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November 28th, 2011

Mortgage rates steady, but would new plan raise rates?

by Peter Miller


int rate QMarkFor yet another week, mortgage rates have remained near historic lows. Yet a proposed plan out of Washington could send mortgage rates in the opposite direction.

While the U.S. economy continues to show grudging signs of improvement, the Eurozone mess is proving to be more than a sufficient counterweight to any modest improvements. Both global and domestic economic troubles are contributing to our current low interest rate environment. As central banks keep short-term rates low and as investors continue to seek shelter for their assets, mortgage rates remain on a low and even path (and for that, potential homebuyers and refinancers can be thankful).

Mortgage rates hold steady

According to the latest figures from HSH.com’s broad-market mortgage tracker, the overall average rate for 30-year fixed-rate mortgages (conforming, non-conforming and jumbos) rose by just two basis points (0.02 percent) from the week prior, rising to an average 4.35 percent.

Important to a large portion of today’s buying and refinancing market, 30-year FHA-backed mortgages slipped to a new record low of 3.92 percent.

Despite lots of economic news and international troubles, mortgage rates barely moved during November and are holding at historical lows. But will a proposed piece of legislation put mortgage rates back on the rise?

A private-sector takeover could increase costs

Sen. Bob Corker, R-Tenn., has proposed the “Residential Mortgage Market Privatization and Standardization Act of 2011,” an effort that seeks to replace Fannie Mae and Freddie Mac with firms from the private sector. This shift of power means we might see increased costs to the consumer.

According to a summary of the bill, its purpose is to gradually reduce “Fannie Mae and Freddie Mac over the course of 10 years by forcing the institutions to guarantee the credit on a decreasing percentage of the mortgage backed securities they issue. It also takes steps to bring uniformity and transparency to the housing market so that private capital can gradually replace the GSEs.”

In his latest book “Way Too Big to Fail,” finance expert William A. Frey explains that a private-sector takeover of the secondary mortgage market will likely add an additional one percent to the cost of real estate financing. While that may not sound like much, it’s 25 percent higher than today’s costs and means your next mortgage will be significantly more expensive.

Replace the QRM

Corker said this country needs uniform underwriting standards to replace the Qualified Residential Mortgage (QRM) and risk retention requirements created by the Wall Street Reform. Corker’s idea is to require a 5 percent minimum down payment and a fully documented loan application.

Hidden in this simple formula are several interesting points worth noting:

First: FHA, VA and conventional loans are automatically defined as QRMs under the Wall Street Reform. If loans suddenly require 5 percent down, higher down payments for FHA and VA borrowers could lead to higher mortgage rates and fewer home sales.

Second: There is little evidence that small down payments lead to more defaults or foreclosures. According to the Mortgage Bankers Association, VA loans—which require nothing down–have the lowest level of foreclosures.

Third: Corker would get rid of a lender’s 5 percent risk-retention reserve that the Wall Street Reform now requires. Lender’s today have little interest in making high-profit, high-risk loans because they must retain that reserve to protect against future losses. The Corker plan appears to dump any requirement for lender responsibility while increasing the upfront cost for most borrowers.

In my opinion, the Corker proposal basically returns us the days of the real estate run-up–the irresponsibility, non-regulation and greed that lead directly to the low home prices we face today. Furthermore, we could see a rise in what otherwise are historically-low mortgage rates.

Tim Manni and Keith Gumbinger contributed to this post.

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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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