For years, the housing market has given Americans little except bad news. Now falling home prices have forced policymakers to take a number of actions in response, and in doing so, they're changing the way you'll get a mortgage -- and how much you'll pay for it.
The last bastion for low-down payment buyers
From one corner of the mortgage market, the Federal Housing Administration announced last week that it would boost the amount that borrowers under its mortgage loan program have to pay each year for mortgage insurance by a quarter percentage point. Effective April 18, that will raise the FHA's insurance premium for 30-year mortgages to between 1.1% and 1.15%. The new premium for 15-year mortgages will range from 0.25% to 0.50%. So on a $240,000 loan, borrowers will pay $50 more per month to cover the higher cost of mortgage insurance. The move will help the FHA shore up its capital reserves.
The move may seem insubstantial, but it affects the margins of the mortgage business right now. Whereas the popular conception is that private mortgage lenders Citigroup
For most loans, the government agencies involved are Fannie Mae (OTC BB: FNMA.OB) and Freddie Mac (OTC BB: FMCC.OB). But the FHA requires smaller down payments from borrowers -- as little as 3.5% of the value of the home, compared with 5% to 15% or more for Fannie. Even though the FHA started requiring credit scores of at least 500 for borrowers under its mortgage lending program and requires a higher 10% down payment for those with scores under 580, that's still well below the level at which Fannie and Freddie will back mortgage loans at all.
As a result, banks have jumped on FHA loans. In 2010, more than 30% of home purchases had FHA mortgage, compared with less than 6% in 2005. Wells Fargo has taken advantage of FHA's low credit-rating requirements to offer FHA-backed loans to a wider range of potential customers.
More "protection" for borrowers
In an unrelated move, the Federal Reserve put new restrictions on mortgage brokers that will take effect on April 1. In particular, brokers can no longer receive rebates from lenders based on the terms of the loans they make. Under old practices, brokers often got bigger payments from lenders for mortgages that had above-market interest rates or other terms that were favorable to lenders. In addition, brokers can't take compensation both from lenders and from the borrowers they represent in the same transaction.
Brokers argue that the changes will make them unable to give their clients the same level of service as in the past. Although some abusive brokers put many homeowners into loans they couldn't afford during the housing boom, most brokers say that they help clients find the best deals among big banks that themselves have incentives to take advantage of borrowers.
Regulators would likely point out that getting rid of bad actors in the mortgage brokerage industry is the most important thing to accomplish, and that the new regulations achieve that. But if you're looking to get a mortgage, understand that regardless of whether you're working with a broker or directly with a bank or other mortgage lender, you need to look out for yourself and your own interests. In particular, knowing how the person you're working with will get compensated for the work they're doing for you is crucial. If something seems to be free, then you can be almost certain that someone else is paying the professional you're working with -- and knowing who that is will help you understand any conflict of interest that may exist.
Be a smart borrower
From an investing standpoint, these two moves suggest that big banks may be the winners as mortgage alternatives get scarcer. At the same time, the move toward FHA and other government-backed mortgages have hurt private mortgage insurers PMI Group
With the housing market still on the skids, you have to make sure that the mortgage you get is the best you can find. Even as agencies like the FHA, Fannie, and Freddie take steps to recover from the damage the housing bust has caused, you still need to do what you can to control costs and make the most of the situation.
Fool contributor Dan Caplinger hopes he'll never have to get another mortgage again, but he knows better. He doesn't own shares of the companies mentioned in this article. The Fool owns shares of Bank of America and Wells Fargo, and through a separate account in its Rising Stars Portfolios also has a short position on Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy will always be the same.