As 2010 unfolds, expect mortgage costs and rates to rise

For The Daily Record
The outlook for 2010 is beginning to take focus and from actions coming from the Federal Housing Administration last week and Wednesday’s words coming from the Federal Reserve, the cost of getting a mortgage is heading upward.

Earlier this week, the Federal Reserve left short term rates alone and indicated that it won’t be raising rates any time soon, or for at least the next several months. However, it also stated that it still plans to wind down its purchasing of mortgage-backed securities, a move that began in late 2008 and has since kept rates well below 6 percent.

Now that the $1.25 trillion program is scheduled to come to an end March 31, it is likely that rates will start to rise as the private sector moves back in to take over where the federal government has left off. And it is doubtful that those investors will be purchasing at the same price as the government.

 The chatter is that rates could rise anywhere from 50 to 100 basis points, moving into the summer, meaning that a 30-year fixed rate will start bouncing around the 6 percent mark. I’m sure the Fed will keep a close watch, but it knows it can’t continue to artificially keep rates down forever. And I have the impression that the weaning away from this program will allow the Fed to step back and see how the market and the economy from Wall Street to Main Street reacts.

The one aspect that might blunt the expected rise is the simple law of supply and demand. Lenders are smart enough to realize that if rates rise it would have the effect slowing down the demand for mortgages. So, in an attempt to keep their pipelines running at a brisk pace, it is entirely possible that banks and lenders will try to keep rates low and when the pipeline becomes bloated, raise rates to ease the stress on the operations end.

The bottom line, though, is that if you are looking to purchase or refinance and believe that things will be better in six months, you may want to adjust that thinking. And if you only qualify for an FHA government-insured loan, then certain the time to do it is now.

Last week FHA announced sweeping changes to how it is doing business. For the last three years, FHA has become the dumping ground for lenders to refinance sub-prime borrowers it had on its books and has been the only place where new borrowers, who may be credit challenged or can’t afford a large down payment, to find refuge. More than 30 percent of all loans now are FHA and that’s why its capital reserves are under stress.

Coming sometime this spring, FHA will increase its upfront mortgage insurance requirement from 1.75 percent of the base loan amount to 2.25 percent. It also is seeking Congressional approval to raise the annual FHA mortgage insurance premium. And if that is granted, FHA said it would shift some of the upfront cost to the annual premium – which is collected on a monthly basis by the lender.

But that’s not all.

If a borrower has a credit score below 580, instead of the required 3.5 percent down payment, the down payment will go to 10 percent. However, that may not have as vast of an impact since many lenders have their own underwriting overlays where the minimum credit score to qualify for an FHA loan is either at 620 or 640.

What may cause the most concern for the Realtor community, however, is the announcement that FHA is scaling back its seller concession provision from 6 percent to 3 percent, putting it in line with non-government insured conventional loans.

That decision is a direct strike at one of the best selling points for an FHA loan. An FHA borrower always has to have at least 3.5 percent into the transaction. And if a sale could be negotiated to the point where the seller was willing to help the buyer by giving back 6 percent of the sales price as a concession toward paying closing costs and pre-paid items (days of interest and tax and insurance escrows), then many times all the borrower would need would be just his 3.5 percent.

Now with that being cut back to 3 percent – which is supposed to take effect sometime this summer – more pressure will be placed on the borrower.

FHA did this by stating it wanted to do away with any possibility of inflated home prices. But because of the firewall now in place between lenders and appraisers, the ability to influence appraisals has been greatly diminished and appraisers are in no mood to be swayed when scrutiny has never been higher on appraisals.

Nevertheless, these changes are coming. And it wouldn’t be surprising to see FHA move later in the year from its 3.5 percent requirement to a 5 percent requirement.

So as 2010 unfolds, the wise move for borrowers seemingly is not to procrastinate because the indicators are pointing to a more costly environment.

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HUD’s new good faith doesn’t answer simplist questions

If you’ve been shopping for a mortgage in these first few days of the 2010, then you may have already gotten the new good faith estimate that all lenders are required to use by the Department of Housing and Urban Development.

Sure looks a little different than what borrowers have been seeing for a number of years under the Real Estate Settlement Procedures Act.

Previously, lenders and mortgage brokers could design their own version of a good faith estimate and when borrowers were trying to shop for a mortgage, it truly was confusing to compare and contrast various good faiths from one company to another because visually they could be very different and when numbers are show up in different places, then naturally confusion will exist.

HUD decided to make the new good faith estimate uniform from one lender to another and the main thrust seemed to be making a document that more user friendly with the ability to allow consumers to more easily do side-by-side comparisons.

Well, it was a nice try. HUD took what was basically a one-page document that — more times than not — would specifically detail the estimated charges a borrower could expect to see when settlement time comes and turned it into a three-page document that fails to display some of the first questions that a borrower wants to know. These include:

• What is my total monthly payment, including taxes and insurance?
• How much money do I need to come to closing with?
• Or, if I am refinancing and getting cash back, how much should I expect to get back?

Yes, that’s true. Now a borrower will not have an official document, required by HUD that will give them the answers to three of the most important questions that a borrower seeks. And nowhere in the new good faith estimate does it break down the specific dollar charges for getting the loan. It clumps them all together in a single origination charge.

True, some lenders are taking it upon themselves to embellish the new good faith with more details as way to protect them in the name of disclosure. But in reality all that does is generate more paperwork for the borrower to sift through and attempt to understand. A three-page document may now grow to six pages.

The new good faith estimate seems to be clearly focused on making sure the borrower understands what interest rate they have, how long that rate is good for, how it or the monthly payment can rise or fall or not all, if there is a pre-payment penalty and what charges at closing can increase, not increase or increase by no more than 10 percent.

Making lenders and loan officers more accurate in their estimates should be applauded. A seasoned loan officer should pride themselves on issuing a good faith that will be extremely close to what the final numbers will be at closing. A good loan officer, if unsure, will check with a title company to get exact fees for taxes, title insurance and such. Of course there are times when some charges that the loan officer could not anticipate for the good faith will show up on the settlement sheet – such as a homeowner’s insurance policy annual renewal being required to be collected.

Nevertheless, the idea of creating a uniform document that all lenders can use is a first-class thought and a step in the right direction.

The U.S. Department of Housing and Urban Development, which pushed hard for the new RESPA regulations, has said that it will “exercise restraint in enforcing new regulatory requirements” under RESPA until May 1. But let’s hope by then, some revisions will have been made so that there is a place within the new good faith where borrower will easily be able to see what their effective monthly mortgage payment will be, how much they should expect to bring to closing or how much they should expect back if refinancing.

Sometimes, the simplest things are the hardest to do.