Mortgage rates move lower for 3rd week

Mortgage rates fell slightly for the third week in a row.

The benchmark 30-year fixed-rate mortgage fell 8 basis points this week, to 5.15 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.45 discount and origination points. One year ago, the mortgage index was 5.59 percent; four weeks ago, it was 5.24 percent.

The benchmark 15-year fixed-rate mortgage fell 6 basis points, to 4.56 percent. The benchmark 5/1 adjustable-rate mortgage fell 5 basis points, to 4.63 percent.

Mortgage rates have held fairly steady since mid-December, ranging as low as 5.13 percent and as high as 5.33 percent. The Federal Reserve is buying most mortgage-backed securities being created nowadays. Thus, the Fed is in the position of being able to manage mortgage rates -- and it looks like the Fed wants them in the vicinity of 5.25 percent.

Fed officials say they plan to stop buying mortgage-backed securities by the end of March. That might accompany a rise in mortgage rates. The Fed hasn't tipped its hand on whether it will resume buying mortgage-backed securities if the central bank's exit from the market causes rates to rise sharply.

FHA will cost more

The federal government has another change up its sleeve -- raising the price of getting an FHA-insured mortgage. The Federal Housing Administration requires lower down payments than conventional mortgage programs. Thus, FHA-insured loans are popular. About one-quarter of borrowers get FHA-insured loans nowadays, so the higher prices will affect a lot of homebuyers and refinancers.

The FHA doesn't lend money; instead, it insures mortgages underwritten by private-sector lenders. FHA insurance protects the lender from losing money if the borrower defaults on the mortgage. Borrowers pay for FHA insurance twice: first, with a lump-sum payment called the upfront premium, and subsequently in smaller monthly payments. The FHA is going to increase the upfront premium this spring, and will ask Congress to allow it to raise the monthly premiums.

Right now, the upfront premium is 1.75 percent, which means that someone borrowing $100,000 would pay $1,750 at closing. (This portion of the FHA premium can be rolled into the loan amount.) The upfront premium will be raised to 2.25 percent this spring, FHA Commissioner David Stevens announced. This premium increase amounts to $500 more for every $100,000 borrowed.

That's the annual premium. The monthly premium is more complicated, because it varies depending on the loan's term and the original loan-to-value ratio. For most homebuyers, the monthly premiums are either $41.67 or $45.83 for every $100,000 borrowed, which amounts to $500 or $550 annually per $100,000 borrowed. (It's the higher amount if the borrower made a down payment of less than 5 percent.) Stevens said he wants to raise monthly premiums, too -- but the FHA has to seek Congress's permission to do so because the monthly premiums are as high as they can legally go. Stevens didn't say how much he wants to raise the monthly premiums.

The FHA says that if it gets the authority to raise the monthly premiums, "the second step will be to shift some of the premium increase" from the upfront payment to the monthly payments. In other words, the 2.25 percent upfront premium would be temporary, and would eventually be reduced.

The premium increase is the biggest change that the FHA announced, but there were a couple of others that directly affect borrowers. The FHA will reduce the amount of money that the seller can contribute to the buyer's closing costs, from the current 6 percent of the home's value to 3 percent. This change will reduce "incentives to inflate appraised value," according to the FHA.

And the agency will require a credit score of at least 580 to qualify for the FHA's 3.5 percent down payment program. A borrower with a lower credit score would have to come up with a down payment of at least 10 percent. This change won't have much of an effect, because most lenders require a credit score of 620 or 640 for FHA borrowers, anyway.

All of these changes are being made because too many FHA-insured mortgages have gone bad and the agency's loan-loss reserves are depleting. Charging higher premiums will replenish the reserves.