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FHA & Conventional Loans About To Evaporate For Some Benicia, Vallejo Homebuyers?

Rod Herman — Sat, 18 Jun 2011 15:15:22 +0000

Unless Congress steps in soon, some Benicia, Vallejo homebuyers may find it impossible to get an FHA or conventional loan by early Fall.

That’s because loan limits for the two loan programs that cover probably at least 90% of the loans originated in Solano County are set to change come Oct. 1.

And barring Congressional action, the maximum you can borrow under both programs is going to drop substantially, which means that many Benicia, Vallejo and Solano County home buyers could suddenly find themselves needing to come up with tens of thousands more in down payment or accept a costlier “jumbo” loan.

Right now, the maximum you can borrow with an FHA or conventional loan is $557,500. But as it stands right now, after September 30, the conforming loan limit in Solano County will drop to $417,000 and the FHA limit to $400,200, which is certain to impact local borrowers who are planning to finance a home with a loan amount that exceeds the new limits.

In plain English, that means that any borrower in Solano County who is today planning to buy a home for more than $415,000 with an FHA loan or more than $463,000 with a conventional loan could find getting a loan potentially tougher and definitely more expensive if they wait until October.

If you’re not in contract by the end of September and want to use an FHA or conventional loan on a home that exceeds the new loan limits, your only options will be to come up with a large enough down payment to cover the difference or try to qualify for a costlier jumbo loan.

And it’s not just Solano County that’s affected. Unless Congress steps in and extends the current loan limits, which have been in effect since 2008, FHA and conventional loan limits will drop in every Bay Area county in October.

The biggest decline for FHA loans in the Bay Area will be right here in Solano County, where the FHA limit will drop by $157,300 (the conventional loan limit in Solano will fall by $140,500). With the exception of Napa and Sonoma Counties, most other Bay Area counties will see their loan limits fall about $100,000.

And Solano will be the only Bay Area county where FHA and conventional loans will have different loan limits.

Here are the new scheduled loan limits for the rest of the Bay Area:

Napa County – from $729,750 to $592,250.
Sonoma County — from $662,500 to $520,950.
Alameda, Contra Costa, Marin, San Francisco, San Mateo & Santa Clara Counties — from $729,750 to $625,500.

Now, it’s only June, so a lot can happen between now and the end of September. It’s possible that lobbyists will succeed in getting Congress to extend the current loan limits or at least come up with an amount somewhere between today’s limits and the scheduled Oct. 1 figures.

I’ll be keeping an eye on this and will post updates if anything changes.

Big Vote Thursday: The End Of Loan Mods?

Rod Herman — Tue, 01 Mar 2011 06:23:39 +0000

If you own a home in Solano County and are thinking of applying for a loan modification under the government’s widely publicized Home Affordable Modification Program (HAMP), come Thursday you may find yourself out of luck.

For that’s when the House Finance Services Committee plans to vote on a bill that, if passed, would signal the end the White House’s failed loan mod program.

When the HAMP program was announced by President Obama almost two years ago, there were high expectations and hopes that it would help millions of underwater borrowers restructure their loans so that they could stay in their homes with newly affordable monthly payments.

Well here we are two years later, and only about 3% of the $29 billion (yes, billion) that was allocated has been spent. Less than 15% of the 4 million households that HAMP was supposed to help have gotten permanent modifications. For the other HAMP applicants, HAMP has brought nothing but frustration and dissatisfaction.

If the House bill goes through, it will be the end of the road for HAMP and the unused $29 billion will go back to the Treasury, presumably to be allocated to some other program.

When the House Finance Services Committee votes on the bill, it is also likely to include three other programs that, like HAMP, have fallen flat on their faces: the Emergency Mortgage Relief Program, the Neighborhood Stabilization Program, and FHA’s mortgage refinancing program.

The FHA refinancing program has been a colossal failure. Over $8 billion was set aside to help underwater FHA borrowers refinance their loans into a payment they could afford.

But the guidelines made the program so unattractive to lenders that as recently as last December only 35 (yes, just 35) Americans took advantage of a program that was originally expected to help up to 1.5 million existing FHA borrowers. So far, just $50 million of that $8 billion has been used.

So if you’re thinking of doing a loan mod and planning on using the government’s HAMP program, sorry, but it looks like that ship is about to sink.

