Recent changes to the economy are clearly paving the way for some turbulence ahead. With the improvements made to the housing market over the past several years, it may appear that everything is returning back to normal or at least to a point of being more stabilized. With so many cash sales, this may be true for housing for awhile, but is there a tough road ahead for the mortgage industry?

With home prices on the rise in most areas of the country, more than 2.5 million residential properties went from negative equity to positive equity during the second quarter of this year, according to the most recent report from CoreLogic. The report shows that 41.5 million residential properties with mortgages have equity while underwater properties stands at 7.1 million or 14.5% of all homes with a mortgage. Underwater mortgages are down from 19.7% during the first quarter of this year. CoreLogic also reports that of those with positive equity, 10.3 million or 21.1% had less than 20% equity and 1.7 million had less than 5% equity. This group of above water properties, but below 20% and 5% equity, are most likely those that may have found it difficult to refinance. Even though HARP refinances are still available, many of these homeowners are not eligible for the HARP refinance program because they do not have loans that were sold to Fannie Mae or Freddie Mac. This group is also at risk of falling back underwater if home prices suddenly drop even slightly. HARP loans have been a good source of continuing business for the mortgage industry, but as more homes enter positive equity, this will change.

With the speculation that QE3 will be tapered by the Feds, mortgage rates have become erratic from day to day. This is keeping many borrowers away from the mortgage market which has seen major fluctuations in activity in recent months. The Mortgage Bankers Association Market Composite Index drop by 13.55% on a seasonally adjusted basis for the week ending September 6th. Suffering the most is the Refinance Index which decreased 20% and has fallen 71% from the recent peak reached the week of May 3, 2013. Even though the Purchase Index fell 3% on a seasonally adjusted basis, it is still 7% higher than the same time last year. Refinances are a major source of business for mortgage professionals, however, many homeowners may never refinance again if they are already in possession of a mortgage with historically low interest rates.

In another report from the Mortgage Bankers Association, the Mortgage Credit Availability Index, credit availability decreased in August 0.7% to 111.5. This is an indication that credit is tightening as the availability of interest only loans and above 30 year term loans have been reduced due to QM (Qualified Mortgage) rules for GSE loans. These new rules go into full effect in January 2014. However, while regular conforming mortgages are becoming more difficult to obtain, jumbo loan rules have become more flexible leading to increased competition and lower jumbo rates. Unfortunately, the industry depends on the larger volume of conforming mortgages.

With higher home prices in place, purchase activity amongst investors has slowed down. Credit availability and volatile rates has put the brakes on refinancing activity. While there are still some home purchases being made, many consumers lost their homes during the housing bust years. Who will be able to purchase a home? Seeing this as a problem, FHA has now changed its guidelines so that homeowners, who suffered through extenuating circumstances from a loss of income or job that resulted in a foreclosure, bankruptcy, deed-in-lieu or short sale, can now purchase a home after 12 months when financing with an FHA mortgage. This is definitely one way of keeping home purchases moving forward. Fannie Mae has also updated their policy so that borrowers can purchase a home after 2 years, however, they must have a 20% down payment in order to do so. Such a large down payment is difficult to accumulate when many of these former homeowners are now renting.

What should potential borrowers do at this point? Right now, qualifying is possible for many people and rates are still low. Since no one knows exactly what the future holds, borrowers who want to and can refinance should probably do so now before guidelines and mortgage interest rates change further. The same is true for those who want to and can purchase a home. Rates have already hit their records lows and now have nowhere to go but up. Only if the market heads south again in the near future will this part of history ever repeat itself.

With so many changes happening at a fast pace, housing may in some ways be stabilizing. However, there are already job losses being recognized in the mortgage industry due to lack of volume. Yes, it may be a tough road ahead for the mortgage industry, but with a little imagination, lenders and mortgage insurance companies can take some steps to ease the burden by re-examining their overlays and restrictions. If the housing market is about to stabilize, the mortgage industry needs to be ready to meet the challenge.

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