Mortgage rates are on the rise, making it even more difficult to finance a house. But that doesn't mean the market will flounder before it has had a chance to really get going.
For one thing, loan volumes usually boom when interest rates start to rise. That's the period when all those would-be buyers and refinancers who have been sitting on the fence decide it's the proverbial "right time" to take the plunge. After all, prices are still down substantially from the market peak. While you may no longer be able to nail a rate of 4 percent or less, a loan at 4.5 percent is still better than one at 5 or 6.
Real estate and mortgages have never been totally predictable. While rising rates should choke off refinancings, there are always niche markets that are going to go the other way. And the government has extended its popular HARP refinancing program so there will be a market, though no one can guess how large, for refinancing --regardless of what interest rates do.
Another niche currently booming is housing bonds. According to Thomson Reuters stats in The Bond Buyer, a trade newspaper, housing bond volumes have doubled so far in 2013. Last year through May, $3.1 billion of these instruments had been issued through 101 offerings. This year through May, that number is $6.2 billion through 140 offerings.
In general, consumers can't invest directly in housing bonds, but low- to moderate-income buyers and first-timers can still benefit from them. Housing bond proceeds are used by state housing finance agencies to buy down interest rates on residential mortgages for qualified borrowers.
When rates got down as low as 3.5 percent, how much of a break could there be? In other words, how low can you go? In New Mexico and some other states, the answer is: as low as 1 percent.
Housing finance agencies (HFAs) always manage to offer healthy discounts, even in a low-rate environment. And now that rates are rising, these state agencies will have a little more wiggle room to offer even more options. The result should be increased demand for more housing bonds.
But even before rates have made a serious turn upward, housing bonds are receiving a bump from a new structure that copies probably the most successful mortgage bonds of all time: the mortgage-backed security. The structure is called a "passthrough," and it is for investors who buy these securities in a "secondary" mortgage market designed to pump more lending cash into the system.
A passthrough functions much the way it sounds: The bank or agency that collects the mortgage payment takes a cut for its trouble and then passes through the rest of the money to the investor.
Trillions of dollars of mortgage-backed securities have used this structure. But with housing bonds, the passthrough has a provision investors are going to like:
In the typical passthrough, when a mortgage that has been bundled into the security prepays -- say, for instance, you sell your house and move, paying off your original mortgage and getting another one somewhere in its stead -- the money returns to the housing agency, which reinvests it in more affordable housing. But with the new structure, the investor receives the money, not the HFA.
Last year, according to The Bond Buyer, Minnesota became the first state to use a housing bond passthrough. Illinois, Indiana and Florida have since followed.
The HFAs are important players in the rental market, too. They administer a key federal program called the Low Income Housing Tax Credit, a major boon to the construction of new, affordable multi-family units.
Here's how this program works: HFAs take applications from developers in their states and, through a complex points system, decide to fund projects with the highest scores. Packagers called syndicators sell the tax credits to investors. Any investor can buy tax credits, whether or not they have any real interest in housing, and many do because they receive a double benefit. Not only do they get a tax credit, they can buy the credits at a discount that varies depending on market conditions.
But the net effect is that the investor is buying an equity-stake in these lower-income rental projects, helping to make them possible. Often, their investment is not enough to fund the deal completely. But in most cases, financing packages are cobbled together using tax credit money, money from the Affordable Housing Program of the nearest of the 12 Federal Home Loan banks, the Department of Housing and Urban Development's HOME funds and other sources.
This is how affordable housing projects get stitched together like the quilts your grandmother used to make. And because these finance quilts are made through the hard work of dedicated people all over the country, many families get to stay warm in new or existing houses or apartments they are able to afford -- no matter if interest rates are going up or down.