2011 is going to be an interesting year to buy a house. Fannie Mae and Freddie Mac, the two government back mortgage institutions, are buckling under debt. The Obama administration is determined to find a solution between total privatization of the mortgage market (no government backed loans) and total nationalization (all loans government backed).
Right now, federal control of the market is close to 90%. The administration would like to see that reduced down to about 20% or less. What that means could be a serious jolt to the housing market for buyers. In order to do that, the government will have to make their loans less attractive and more difficult to obtain. Guidelines will be stricter and buyers will be encouraged to find non-government backed loans with better terms.
Some specific ideas being considered:
Higher interest rates for FHA and other government loans
Higher down payment requirements. Currently FHA loans require 3.5% down. Under consideration is a requirement for 5% down payment.
Higher funding fees to buyers. FHA loan fees went up last year. They will likely go up another quarter of a percent this year as well.
Cutting the maximum loan limit for FHA loans in high cost areas from $729,500 to $625,500. Some are even pushing a return to the traditional FHA maximum of $417,000. That change would adversely affect areas like Monterey County beach communities and damage the move-up buyer market that counts on reasonably low cost jumbo loans. This means the “upper-middle” class could be in for some high interest rate loans soon. This will likely cause an already declining market to accelerate that decline faster.
Lower allowed closing costs credits. Currently guidelines allow the sellers to credit buyers up to 6% of the purchase price on FHA loans to cover the buyer’s closing costs. It’s expected that FHA will change that to only 3% closing cost contributions from the seller allowed.
This means buyers will have to have a lot more cash to use these loans and they will have to pay a higher interest rate as well.
Right now, FHA loans account for almost 30% of the home purchases nationally. The government is determined to revert to the “historic” average market share of 10 to 15 percent. These changes will help them do that, but home affordability will also suffer. Clear message: buy now! A 1% increase in interest rate means a 10% decrease in buying power. As always, you are encouraged to email me at email@example.com