Obama report on Fannie, Freddie plan may boost mortgage rates

The Obama administration wants to raise fees for borrowers and require larger down payments for home loans as part of a long-term effort to restructure the nation's housing market. But it warned that these measures could boost mortgage rates and make it harder for home buyers to secure the 30-year fixed-rate mortgage, a mainstay of American home buying for decades.

In a long-awaited white paper, the administration said it intends to wind down the federal mortgage giants Fannie Mae and Freddie Mac and curtail the Federal Housing Administration to help reduce the government's outsized role in mortgage funding.

The housing finance system, which has ensured that Americans can get home loans, came crashing down in the financial crisis, helping fuel millions of foreclosures and the recession.

"I think it's absolutely the case that the U.S. government provided too much support for housing, too strong incentives for investment in housing," Treasury Secretary Timothy F. Geithner said Friday during a speech at the Brookings Institution. He noted that in addition to those fundamental mistakes, the government "allowed a huge amount of basic mortgage business to shift where there was no regulation or oversight."

But in proposing a strategy for the future, administration officials acknowledged they are walking a tightrope. Any steps that dial back government support too dramatically - making mortgages more expensive - could extend the housing decline.

Geithner said that a new housing finance system without Fannie and Freddie could take seven years to put in place, suggesting it might fall in part to future administrations.

"We have to see the process of repair in the housing market completed," Geithner said.

The white paper focuses on a series of short steps to increase fees and down-payment requirements. The administration hopes these measures will allow banks to more effectively compete in offering loans without government guarantees.

The report offers three options for replacing Fannie and Freddie. They include creating a new government agency that would continue to insure mortgages or a new agency that would step in only during times of crisis. Each, however, could put taxpayers at more risk of having to bail out the mortgage market during big declines.

The most drastic option would end government backing for home loans beyond the FHA. But the administration warned that this measure could affect access to credit for many potential homeowners. It could boost mortgage rates the most, the officials said, and it could make it harder for community banks to compete in the housing market.

In not offering a single long-term vision for the housing finance system, the administration sought to avoid a contentious clash with Republicans, who often have portrayed the mortgage giants as the chief culprit in the financial crisis. Republicans are likely to agree with the administration's plan to reduce taxpayer support for mortgages over time.

But Rep. Spencer Bachus (R-Ala.), the new chairman of the House Financial Services Committee, said in a statement that while the proposal includes elements that GOP lawmakers have embraced in the past, it "isn't a plan to move us forward, but rather a collection of opinions to consider. What's needed is a real plan, and we intend to sit down with administration officials to find common ground ... we need legislation that protects taxpayers from further losses and future bailouts and builds a stable housing finance system based on private capital."

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Mortgage delinquency rates drop

As the labor market improved, the number of homeowners who fell behind on their mortgage payments dropped in the final three months of last year to the lowest level since 2008, according to a national survey released Thursday by the Mortgage Bankers Association.

But the delinquency rate remains higher than what's traditionally normal, and the volume of homes in some stage of foreclosure returned to the record high of early 2010, the report said. The survey covered nearly nine out of 10 primary mortgages.

The data offer a mixed view of the housing market's prospects for recovery any time soon. While delinquency rates have improved across all types of home loans, a swelling supply of low-priced, foreclosed properties suggests that home values could keep eroding and further undermine the ailing housing sector.

"We have to clear out those distressed properties before we can talk about any kind of housing market recovery," said Guy Cecala, publisher of Inside Mortgage Finance. "There are signs of improvement, but I think it's a little early to break out the champagne."

The report's seasonally adjusted figures showed that 8.2 percent of the outstanding loans were delinquent in the fourth quarter of last year, down from 9.1 percent the previous quarter and 9.5 percent a year earlier. Those figures do not include loans that were in foreclosure.

Fewer loans were seriously overdue. The number that were at least three payments past due, for instance, fell to 3.6 percent from a high of 5 percent at the end of the first quarter of 2010.

