Why Interest Rates are Going to be Up within the next few months

There are a number of reasons that pressure to increase interest rates will occur over the coming months:

1) The Federal housing Administration is planning on charging higher insurance fees on their loan by another quarter of a percent. The FHA is also reportedly planning to possibly increase the minimum down payments required for FHA loans from the current 3.5%

2) There may be significant reductions in the maximum loan amounts later this year for both FHA loans as well as conventional loans purchased by Fannie Mae and Freddie Mac Unless Congress votes to extend the current statutory limit for loans up to $729,750 for so called conforming jumbo loans in high-cost areas such as Southern California which expires Oct. 1, many more loans will be considered jumbo loans with a corresponding higher interest rate.

3) The “white paper” report prepared by the Obama Administration to make recommendations to create controls to help prevent another mortgage melt-down has recommended that Fannie Mae and Freddie Mac charge lenders higher fees to guarantee pools of their mortgages for resale to bond investors.. These increased fees will be passed on to borrowers as an increase in interest rates.The report also recommends raising down payment requirements for loans purchased by Fannie Mae and Freddie Mac to 10%

4)Regulators are arguing over what the definition of a “qualified residential mortgage” should be under the terms of last years financial reform legislation.. Loans that are not qualified, as to down payment size and other criteria, would require extra investments by lenders when they pool them in mortgage-backed securities to sell to investors. This was done so that banks originating loans that are considered risky would have ‘some skin in the game” and have some of their own funds at risk. Some analysts believe that this change will drive up interest rates for non-qualified mortgages as much as 3 percentage points.

One proposal is to make the down payment requirement for qualified mortgages at least 20 to 30$. If you want to make a smaller down payment, this will probably require a significant increase in interest rates for low down payment loans in the future..

The main thrust of all of this, is that the Obama Administration is trying to significantly decrease the role of the Federal Government in providing capital for the home loan market. For instance, they want to decrease the FHA’s market share of new loans from its current 30% to about 10%. The problem with this is that until the private investment markets regain confidence in the housing markets and are again willing to invest in mortgage backed securities, there will probably be a much lower supply of capital available to make new mortgages.

Only the Federal Reserve’s program of purchasing mortgage backed securites from Fannie Mae has kept interest rates so low in the past. The reality is that all borrowers can probably expect increases in interest rates over the next year, possibly significantly.