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Obama’s Mortgage Reform Plan: A Bitter Pill

Rod Herman — Sat, 19 Feb 2011 16:25:42 +0000

Many years ago, another agent in my office shared a great little saying with me.

It was one that really cut to the chase with a seller who wanted to hold out for a better offer when the one they had in front of them was clearly the best they were ever going to get.

She would say: I know it’s a bitter pill to swallow…but do you want that pill now or do you want it later?

And that little saying of hers resonated with me the moment I heard about the White House’s proposed mortgage reform plan, which was announced just over a week ago.

I wrote about that plan a few days ago. In a nutshell, the Obama administration has proposed sweeping mortgage policy changes that would:

Require higher down payments
Drop the maximum loan amounts for conventional loans in many areas
Raise loan fees to borrowers
Do away with mortgage giants Freddie Mac & Fannie Mae

Making all these changes would definitely be a very bitter pill for the mortgage and housing markets to swallow right now. But if we really want to make sure we don’t have a repeat of the recent mortgage meltdown, there’s no doubt some changes have to take place.

Mortgage Reform Is Needed…But Now or Later?

We have to make sure the riskiest borrowers really have the means to own a home before letting them slip through the cracks and buy something they clearly can’t afford. And we need to get back to where the private sector is fueling the money supply machine rather than government.

Maybe not exactly as Obama’s plan proposes, but some changes definitely are in order to make sure we prevent careless live-only-for-today lenders and home buyers from again bringing the rest of us into their Den of Doom.

Whether we do it the way the White House plan suggests or another way, no one can quarrel that mortgage reform is just what the doctor ordered. And it will be a bitter pill. The big question, though, is Do We Swallow It Now Or Later?

The housing market and our overall economy are both still VERY fragile. So if we implement too much too soon, we run the risk of undoing all the progress we’ve made over the past 2 years.

The Patient Is Still Healing

The housing market is kind of like the patient who just had major surgery. It’s starting to heal, but if we take out the stitches too soon, we could undue everything and be right back in surgery tomorrow.

So while the premise of Obama’s plan makes sense — reducing the housing market’s dependency on the government and safeguarding the mortgage industry from a repeat of the recent mortgage market meltdown — introducing major mortgage changes like these could take a lot of the steam out of a still fragile housing market and cause yet another downward spiral.

I think we need to make sure the patient’s incision is fully healed before we making big sweeping changes like these. And lord knows, the economy still has plenty of healing to do.

Too Much Too Soon?

Premature policy changes will likely cause the housing market to sputter, which likely would curtail our economic recovery and renew cries for more government assistance — the very thing Obama’s plan is trying to curtail.

In my mind, the sensible approach is to wait until the housing market and overall economy is convincingly in a robust recovery mode before making sweeping changes. Over the past few years, underwriting and appraisal rules have tightened, which already has helped prevent the riskiest borrowers and shady investors from buying.

I’m not saying the job is finished. We need reform, but not in one big gulp and certainly not while the economy and housing market are both still so weak and fragile.

The right dose of medicine can can work wonders, but as we all know, an overdose can be lethal.

So let’s not swallow that bitter pill just yet.

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What Obama’s Plan Means For Solano Home Buyers & Sellers

What Obama’s Mortgage Reform Plan Means For Solano County Home Buyers & Sellers

Rod Herman — Thu, 17 Feb 2011 16:38:22 +0000

You may have heard that President Obama unveiled his plans to reform the mortgage industry last Friday. Since then, his proposal has taken a lot of heat in real estate circles, especially since one of his recommendations is to reduce the maximum loan limits on conventional mortgages in high-cost areas by more than $100,000 as early as this fall.

Among some of the proposals in Obama’s plan:

Drop the maximum loan amount in high cost areas (which includes much of the Bay Area) from $729,750 to $625,500.

Phase out both Fannie Mae and Freddie Mac by reducing their loan portfolios by 10% a year

Raise fees for borrowers

Increase minimum down payments borrowers

What This Means To Solano Home Buyers & Sellers

It’s still unclear whether the White House’s proposal to lower the maximum loan limit would really impact Solano County. Currently, for most of the U.S., the limit is $417,000. The majority of the Bay Area, though is at $729,750 — which is the amount that Obama’s plan wants reduced by about $105,000.

In Solano County, however, our limit is $557,500, which is higher than the rest of the U.S., but lower than most other Bay Area counties.

