We are enjoying extremely low interest rates, for sure. With the global economy, the national economy and unemployment where they are, no one is predicting a dramatic change in rates any time soon. BUT, on Monday, the Obama Administration floated out some interesting proposals they are considering through the Acting Director of the Federal Housing Finance Agency (FHFA), Edward DeMarco. It appears that two significant changes in housing financing are on the table.
You should know that FHFA is the new regulator that is overseeing the restoration of viability of Fannie Mae and Freddie Mac. They are charged with reducing the risk on loans delivered to the GSEs in order to protect the U.S. taxpayer.
In a speech this past Monday, Mr. DeMarco mentioned two potential changes:
Increasing the role of the private sector to lessen the risk held by the public sector.
The method mentioned was increasing the insurance coverages assumed by the PMI (Private Mortgage Insurance) companies. One result could be higher insurance rates for loans where customers put less than 20% down. The second wrinkle is potentially more damaging…the idea that PMI coverage may be required on loans with 21%-25% (maybe even 30%) down! Clearly, this is an attempt to get more fee income to the MI companies to entice them to remain viable and continue to serve those with less than 20% down. Regardless, the net result is that more people will have to pay more money for private mortgage insurance. “How much?” and “To what extent?” is yet to be defined; however, more costs to more people is bad.
Recognize that the GSEs charge fees. Explaining what they are and why they exist is a topic for a different day. Suffice to say, today, fees are fairly standard geographically speaking. Mr. DeMarco is talking about adjusting the fees (i.e., increasing them) for areas that have proven more risky. This proposal means the hardest hit areas will have the most difficult time recovering because the increased fees always get passed on to the consumer. Rather than “spread the risk”, FHFA is talking about punishing the defenseless.
The predictable outcome of these “strategies” is higher costs to the consumer which makes buying a home more expensive. As costs go up, desire to buy goes down (as does the borrower’s ability to be approved for a mortgage).
Message: Buy sooner rather than later!