In the last 10 days, it has become apparent that homeownership in the U.S. will be more of a privilege than a right in the coming years.
Last week, the Obama administration released its thoughts on how to deal with mortgage giants Fannie Mae and Freddie Mac, and this week, the Federal Housing Administration, which insures mortgages for lenders, announced that it is raising the annual mortgage insurance premium beginning April 18.
As a result, mortgages are going to become more costly.
The FHA, which last fall changed the way it collected mortgage insurance, announced that it is raising the annual premium by 25 basis points. For most FHA loans it will go from 90 basis points of the base loan amount to 115, meaning that FHA borrowers will be making a higher monthly payment.
Borrowers who can’t afford a high down payment resort to FHA, which only requires a 3.50 percent down payment. In return, borrowers must pay two varieties of mortgage insurance, a one-time upfront fee and then a monthly mortgage insurance premium. The upfront mortgage insurance is equal to 1 percent of the base loan amount and is added to the overall loan. Then there is annual premium that is spread over 12 months each year. That is the portion that is increasing.
In its announcement, the FHA stated that it anticipates the new rate will have “minimal effect” on borrowers while “significantly” strengthening the capital requirements in the Mutual Mortgage Insurance Fund, which allows FHA to remain financially sound.
So how does it affect the borrower? Let’s say on a $175,000 base loan amount, the current monthly FHA mortgage insurance will be $131.25. Effective April 18, the monthly insurance for the same loan will rise to $167.71, a $36 increase. That may not seem like a major increase, but to borrowers whose debt-to-income ratio is just barely qualifying them, that could become a roadblock to getting a mortgage.
As for Fannie Mae and Freddie Mac, the future is not so certain. Both entities have suffered huge losses in the housing market and were taken over by the government in September 2008. It was then that it became clear that something had to be done with them.
When the administration released its suggestions on how to reform the institutions that are responsible for about half of all mortgages in the country, it basically came up with three scenarios:
(bullet) The first would be to vastly reduce Fannie and Freddie’s power and put more of the mortgage origination business into the private sector.
(bullet) The second option would complement FHA by creating a backup mechanism that would be activated in case of another housing or financial crisis.
(bullet) The third would be limited government reinsurance of a select range of mortgage securities that would be designed to keep the mortgage markets liquid in case again of another crisis.
The bottom line is that Fannie and Freddie are going to change. The government wants to decrease its role in securitizing mortgages. So under these new plans, Fannie and Freddie will be implementing reforms such as making the minimum down payment for borrowers 10 percent.
And if that is the case, then you can expect most private lenders to do the same. Also suggested is to allow the expiration of the Fannie and Freddie high-balance loan limits that are in place. The high limit is $560,000 for the Baltimore metro area, and it seems that will come to an end on Sept. 30.
Also, expect the cost of doing business with Fannie and Freddie to go up. We’ve already seen it with higher pricing adjustments based on credit scores and loan to values, so there is reason to believe that more adjustments will be on the way.
These are just some of the ideas that are taking shape, and at least the one thing that Washington does seem to understand is that it can’t just push this on a still-fragile housing market.
However, change is coming, and it seems like we are headed for an era where homeownership will have to be earned.
Robert Nusgart is a loan officer with Prospect Mortgage LLC., which is associated with The Strata Group in Baltimore. He can be reached at 443-632-0858 or by email at Robert.Nusgart@prospectmtg.com. Visit his website at www.RobertNusgart.com for the latest mortgage and financial news.