So if the White House plan reduces the loan limit for all high cost areas on a proportionate basis, then Solano County buyers and sellers could definitely feel a pinch, since buyers of homes priced above the new loan limit would be forced into higher-rate “jumbo” loans, which would no doubt kick some buyers out of the market or force some sellers to lower prices to attract conventional loan buyers.

But if the White House plan keeps our limit at $557,500, since it’s already below the proposed $625,500 ceiling, then Solano County would be spared any impact from the proposed change. I haven’t seen county-by-county specifics yet. But when I do, I’ll post them.

A Definite Impact In Contra Costa

Contra Costa County, meanwhile, will definitely feel the pinch if Obama’s plan is enacted, since it is one of the Bay Area Counties where the $729,750 loan limit is presently in place. If the maximum loan drops to $625,500, then sellers in the $700,000-$900,000 price range, could soon find it much tougher to find qualified buyers for their homes.

Obama is pushing for a change in the loan limit by this fall. And you can bet there will be a lots of lobbying and grass-roots efforts to either stop, delay or modify his proposal in the coming months.

While the jury’s still out on whether the White House plan will affect Solano’s loan limits, those other three proposals in Obama’s plan definitely would impact buyers and sellers here in Solano County as well as throughout the entire U.S.

Less Fannie & Freddie Means Higher Rates & Fees

According to estimates I’ve seen, almost three-quarters of all U.S. loans are sold to Freddie Mac and Fannie Mae. In Solano County, that percentage is probably a bit lower, since FHA loans have become increasingly popular over the past few years due to lower home prices.

But for borrowers opting for a conventional loan, Freddie or Fannie are what makes the whole money supply machine work. So if you reduce the amount of loans that those two organizations can purchase, that will definitely impact the availability and cost of that financing.

According to the National Assn. of Realtors, Credit Suisse Bank has estimated that interest rates could easily rise 2 full percentage points (to the 7%-plus range) if the government withdraws its backing of Freddie and Fannie, which would easily price many of today’s buyers out of the housing market.

Goodbye To Low Down Payment Loans?

The same would happen if the government pushed lenders to increase minimum down payment amounts. With conventional financing, buyers have to put at least 10% down. With an FHA loan, the minimum is 3.5% down — which is huge for first-time buyers, since many have the income to qualify but not 10% plus closing costs (about $35,000+ on a $250,000 home).

The White House’s premise — more skin in the game by the homeowner means less risk for the lender — makes sense. Before creative financing entered the marketplace back in the 1980s, buyers using a conventional loan traditionally had to come up with 20% down. Of course, back then, most Bay Area home prices were below $100,000.

There’s been quite a bit of talk about FHA increasing the minimum down payment on all of its loans. If that happens and if the same occurs with conventional financing, many buyers would find themselves unable to buy. And that would certainly cause activity to wane, inventory to climb and prices to fall.

I understand the need for mortgage reform. Nobody wants a repeat of 2007-2008. But if the sweeping changes outlined in Obama’s proposal are enacted, Solano County home buyers and sellers will definitely feel it — and not in a good way.

Even Without Uncle Sam’s Help, Mortgage Rates Still Holding Steady

Rod Herman — Fri, 23 Apr 2010 14:52:45 +0000

If you checked out the Freddie Mac Weekly Mortgage Survey box on the left sidebar of our web site late yesterday, you’ll see that interest rates remain virtually unchanged from last week’s survey — which is a very good sign.

It’s now been three weeks since the federal government stopped buying mortgage-backed securities. And despite a prevailing consensus that rates would go up perhaps a half-percentage point shortly after Uncle Sam stopped propping up the mortgage market, so far so good.

As you’ll recall, the first week after the government got out of the mortgage-buying business was a little iffy, as rates immediately jumped 1/8%. But then last week, they dropped back down by almost that same amount to an average nationally of 5.07% with 0.6 points.

And, as you can see in the box on the left side of our website, this week’s rate is essentially a carbon copy of last week: 5.07% with a 0.7 point for a 30-year fixed rate mortgage.

So on a $200,000 loan, aside from that mere $200 increase in points, everything’s the same as it was a week ago.

The longer we go without any significant interest rate increases, the more confidence it should give to the overall mortgage market, which in turn, would keep rates affordable and enable more people to buy a home.

Remember that, as I pointed out last week, the 5.07% rate is a national survey, so the rates you can get locally will likely be marginally different.

