March 25th, 2011

Mortgage costs expected to rise with market in a “swirl”



int rate QMarkLast year, many mortgage market analysts didn’t think mortgage rates could go any lower. After reaching 50-plus-year lows, the expectation was for mortgage rates to consistently trend upwards (where else could they go?). Yet with moderate economic improvement over the last few months, and most recently, several tumultuous global events (Japan disasters, unrest in the Middle East and Africa), mortgage rates have found little upward momentum.

However, outside of current mortgage rates, the mortgage market is in the midst of a regulatory whirlwind that has the market in a “swirl.” HSH.com’s VP Keith Gumbinger shares nine issues “which all contribute to the uncertainty in the market and are a deterrent to improving lending conditions, reducing costs or to making the mortgage market a less-messy landscape.”

Let’s take a look at a few of the issues, and keep in mind how they’re going to impact your bottom line (emphasis added):

1. Risk-based pricing adjustments

As far as cost increases go, both Fannie Mae and Freddie Mac increased their “Loan Level Pricing Adjustments” (LLPA; Fannie) and their “Post-Settlement Closing Fees” (Freddie). Applied at the intersection of your credit score and the amount of equity or down payment you have, these increase the cost to the consumer to help Fannie and Freddie offset the risks of making loans to lower credit or equity borrowers. However, for the first time this spring, these apply not just to risky borrowers, but even to those with stellar credit and fairly deep equity stakes. Basically, costs have risen for all borrowers.

2. FHA insurance cost increases

Not the same as the LLPAs above, the FHA — which recently changed its insurance premium structures to lower initial costs in favor of higher recurring (annual) costs — has decided to add another 0.25 percent increase to its annual mortgage insurance premium. This adds an additional $250 to the annual cost for a $100,000 loan in the first year. It’s not a huge increase, but no additional cost increases are welcome in this housing market.

5. Dodd-Frank and QRM 

As far as we know, QRM isn’t a radio station anywhere, but rather a vague concept which may come to dominate the mortgage securities industry. The Qualified Residential Mortgage (QRM) will eventually be the “standard” mortgage structure, as it will be the mortgage(s) which won’t require loan sellers to retain as much as 5 percent of the value of the loans sold into securitization. At present, and while the definition isn’t set just yet, this is likely to be a conforming 30-year fixed-rate mortgage with a high credit score and down payment requirement (possibly at least 20 percent down). All other loans being sold or packaged into securities will require the firm(s) who securitizes the loan to hold back a pile of cash against possible loss, called “skin in the game.” Five percent of hundreds of billions of dollars adds up to a lot of money that needs to be held back, which reduces funds available to lend… and the institution of such a standard will make loans outside any narrow definition more scarce and expensive.


Coming soon to a mortgage market near you will be a bureaucracy with sweeping regulatory authority. How the new agency will change the mortgage and consumer-lending markets will remain unclear for some time, but borrowers should start to familiarize themselves with a concept that lenders have been aware of for some time: regulatory risk. Regulatory risk is a part of any regulated business model and has impacts (in this case) on the availability and the price of credit. A climate of stable regulations can become well-modeled with known costs and implications, but an unclear or stormy one is hard to plan for or quantify. In such a situation, “erring on the side of caution” becomes the order of the day, with potential effects on the price of credit tending toward the high side until the true costs of conducting business are known. In a worst case scenario, a lender may simply decide to pull away from lending at all until at least some clarity returns. If nothing else, the initial expected focus of the new bureau on mortgage disclosure reform will likely drive up the cost of making new loans to some additional degree.

“This spring (and beyond), everything from front-end originator compensation to back-end loan failure management (and everything in between, it seems) is in this regulatory swirl at the moment,” said Gumbinger. “Homebuyers and homeowners are left to navigate this mess as they search for credit to buy and refinance homes this year. Here’s wishing them ‘Good luck!’”

Be sure to read “The 2011 mortgage market swirl” in its entirety.

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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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