The cost of mortgages is going up!by Tim Manni
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.
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.