 2013

Discouraging economic news has a silver lining for mortgage shoppers, in the form of sharply lower rates....  Read More

Budget deal leaves mortgage rates stable -- for now

October 23rd, 2013

The budget deal removes one potential disruption from the mortgage market, but don't expect rates to stay stable forever....  Read More

0 Responses to "New banking standards could disrupt mortgage market"

No Comments

Leave a Comment