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February 16th, 2011 (Modified on May 22nd, 2015)

The cost of mortgages is going up!



rising housing costsThere was a great deal of fanfare that came along with the announcement that the U.S. government was going to introduce plans to reform the heart and soul of the American mortgage market.

Despite all the attention that the Treasury’s announcement received last Friday, the truth is, the reform of Fannie Mae and Freddie Mac is still in the earliest of stages and the Treasury’s three strategies were general outlines at best. As we outlined on the day before the Treasury’s announcement, we expected a few common threads throughout all the proposals:

The government will strive to reduce their role in the mortgage and housing markets;

Strides will be taken to protect taxpayers to a greater degree;

The private market must return from the sidelines;

And perhaps most importantly, the cost of home loans is going to rise.

Proof that mortgage costs will rise

In each of the Treasury’s three proposals (options), it was clearly stated that mortgage costs will increase:

Option 1: Privatized system of housing finance with the government insurance role limited to FHA, USDA and Department of Veterans’ Affairs’ assistance for narrowly targeted groups of borrowers:

Though these are indeed significant benefits, this option has particularly acute costs in its potential impact on access to credit for many Americans.

While FHA would continue to provide access to mortgage credit for low- and moderate-income Americans, the cost of mortgage credit for those who do not qualify for an FHA-insured loan – the majority of borrowers – would likely

Option 2: Privatized system of housing finance with assistance from FHA, USDA and Department of Veterans’ Affairs for narrowly targeted groups of borrowers and a guarantee mechanism to scale up during times of crisis:

There are other costs to this model as well. Aside from the uncertainty around how well it would be able to scale up in times of crisis, there is the same concern with the access issues that we face with the prior option. Access to credit, particularly the pre-payable, 30-year fixed-rate mortgage, would likely be more expensive under this option than under the following one.

Option 3: Privatized system of housing finance with FHA, USDA and Department of Veterans’ Affairs assistance for low- and moderate-income borrowers and catastrophic reinsurance behind significant private capital:

The strength of this option is that it likely provides the lowest-cost access to mortgage credit of the three options. While mortgage rates would be increased by the cost of the premium and the first-loss position of private capital, this reinsurance will likely attract a larger pool of investors to the mortgage market, increasing liquidity. This, in turn, could help to lower the prices and pricing volatility of mortgages and increase the availability of the pre-payable, 30-year fixed-rate mortgage.

However, this option, too, comes with costs. The increased flow of capital into the mortgage market could draw capital away from potentially more productive sectors of the economy and could artificially inflate the value of housing assets…If the oversight of the private mortgage guarantors is inadequate or the pricing of the reinsurance too low or recoupment of costs too politically difficult, then private actors in the market may take on excessive risk and the taxpayer could again bear the cost.

The Treasury’s full report is available here

Also, be sure to read the Treasury’s press release

FHA increases premium

Another example of rising mortgage costs came on Monday when the Federal Housing Administration (FHA) announced the increase of their annual mortgage insurance premium:

As part of ongoing efforts to strengthen the Federal Housing Administration’s (FHA) capital reserves, FHA Commissioner David H. Stevens today announced a new premium structure for FHA-insured mortgage loans increasing its annual mortgage insurance premium (MIP) by a quarter of a percentage point (.25) on all 30- and 15-year loans.  The upfront MIP will remain unchanged at 1.0 percent.  This premium change was detailed in President Obama’s fiscal year 2012 budget, also released today, and will impact new loans insured by FHA on or after April 18, 2011.

Bottom line: Mortgage costs are rising.

-What’s going with mortgage rates? Well, they’re rising too

3 Responses to “The cost of mortgages is going up!”

  1. Hal (GT) Says: February 16th, 2011 at 6:49 pm

    You would think that with all the money the FED has injected into the system that the mortgage costs would be going down.

  2. Tim Manni Says: February 17th, 2011 at 11:16 am

    Hey Hal, The Fed’s program was more designed to be an indirect influence on rates. If you think about, rates are still historically low. Thanks for your comment, Tim

  3. Mike Says: February 18th, 2011 at 5:29 am

    The mortgage market is already volatile enough without making it even more difficult for buyers and consequently sellers. These proposals seem to hit the average American the hardest when perhaps a tiered approach may yield the same results but impact less people.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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