Major changes ahead for mortgage system as U.S. seeks to scale back role in housing

Fundamental changes are probably ahead for the American mortgage system as the federal government pushes to unwind its unprecedented involvement in the housing market.

These changes could significantly raise the down payments demanded by lenders, curtail the availability of long-term mortgages with fixed interest rates, and increase the cost of borrowing in general.

The government's effort to scale back its role in housing could show up in small ways soon. In April, the Federal Housing Administration plans to raise the annual premium it charges borrowers by a quarter of a percentage point. In October, the maximum size of loans that the federal government backs is scheduled to drop to $625,500 from $729,750. The most dramatic proposal - eliminating mortgage financiers Fannie Mae and Freddie Mac - could take five to seven years.

The thinking is that the government cannot sustain its role in the housing finance system. Federally backed loans make up an outsize share of home purchases - about 90 percent - through Fannie, Freddie and the FHA. Taxpayers have kicked in more than $130 billion to cover Fannie and Freddie losses during the housing crisis, and they could be on the hook for more if the FHA depletes its cash reserves, which are already lower than the level required by law.

All three institutions guarantee that payments will be made to mortgage investors, even when loans go bad. Those guarantees helped keep the housing market from coming to a standstill during the darkest days of the economic crisis.

"But the government is taking on a lot of credit risk," said Mark Zandi, chief economist at Moody's Analytics. "So if loans go bad, it's on the taxpayer. Everyone would find it preferable if the private sector were to take more of the risk."

Loan limits

To that end, the federal government is eager to tackle the "jumbo" loan limits.

In the District and most of its neighboring counties, a temporary federal policy allows the government to back mortgages up to $729,750. Such loans typically carry a lower interest rate than those without government backing, in part because the federal guarantee makes them a safer bet for investors.

"Investors are willing to accept a lower return if their investment is less risky," said Keith Gumbinger, a vice president at HSH Associates.

The Obama administration has supported allowing the maximum loan limit to drop to $625,500 starting Oct. 1 , and Congress is expected to back that move. (Loan limits may be lowered even further for FHA-insured loans, federal officials said, though no details are available.)

Once the cap is lowered, loans larger than $625,500 will fall into the "jumbo" category. Jumbos are perceived to be more risky and therefore often face tougher requirements, such as 30 percent down payments and stellar credit scores.

Standards might ease if the private sector reenters that market, said Eric Gates, president of Apex Home Loans in Rockville. But if the $625,500 cap were in place today, it could lock many potential buyers out, he said.

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Peak buying time ahead, mortgage rates rise

The average rate on a 30-year mortgage topped 5 percent this week for the first time since April, and higher rates could further hamper the struggling housing market ahead of the spring's prime home-buying season.

Freddie Mac said Thursday that the average rate rose to 5.05 percent from 4.81 percent the previous week. It hit a 40-year low of 4.17 percent in November. The average rate on the 15-year home loan, a popular refinance option, increased from 4.08 percent to to 4.29 percent. The average rate on a five-year adjustable-rate mortgage rose to 3.92 percent from 3.69 percent, and the average rate on one-year adjustable-rate home loans increased from 3.26 percent to 3.35 percent.

Thirty-year rates are following the yields on the 10-year Treasury note, which are spiking on fears of higher inflation. Investors have been demanding higher Treasury yields since the Federal Reserve began its $600 billion bond-buying program to boost the economy.

Rates may not have an effect on homebuying until they reach about 6 percent, said Tom Tzitzouris, head of the fixed-income department at Strategas Research Partners in New York. The current levels are a "neutral zone," and buyers are neither prodded to sign nor discouraged from the market, he said.

"If you get another uptick again next week, you may see some movement," said Tzitzouris, who previously worked as a valuation manager for Freddie Mac and as a debt securities analyst for Fannie Mae.

The payment difference between today's rate and the historically low rate in November on a $200,000 loan is less than $100 a month, not enough to price a buyer out of a market, said Greg McBride, a senior financial analyst with Bankrate.com. There also are many buyers who are paying cash.

Mortgage applications fell for the second time in three weeks, a Mortgage Bankers Association index showed Wednesday. The group's gauge of purchases decreased 1.4 percent in the week ended Feb. 4, and its refinancing measure dropped 7.7 percent.

To calculate average mortgage rates, Freddie Mac collects rates from lenders across the country on Monday through Wednesday of each week. Rates often fluctuate significantly, even within a single day.

The rates do not include add-on fees, known as points. One point is equal to 1 percent of the total loan amount. The average fee for the 30-year and 15-year loan in Freddie Mac's survey was 0.7 point. The average fee for the five-year and 1-year ARM was 0.6 point.

-From news services

4.81%

Last week

5.05%

This week

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Major changes ahead for mortgage system as U.S. seeks to scale back role in housing

Fundamental changes are probably ahead for the American mortgage system as the federal government pushes to unwind its unprecedented involvement in the housing market.

These changes could significantly raise the down payments demanded by lenders, curtail the availability of long-term mortgages with fixed interest rates, and increase the cost of borrowing in general.

The government's effort to scale back its role in housing could show up in small ways soon. In April, the Federal Housing Administration plans to raise the annual premium it charges borrowers by a quarter of a percentage point. In October, the maximum size of loans that the federal government backs is scheduled to drop to $625,500 from $729,750. The most dramatic proposal - eliminating mortgage financiers Fannie Mae and Freddie Mac - could take five to seven years.

The thinking is that the government cannot sustain its role in the housing finance system. Federally backed loans make up an outsize share of home purchases - about 90 percent - through Fannie, Freddie and the FHA. Taxpayers have kicked in more than $130 billion to cover Fannie and Freddie losses during the housing crisis, and they could be on the hook for more if the FHA depletes its cash reserves, which are already lower than the level required by law.

All three institutions guarantee that payments will be made to mortgage investors, even when loans go bad. Those guarantees helped keep the housing market from coming to a standstill during the darkest days of the economic crisis.

"But the government is taking on a lot of credit risk," said Mark Zandi, chief economist at Moody's Analytics. "So if loans go bad, it's on the taxpayer. Everyone would find it preferable if the private sector were to take more of the risk."

Loan limits

To that end, the federal government is eager to tackle the "jumbo" loan limits.

In the District and most of its neighboring counties, a temporary federal policy allows the government to back mortgages up to $729,750. Such loans typically carry a lower interest rate than those without government backing, in part because the federal guarantee makes them a safer bet for investors.

"Investors are willing to accept a lower return if their investment is less risky," said Keith Gumbinger, a vice president at HSH Associates.

The Obama administration has supported allowing the maximum loan limit to drop to $625,500 starting Oct. 1 , and Congress is expected to back that move. (Loan limits may be lowered even further for FHA-insured loans, federal officials said, though no details are available.)

Once the cap is lowered, loans larger than $625,500 will fall into the "jumbo" category. Jumbos are perceived to be more risky and therefore often face tougher requirements, such as 30 percent down payments and stellar credit scores.

Standards might ease if the private sector reenters that market, said Eric Gates, president of Apex Home Loans in Rockville. But if the $625,500 cap were in place today, it could lock many potential buyers out, he said.

View the original article here