A recent study suggests that housing finance reform could have a significant impact on mortgage rates. But even factoring in such increases, mortgage rates would still be lower than they’ve been for most of the past five decades.
The report, The Impact of Housing Finance Reform on Mortgage Rates, Home Buyers and the Economy, was written by Kent W. Colton, PhD, and Marchel Carliner, both of the Harvard Joint Center for Housing Studies.
It was prepared for the Leading Builders of America, a trade group that claims many of the largest U.S. home builders among its members.
According to the authors, new mortgage finance reform legislation will require the private sector to set aside capital to cover first loss risk. It will also have the government establishing a catastrophic risk fund.
Both moves will increase interest rates.
“The basic questions are how much will mortgage rates rise, and what will be the impact on homebuyers and the economy,” the authors wrote.
After considering several studies, the authors estimated that mortgage rates could be negatively impacted by between 25 basis points and 150 BPS.
The low-end figure represents the impact to a pristine borrower, while the high end was indicative of the impact to someone with a FICO score of between 650 and 750 and a loan-to-value ratio of between 85 percent and 95 percent.
The report suggested that 9.4 percent of current buyers would no longer qualify if rates increased 150 BPS. In addition, housing starts would decline by 155,893 units and the gross domestic product would decline by $44.4 billion.
Thirty-year fixed rates averaged 4.41 percent in Freddie Mac’s most recent survey. Given the worst-case estimate of 150 BPS, mortgage rates could jump to around 5.91 percent if housing finance reform occurs.
That was about where mortgage rates were in the early sixties.
But by 1967 rates were above 6 percent — where they’ve stayed until about a decade ago.
Yet, even when mortgage rates exceeded 18 percent in the early 1980s, the real estate market survived — and even thrived in some areas as home prices kept pace with inflation.