Your actual rate will depend on your credit score, loan amount, loan program and various other factors. So be sure to consult with a local loan professional for current rates and fees (or, if you don’t have one and want a recommendation, contact us and we’ll be happy to suggest one).

In the coming weeks, I’ll keep watching this rate survey and will report any significant or noteworthy changes. For now, though, so far so good!

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Haven’t We Learned Anything?

Rod Herman — Wed, 21 Apr 2010 03:30:00 +0000

I just got the following email in my spam folder, from a mortgage lender out of Southern California:

Even though we’re not even close to getting out of our nation’s worst financial mess since the Great Depression, we’re already beginning to see a smattering of snake oil salesman peddling loans that look and feel just like their subprime cousins that started this whole economic tailspin.

I guess I was naive to think that those flim-flam men and women who pushed people into homes they clearly couldn’t afford had left our industry for good.

No, it looks like they’ve just been laying low for the last few years.

Yet here they come, even as traditional, institutional lenders are still tightening guidelines to ensure that the only ones who get a loan are those who truly qualify. And as the government government continues to unveil programs to help borrowers caught in the cross-fire of the recent subprime meltdown.

It didn’t take long for these sharks to start peddling their smelly wares again, did it?

Call me naive, but shouldn’t a lender or investor know a little bit about the borrower’s financial ability to repay before giving them hundreds of thousands of dollars?

Yet, according to this email, all this lender wants is a verification of employment (VOE). That’s right, as long as your boss says “yep, Charlie works here” you’ve got yourself a loan.

So as long as I put 20% down, I don’t need to show any paystubs, W-2’s nor tax returns. And with a score of 720, I can borrow almost three-quarters of a million dollars. Plus, I can close escrow in 10 days?

Do the words “too good to be true” come to mind? And you know what they say: if it smells like a rat, it MUST be a rat.

Now let me ask you — isn’t this exactly the type of lending that got us into the economic cesspool we’re in right now?

I wondered how long it would take before the predators would reappear. I was pretty optimistic, I guess, for I figured it might take another 3-4 years before we started to see a rebirth of these smell-like-a-rat loan programs.

Yet, in the last 4-6 weeks, I’ve started to notice a few emails like the one above hitting my spam folder.

Hopefully most of my fellow real estate agents will do just what I did and trash the email right away. And hopefully any borrower who comes in contact with someone peddling one of these loans will run like the wind.

I really thought we’d learned from what’s happened over the past 3-4 years.

Obviously not!

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Good News For Solano Home Buyers: Interest Rates Drop Back Down This Week

Rod Herman — Sat, 17 Apr 2010 19:03:12 +0000

There’s been a lot of talk in recent months (including right here) about what would happen to interest rates once the federal government stopped buying mortgage-backed securities and mortgage pricing was left solely to the free market.

The prevailing sentiment at the end of March was that rates would go up by about a half-percentage point in the coming weeks. And that’s exactly what started to happened when the calendar changed from March to April.

As I reported last week, Freddie Mac’s weekly mortgage survey on April 8, showed that rates had reached an 8-month high at 5.21%.

So we all waited with baited breath for this week’s report to come out, wondering whether we’d see another 1/8 point jump in the rates.

Well, this week, the mortgage market did an about-face and rates are again right back to where they were on April 1, which is a very encouraging sign.

According to Freddie Mac’s weekly survey (which appears on the left sidebar of our web site), rates for a 30-year fixed-rate mortgage (with 0.6 “points”) averaged 5.07% nationally this week. That’s down from 5.21% a week ago and even lower than it was the first two weeks of January.

So what does this mean for Solano County homebuyers?

Well, as I wrote in that same post on April 8, on a $200,000 loan, for every 1/4% change in the rate, the payment goes up or down about $30/mo. and the loan amount you qualify for changes by about $5,000.

Earlier this year, there was a great fear that once the government got out of the mortgage-buying business, rates would immediately skyrocket. That fear was tempered somewhat as the end of March approached, but most experts still expected a 1/2% jump in relatively quick fashion.

So seeing rates back to the same point they were the day after the government exited the mortgage purchase arena is very welcomed news.

Keep in mind that your own mortgage lender will likely quote rates that are slightly different than what appears in the Freddie Mac chart, since that is a national average. Local factors and things like credit scores, down payment and loan type can all affect your interest rate.

