THE BASIS POINT

WeeklyBasis 9/18/10: Big FHA Loan Cost Increase Oct 4, Advice For Refinancers

Rates ended last week even vs. previous week. Record low rates are holding as we head into the September 20 week. Rates and fine-print below. Also below are three topics: (1) Fed meeting and home sales preview, (2) critical alert on FHA loan cost increases, and (3) advice for refinancers.

Rate Factors Week of September 20
Fed rate policy and housing data are front and center next week. Tuesday is the sixth Fed rate meeting of 2010. So far only Kansas City Fed president Thomas Hoenig has voted against near-zero overnight rates all year, but St. Louis Fed president James Bullard’s recent public comments allude to his changing stance. If Bullard adds a dissenting vote, mortgage bonds would sell off and rates would rise.

As for housing data, all eyes will be on August New and Existing Home Sales reports Thursday and Friday. Rates dropped last month when these two reports both posted record lows in their first month after federal homebuyer tax credits expired: July New Home Sales were down 32.4% year-over-year, and July Existing Home Sales were down 25.5% year-over-year.

Big FHA Mortgage Insurance Increase October 4
Effective for FHA loans October 4, 2010 or later, FHA mortgage insurance (MI) will be increasing on new loans—existing FHA borrowers are unaffected. Using money from MI premiums, the FHA helps troubled borrowers and backs lenders if loans go into foreclosure. Mounting foreclosures in recent years have depleted the FHA’s fund and this fee hike is to replenish the fund. Up-front mortgage insurance is now 2.25% of loan amount which can be financed or paid at closing. Monthly mortgage insurance is now .5% or .55% (depending on down payment) of loan amount and paid monthly for at least 5 years. A September 1 FHA bulletin confirms that up-front MI will drop to 1% and monthly MI will rise to .8 or .9% (depending on down payment) on October 4. On a $500k loan, these proposed changes mean an estimated $112 monthly cost increase. FHA loan shoppers need to work with their mortgage advisor now to evaluate the impact of these changes.

Just as FHA mortgage insurance (MI) hikes are coming, private MI companies have relaxed guidelines. Here’s more on private mortgage insurance options.

Advice For Refinancers
All time record low rates today are 2.25% lower than rates just before the crisis hit in August 2007. No surprises that everyone is trying to refi. There are two key differences today:

(1) the mortgage industry employs half as many people as it did then. The good news is that the survivors are (for the most part) better qualified than before. The bad news is that your refinance loan will most likely take 40-60 days. You need to plan this timeline accordingly with your mortgage advisor in order to avoid timing or fee surprises.

(2) Regulations make it more difficult and costly to obtain a loan. Perhaps the biggest issue is that refinancers, in most cases, will need to pay for a home appraisal up front before they will even know if a refinance transaction is possible. Lenders will not approve a refi without an appraisal, and lenders are now prohibited from obtaining value estimates from appraisers before ordering an appraisal. The best alternative to evaluate the viability of a refi is for homeowners to get a value estimate from the realtor who sold them their home and share that data with your lender when discussing options.

CONFORMING RATES ($200,000 – $417,000) – 0 POINT
30 Year: 4.375% (4.49% APR)
FHA 30 Year: 4.375% (4.51% APR)
5/1 ARM: 3.25% (3.37% APR)

SUPER-CONFORMING RATES ($417,001 to $729,750 cap by county) – 0 POINT
30 Year: 4.75% (4.87% APR)
FHA 30 Year: 4.75% (4.87% APR)
5/1 ARM: 3.75% (3.87% APR)

JUMBO RATES ($729,751 – $2,00,000) – 1 POINT
30 Year: 5.125% (5.24% APR)
5/1 ARM: 3.875% (3.99% APR)