WARNING: Troubled Markets Ahead

I wrote last month about how FHA has been facing problems keeping its losses from foreclosure under control and some of the proposed solutions.

Yesterday I read more on the issue.  FHA is looking at many options but here are a few that are on the table:

• Higher Downpayments - raising downpayments from 3.5% to 5%
• Higher Mortgage Insurance Premiums - increase mortgage insurance premiums from 1.75% to 2.25% of the loan amount
  
• Cut Seller Concessions - Cut allowed seller concessions from 6% of purchase price to just 2%.
• Tighter Underwriting Guidelines - move to risk-based lending rather than today's generous model

These are some significant changes if they are implemented.  In discussing this situation with a loan officer collegue, he indicated that it may be possible to "premium price" loans so that many of these expenses can be paid for the buyer.  In other words, since lenders give financial incentives to brokerages to sell higher interest rate loans, increasing the loan interest rate above prevailing par rates could provide enough incentive money to pay for buyer closing costs or MI premiums.  The drawback of course is that mortgage payments go up when you increase rates and since buyers shop for payments more so than price points, they must be willing to accept less loan (and home) for the same payment.  It means buyers will have to expect to get less home for their money...an awkward adjustment at best.

Now the big question is WHEN will FHA make these changes?

That brings us to the next interesting piece of news.  Interest rates have been incredibly low of the last year because the Fed has been buying Fannie Mae and Freddie Mac (Agency) mortgages.  This artificial demand for agency mortgages has pushed rates down. The Fed can't buy the debt forever.  In fact, we know the date that they are scheduled to stop buying - MARCH 31, 2010.

What will this do to rates?  By all estimations, it will increase rates .3 to .5 above where they are today.  So, if rates jump up after the Fed purchases end, and FHA drops the hammer on guidelines, we may see another round of market contraction sometime in 2010.  It will be tough to "premium price" a mortgage if the rates are already inflated due to natural market conditions.  If this scenario plays out, we may actually not be at the bottom of sales volume or pricing for homes yet.

Although I am encouraged that most of the excesses have been blown off from the market bubble in Utah, we are entering a new phase of shifting fundamentals that include structurally high unemployment and wacky government interference.  Unemployment doesn't scare me, the market has already been priced to our existing unemployment.  It's the government interference in the market, however, that keeps the ship rocking.

Lets brace ourselves for a very interesting 12 months ahead.