For the first time in its history, the FHA changed its funding fees and mortgage insurance structure this week.  FHA-insured home loans are now subject to a risk-based pricing adjustment, as shown by the table above.

Because of risk-based pricing, FHA home loans are now more expensive for borrowers with less-than-ideal credit profiles, and less expensive borrowers with perfect ones.

Prior to the changes, most FHA borrowers paid an up-front fee of 1.500 percent, plus on-going annual mortgage insurance payments equal to one-half-percent on the amount borrowed.

FHA-insured mortgages have grown in popularity this year because, while the guidelines of other mortgage products have tightened, FHA program guidelines have remained loose.  FHA allows 3 percent downpayments on purchases, for example, and allows “cash out” refinances to 95 percent.

Fannie Mae and Freddie Mac do not.

(Image courtesy: FHA.gov)

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This is bad news for both home buyers and homeowners in want of a new mortgage because rising costs are inflationary and inflation causes mortgage rates to move higher.

Predictably, mortgage rates jumped Wednesday morning after the CPI data was released and they edged higher throughout the rest of the day.

This morning, mortgage rates are higher again on unexpected strength in housing starts and building permits across the country.

On most mortgage products, rates are now higher by 0.250 or more since Tuesday.  This is equivalent to $192 in extra mortgage payments per year per $100,000 borrowed.

(Image courtesy: The New York Times)

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• Take citywide income data as reported by HUD
• Match it against purchase prices from court records
• Run the math using “prevailing interest rates” from Wells Fargo

A city is considered “more affordable” if increasing numbers of “average families” can afford “average homes”.  It’s not surprising, therefore, that the Forbes list is dominated by cities in which home prices have plummeted over the last year, and in which he economy is relatively sound.

This may suggest that a housing rebound is already underway in several of the cities listed as Increasingly Affordable U.S. Housing Markets, including:

• San Diego, CA
• Orlando, FL
• Riverside, CA
• Phoenix, AZ
• Las Vegas, NV

Read the complete study and its results at Forbes.com.

(Image courtesy: Memorable San Diego Vacations)

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This is a negative for active home buyers because American homeowners repay their mortgage interest in U.S. dollars.  When the dollar loses value, so does the value of those interest payments so mortgage rates end up increasing in order to attract new investors.

Another reason why mortgage rates are higher this morning is that June’s Producer Price Index registered much higher than was expected, posting its largest one-month gain since November 2007.

PPI is a lot like the Cost of Living index, except that it measures operating costs for businesses instead.  When business costs are increasing, they are often passed onto consumers and this is why rising PPI is thought to be inflationary and inflation — like a weakening dollar — pressures mortgage rates to rise.

So, while Monday’s rate improvements haven’t completely erased, today’s action reminds us that mortgage markets wait for no one and yesterday’s mortgage rates rarely carry forward.

Especially when inflation is in the mix.

(Image courtesy: The Wall Street Journal)

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As financial markets fell under stress, most people missed the strong points that emerged about the U.S. economy last week:

1. Fewer Americans filed for unemployment benefits
2. Wal-Mart reported stronger-than-expected sales
3. Consumer confidence rose for the first time in 7 months

And, also worth noting: homes under contract slipped but remained above the lowest levels of the year, suggesting a potential housing floor.

But, the biggest story of last week was the stock-price collapse and subsequent pressure on Fannie Mae and Freddie Mac.  It should be the biggest story of this week, too.

So far, Fannie and Freddie’s issues appear to be more psychological in nature than fundamental, but to an already roiled market, negative perception can quickly become reality.  This is one of the biggest reasons why both the Federal Reserve and the U.S. Treasury made public statements Sunday in support of Fannie and Freddie, and in advance of the Asian markets’ opening.

Other events that may move markets this week include Retail Sales data on Tuesday, consumer inflation data on Wednesday and Ben Bernanke’s two-day testimony to Congress which takes place over both Tuesday and Wednesday.

It’s unclear in which direction mortgage rates will go, but because the markets are on-edge, expect rate movements to be sharp and quick.  In other words, if you’re in the market for a mortgage this week and you see a rate and payment you like, don’t mess around with it — just get it locked.

(Image courtesy: Wall Street Journal Online)

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1. Rising oil costs
2. Rising food prices
3. Higher Cost of Living

On the other hand, there are precursors to recession in the economy, too:

1. Mounting job losses
2. Less access to credit and/or loans
3. Falling consumer confidence data

The pie chart at right illustrates just how uncertain the “experts” are about the state of the U.S. economy.  They’re evenly split, right down the middle.

