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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