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Reunion of higher mortgage costs+ rates; Regulators want lenders to have “skin in the game”. This is like Custer at Little Big Horn bellowing “take no prisoners” as the Indians approached.

Background
Passing of the Dodd-Frank act July 21, 2010 established rigorous standards and supervision to protect the economy and American consumers, investors and businesses, and ends taxpayer funded bailouts of financial institutions. This represents a significant change in the American financial regulatory environment affecting all Federal financial regulatory agencies and affecting almost every aspect of the nation’s financial services industry.

Current
The Board of Govenors of the Federal Reserve: March 29, 2011
The Federal Reserve Board proposed a rule to differentiate qualified residential mortgages vs non-qualified residential mortgages. Most noteworthy of the qualifying standards are down payment requirements which are; 20% down payments on new loans, 25% on refinances and 30% on cash out home equity loans. The loans comprised of lower down payments would be considered of lower quality thus a lender making this loan is required to retain 5% of the asset in order to package and resell thereby having “skin in the game”.

The rule proposed seeks to ensure that the amount of credit risk retained is meaningful, the idea being banks are then more careful in their lending standards. Some history, 20% of new loans in 2010 had down payments of less than 15%. Regulators have patterned the QRM from Redwood trust the only company since 2007 to offer non- government backed mortgage debt. In its portfolio of home loans retaining 5% of the risk, home loans averaged 40% cash down payments. You do the math and figure how many of these loans get done in the future.

The exemption to these new standards is government backed loans such as Fannie Mae, Freddie Mac, FHA and VA, these institutions accounted for 96% of all mortgage backed closings in 2010. Details that will get the attention of non-first time home buyers will be, FHA’s Dallas Texas cap of $271,050, this varies based on the county and state. Also, all 30yr mortgages will pay PMI regardless of down payments for a 5 yr. minimum term and exclude refinance for non- primary residences. Furthermore the Obama administration and Congress are considering ways to wind down Fannie Mae and Freddie Mac to reduce the government’s role in housing.

The upshot is increases and a flat out end to many re-finances. Government backed mortgages will see tiered mortgage insurance rates based on the amount of down payment brought to the table in addition to any fluctuations in the underlying interest rates .

My opinion is based on 3 decades around the home finance industry and the creativity with which lenders have responded to challenges. We will see variations debated on effects, however the die is cast on future mortgage costs.