Mortgages that were only one payment past due are at the lowest level since the recession began in late 2007, suggesting that the employment picture is improving, said Jay Brinkmann, the mortgage banking group's chief economist.

"First-time delinquency is very much a measure of distress in the employment system," he said. "I see all of this as pretty good news. It looks like we've clearly hit the turning point."

Even the percentage of homes entering the foreclosure process slipped a bit, to 1.28 percent from 1.32 percent, in the third quarter. Foreclosure starts rose in only 11 states, with the largest increase in Maryland, where the percentage of homes entering foreclosure rose to 0.9 percent.

Yet the number of loans stuck in foreclosure was up, and that was mostly because many of the country's largest lenders temporarily stopped seizing homes from delinquent borrowers in October after widespread reports of flawed and fraudulent documents.

With so many loans in limbo, the number of homes in some stage of foreclosure rose to 4.63 percent in the fourth quarter. That's up from 4.4 percent the previous quarter and 4.58 percent a year earlier.

About half of the foreclosures are concentrated in five states - Florida, California, Illinois, New York, and New Jersey, Brinkmann said. Four of those states require court approval for foreclosures. When problems with the foreclosure paperwork surfaced in the fall, many of the troubled loans got stuck in the legal process, adding to the foreclosure supply in those areas.

Bank of America, the country's largest financial institution, has since lifted its freeze, and other lenders are starting to do so. Even so, distressed properties continue to make up an unusually large share of home sales.

In January, nearly half of all home purchases involved a distressed property, namely foreclosures or "short sale" transactions that enable borrowers to sell their homes for less than they owe on their mortgages, according to the Campbell/Inside Mortgage Finance Housing Pulse, an index that tracks such sales.

Foreclosures tend to drag down the values of surrounding properties, making many borrowers vulnerable to losing their homes. That's because many borrowers end up owing more on their mortgages than their homes are worth. If they lose their jobs or face other financial setbacks, they are unable to sell or refinance their way out of trouble.

Cecala of Inside Mortgage Finance estimated that 4.5 million loans are seriously delinquent or in the foreclosure process already, based on Thursday's survey. Even if 1 million of those loans were modified each year and another 1 million foreclosures were sold, it would take more than two years to clear them off the market, he said.

"And that's assuming that no more foreclosures are added to that inventory," he said.

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Mortgage rates down as investors react to Japan crisis

Mortgage rates fell to the lowest level in almost two months, tracking a drop in Treasury yields as Japan's deepening nuclear crisis spurred demand for relatively safe investments.

The average rate for 30-year fixed loans declined to 4.76 percent this week from 4.88 percent last week, according to Freddie Mac. The average 15-year rate was 3.97 percent, down from 4.15 percent.

The average rate on adjustable-rate mortgages that are fixed for the first five years was 3.57 percent this week, down from 3.73 percent last week. Rates on one-year ARMs averaged 3.17 percent, down from 3.21 percent.

Yields on 10-year Treasury notes, which are benchmarks for some consumer loans, fell this week to the lowest level since December, and stocks sank, reflecting investors' concern about the situation in Japan.

"There's been a little flight to - I don't want to say safety - quality," said Keith Gumbinger, vice president of HSH Associates, a publisher of consumer loan data in Pompton Plains, N.J. "As long as trouble remains in the forefront, interest rates are likely to be lower than they otherwise would be."

Mortgage applications fell 0.7 percent in the week ended March 11, according to the Mortgage Bankers Association. The association's measure of purchase applications declined 4 percent; refinancings climbed 0.9 percent.

Housing starts plunged to a 22-month low in February, and permits for construction fell to a record low, the Commerce Department said. Homebuilders are competing with foreclosures and falling prices for existing homes.

Mortgage rates began climbing from a record low of 4.17 percent in the week ended Nov. 11 and reached a 10-month high of 5.05 percent in February.

- From news services

4.88

Last week

4.76

This week

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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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