This isn’t good news or bad news for Americans, per se, but it does legitimize the idea that the economy’s future direction is in doubt.  This is one of the biggest reasons why there’s been no clear direction for mortgage rates or stock markets since the start of the year.

Until the picture gets more clear, we can expect the volatility to continue.

(Image courtesy: Wall Street Journal)

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A sampling of RealtyTrac’s data includes:

1. California : Foreclosures down 4.54 percent
2. Georgia : Foreclosures down 14.91 percent
3. Arizona : Foreclosures down 0.07 percent
4. Michigan : Foreclosures down 6.00 percent
5. Illinois : Foreclosures down 15.65 percent

However, the improving nature of the data is not what is making news this morning. Instead, the press is reporting that foreclosures are up by half since last year and that bank seizures have tripled.

And while the annual data may be accurate, that doesn’t mean that it’s necessarily relevant to home buyers and home sellers across the country.

This is because people buying and selling homes don’t usually boast an “annual” mentality; when someone’s an active participant in the real estate market, the mentality is “right now”.

In other words, annual data fits an economist, but month-to-month data fits you.

June’s foreclosure data may be the start of a trend, or it may be a blip. It’s really too soon to tell. But the RealtyTrac data reinforces what real estate professionals already know — that markets all over the country are showing signs of life.

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The speed at which Monday’s and Tuesday’s respective rallies tore through mortgage markets illustrates how deep the uncertainty that surrounds the U.S. economy really is.

One reason why the market swings so quickly is that, lately, traders are tending to follow the herd.

As a mortgage rate shopper, it’s outstanding when the herd is moving in your favor.  However, when the herd moves in the opposite direction, the impact on your monthly housing cost can be huge.

Volatility has been the common theme for mortgage rates in 2008 and it’s likely to remain a factor until the nation’s economic picture gets a little bit more clear.

Some experts are saying that may happen in 2009.  Therefore, you should be prepared for rapid mortgage rate movement and act accordingly when you see a rate-and-payment combination that makes sense for your household budget.

The payment you see in the morning is likely to be gone by the afternoon.

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Monday, Alt-A mortgage lender IndyMac Bank stopped accepting mortgage applications and it’s likely that other Alt-A lenders will likely follow suit.

Alt-A loans are ones in which borrowers can’t (or won’t) verify one of two major underwriting criteria:

1. Evidence of income
2. Evidence of assets

Since the Credit Crunch began last July, Alt-A mortgages have been a steady source of funds for “in-between” borrowers — those that are not quite prime, and not quite sub-prime. IndyMac was among the largest lenders of its type and had outlasted many of its peers.

Its position as a market leader and subsequent exit from lending means that the remaining Alt-A lenders will likely make one of two choices in the coming weeks:

1. Raise rates and fees because of greater Alt-A mortgage risk, or
2. Follow IndyMac’s lead and exit mortgage lending altogether

Both outcomes would be harsh for home buyers of all types because when any large bank takes mortgage-related losses like IndyMac just did, it tends to create major risk aversion in the market.

Risk aversion impacts everyone – even the “good” borrowers.

Banks have been nervous about lending for several months and so they’d rather pass on an “average” mortgage application rather than risk getting stuck with a potentially “bad” one. IndyMac’s exit may cause fewer mortgages to get approved.

In other words, buyers eligible for financing today may be ineligible tomorrow.

Therefore, if you’re a home buyer and you know your credit profile is less-than-ideal, consider writing a purchase contract sooner rather than later. Your mortgage options may be thinning, and the ones you have may be getting more expensive.

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Mortgage insiders may have found last week to be boring, but for active home buyers, the semi-lull was a welcome break from the up-and-downs that have gripped the markets since January.

It’s been three consecutive weeks without a substantial increase to mortgage rates.

This week, rates aren’t expected to be as calm because Fed Chairman Ben Bernanke is taking two heavy topics and making public speeches about them.

The first speech is to the FDIC on Tuesday.  The speech will focus on mortgage lending.  The second is to House Financial Services Committee on Thursday and it will cover financial market regulation.  In both speeches, expect Bernanke is expected to address inflation and the health of the U.S. banking system.

These two subjects are closely linked to mortgage rates so watch for rate movement during, and after, the speeches.

• If Bernanke says inflation is moderating, mortgage rates should fall
• If Bernanke says the financial system is stabilizing, mortgage rates should rise

From a data perspective, there’s not much doing other than Friday’s Consumer Confidence survey.  Confidence surveys don’t have a direct impact on the economy, but markets are watching them more closely.  A strong reading could benefit the stock market which should, in turn, cause mortgage rates to rise.

(Image courtesy: Wall Street Journal Online)

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