RESPA, which has been with us for a very long time, is finally getting an overhaul. Of particular important to consumers, new Good Faith Estimate of Closing Costs (GFE) requirements kick in. Provided within three days of a loan application, the GFE is intended to give a borrower a sense of some of the costs of obtaining a mortgage loan.

For the first time, HUD has provided a standardized form for lenders to fill out so that borrowers can easily compare loan terms. Previously, they could use any form they wanted provided it contained all the required information. However, the differences in documentation and vague terminology used made direct comparisons from lender to lender difficult, if not impossible, leading to needless borrower confusion.

Not only will the new GFE will be a standard document, but for the first time it will put some limits on how much difference there can be between the Estimate of fees and their final total (usually not revealed until closing on the required HUD-1 form). Several studies found considerable difference between the fees quoted up front and their ultimate cost, and the new requirement sets a limit of not more than a 10% differential.

It's worth noting that the costs to lenders of complying with the new regulations are considerable: software must be changed, new documents printed, originators trained. While fees will be better disclosed, expect them to be somewhat higher as a result.

2. A Consumer Finance Protection Agency is Coming. Still in the formative stages, the CFPA will likely be the regulator for consumer-finance oriented things, from credit cards to furniture loans to mortgages. New rules, regulations, disclosure requirements and more are certain to follow. These may bring greater safeguards to the market, but may also serve to limit innovation and product choice. And, as with the new-and-improved RESPA, it may ultimately trim the availability of certain kinds of loans and drive up the cost of others. Depending upon the form it takes, investors may embrace the changes or be spooked by them, but any changes will inject uncertainty into long-understood and modeled processes. As uncertainty equals risk, and risk equals higher costs, it's hard to expect that rates would be lower as a result of rule changes.

3. Federal Mortgage and Housing Support Programs Will End. The Federal Reserve's program of purchasing a total of $1.25 trillion of mortgage-backed securities will come to an end on March 31. By HSH's reckoning, the Fed's involvement in the market means that conforming fixed-rate mortgages are perhaps 75 basis points (0.75%) below where they would be absent the program. This means that we expect interest rates to rise somewhat when the program expires. How much they rise will depend on whether or not private investors will want to buy these investments, and how strong that demand will be is quite unclear at this time. It's best to plan for at least some increases in interest rates as the end of the program approaches and for some period after March 31, with perhaps as much as a half-point rise to start.  If you are in the market for a new home loan or have not yet joined the millions in refinancing your home loans to take advantage of these historically low rates, act now before these housing support programs come to an end. 

4. Home-Buying Tax Incentives Will Expire in April. As the initial expiry of the "first-time" homebuyer credit came closer, there was a flare in homebuying activity, and of course an associated increase in the demand for mortgage credit. That seemed to give us a minor rise in mortgage rates of perhaps an eighth-percentage point, which vanished when the program ended (it has since been revived). If there is a rush to take advantage of the credit in February and March, this increase in demand may push mortgage rates up to some extent as well.  Talk to a lender to secure your new home loan before increased demand pushes mortgage rates higher.

5. Fannie Mae and Freddie Mac Will Change. While no proposals have yet been released, an outline of some sort is due from the Obama administration early in 2010, perhaps sometime in the first quarter. Whatever new form the GSEs take, or whatever new entities are formed, there will probably be at least some disruption to the flow of mortgage credit at times in 2010 as investors try to become accustomed to these market changes.

6. The Economy Should Improve. As measured by Gross Domestic Product, the economy turned the corner in 2009 and should remain on the positive side of the ledger in 2010. We expect growth to be quite restrained, but any sustained improvement will probably cause at least some firmness to interest rates as the economy's appetite for credit increases.

That said, inflation should be no great concern. During the downturn, we avoided outright deflation, and prices are again firming. Still, there will likely be periods where inflation concerns (rather than actual inflation) will move market interest rates upwards, as was the case in late Spring 2009. Overall, the world remains awash in excess liquidity, thanks to central bank programs enacted during the market panic and subsequent recession, and new asset bubbles are forming or have formed in various places around the globe. Removing that liquidity will be a challenge for the Federal Reserve and other central bankers, as leaving it in place for too long will risk igniting inflation beyond 2010. We expect at least some movement for short-term interest rates during the year, possibly by mid-year. It's worth noting that a Federal Funds Rate below even as "high" as 1% would still qualify as extraordinarily low.

7. Lending Standards May Start to Ease. After several years of continual and often abrupt tightening, improving bank balance sheets should start to allow some loosening around the fringes of consumer and mortgage lending. What form this takes will depend upon what happens to jobs and home prices, as these considerations increase the risk of borrower default. If banks continue to rebuild their balance sheets, and if losses on existing loans become not only more clear but also more manageable, we think that certain requirements, such as the size of a pricing add-on for a credit score/loan-to-value bucket or other terms may be eased somewhat.

8. Mortgage Rates Should Remain Favorable. During 2010, the mortgage market will transition from almost-fully-government supported to one again driven by the private market to a much greater degree. As markets return to "normal", so too will mortgage rates, which should still remain in a range among to the best seen during the past 50 years. However, barring a double dip to the recession, borrowers should have no expectations that rates will remain at multi-generation lows throughout the year. An unsettled and changing marketplace won't allow for that.

Broadly, we expect interest rates to be lowest in the early part of the year, as support programs remain fully in force, with 30-year fixed-rate mortgages hanging around the 5% mark during the first quarter. After that we'll start the transitional period described above, and for planning purposes, borrowers should expect figures one-half to even a full percentage point higher than this. We do think perhaps a half-point lift is most likely, but we may flare higher than that during the Spring at times. Any rise in rates would be accompanied by a reduced demand for mortgages, which in turn would serve to somewhat temper any upward rise.

Rates for the rest of the year are likely to be more economy- and inflation-dependent. With continued economic healing expected, pressure will build for the Fed to list rates and/or begin to remove supports, and, absent any resumption of these programs, that rates will nudge closer to 6% than 5% for the final two quarters of 2010. 

If you are considering buying a new home or refinancing your current mortgage, you may want to act now to avoid the expected rate increase later this year.

9. Demand for Homes Remains Stable. The firming of home sales in 2009, driven by record low rates and tax incentives, should generally continue in 2010. Presently, we have no expectation for any kind of breakout from present ranges; expiring federal supports for mortgage rates and those tax incentives, coupled with a high unemployment rate and stabilizing home prices, will make it difficult to push sales much higher than present levels. Still, there will continue to be excellent opportunities for well-situated borrowers to get great homes at reasonable prices, and financed with attractive interest rates.

10. Failing Loans Will Continue to Distort The Market. Pressures from yesterday's failed loans will continue to push inventory into the marketplace. Many loans will fail for the first time (largely now from economic reasons) and there are a fair number which will fail again after unsuccessful loan modifications. A large number of PayOption ARMs will hit their five-year "recast" trigger in 2010. While lower underlying interest rates may help some borrowers survive the payment increase which will come with the change to fully-amortizing payments, many will not be able to manage the considerable leap in payments -- even if their new interest rate climbs only into the 3% range. As a result, investor and lender losses will continue to make mortgage lending a challenge, and the push to modify mortgages will continue unabated. Loan failures put more homes out into the already-crowded market, so bloated inventory levels of cheap existing homes seems likely to continue, keeping demand for new homes quite low. If inventories of unsold homes increase, the nascent stabilization of home prices in some markets could be affected.

So if you are in the market to refinance or get a new home or equity loan, now may be the time since these record low rates won’t last forever.   A low rate may save you thousands over the course of your loan.  Act now to find a lender and get free expert advice in your area!

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