But regardless of the number your lender quotes you, it definitely should be lower today than it would have been a week ago. And that’s certainly good news.

I’ll keep tracking it. You can too, simply by coming back regularly and checking the Freddie Mac box on our web site. The rate survey usually comes out on Thursdays.

If you’re just starting out or don’t have a lender, please contact us and we’ll be happy to recommend a reputable local lender. To search for homes in Solano County direct from our own MLS feed, be sure to visit our Home Search page and contact us for further details on any homes that interest you.

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Mortgage Rates Up This Past Week; How Will That Affect Solano County Home Buyers?

Rod Herman — Thu, 08 Apr 2010 22:42:26 +0000

In the first week since the government officially exited the mortgage assistance business, interest rates have started to rise, as many experts predicted would happen.

Highest Rates In 8 Months

Freddie Mac released its weekly mortgage market survey earlier today (see the left sidebar) , which shows that the average 30-year mortgage is 1/8% higher today than it was a week ago (5.21% this week vs. 5.08%) and the highest its been since the middle of last August.

Now the big unknown is whether this is the start of a continued climb to even higher rates or just the market correction that everyone expected would occur as soon as the federal government stopped buying mortgage-backed securities.

How Rate Increases Will Affect Local Home Buyers

If you’re in the market to buy a home in Solano County right now, you’re probably wondering just how much a rise in interest rates will impact your buying power.

Well, the answer depends partially on how much you’re borrowing, for the greater the loan amount, the greater the difference.

On a $200,000 loan, if you start out at 5%, for every quarter-percent increase in the interest rate, your payments will go up about $30/mo. On a $300,000 loan, it’s about an extra $45/mo.

So if you’re borrowing $200,000 and rates go up to 5.5%, your payment is going to jump about $60/mo. Borrow $300k and you’re looking at about $90 more every month.

A Rate Jump Could Mean Less Buying Power

That’s all well and good as long as you can still qualify for a payment that high. But if you’re only qualified to borrow $200,000 at 5%, then your buying power would drop by about $5,000 for every 1/4-percent rate increase in the rate.

So if rates went from 5% to 5.5%, instead of being able to borrow $200,000, you’d only be able to borrow about $190,000.

And on a $300,000 loan, going from 5% to 5.5%, your buying power would drop from $300,000 to about $283,000.

One last note: the box on the left sidebar with Freddie Mac’s weekly mortgage survey results is a national average. Interest rates locally can vary somewhat, so it’s best to check in with your mortgage lender to get the most current local rates, especially since interest rates for many loan programs are now very credit score driven.

If you’re just starting out or don’t have a lender, feel free to contact us and we’ll be happy to recommend a reputable local lender. To search for homes in Solano County direct from our own MLS feed, be sure to visit our Home Search page and contact us for further details on any homes that interest you.

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6 Big Real Estate Changes For Benicia-Vallejo Home Buyers & Sellers This Month

Rod Herman — Tue, 06 Apr 2010 01:31:12 +0000

If you’re planning to buy or sell a home in Benicia, Vallejo or even anywhere else in Solano County, you may need a scorecard to keep track of all the changes that either already have occurred or will take place by the end of April.

I’ve been a real estate agent since 1995. And before that I worked in the title and new homes sectors of our business — dating all the way back to 1978. And in all the years I’ve been in the real estate business, I can’t remember another time when this many changes occurred in one single month.

So if you’ve got your scorecard ready, here’s a quick overview of some of the changes that are taking place in April:

1. Government’s MBS Buy-Back Program Ends

April 1 was the first day in over 14 months that the government wasn’t buying mortgage-backed securities, which it had been doing since Jan. ‘09 to keep mortgage money flowing and interest rates affordable.

Without Uncle Sam there to prop up the mortgage market, it’s now up to the free market to to decide just how high mortgage rates should really be.

Some experts have said that rates would skyrocket without the government’s help, while others expect the change to be very subtle.

For more details, see the post I wrote on the final day of the U.S. government’s MBS Buy-Back program.

2. Faster Short Sales Starting Today?

Today is the day the federal government’s Housing Affordable Foreclosure Alternatives (HAFA) program goes into effect.

The Obama administration announced the program last fall but wanted to allow plenty of time for mortgage lenders to prepare for participation in the program.

Among other things, the HAFA program enacts strict deadlines, requires banks to determine the minimum net proceeds they’ll accept up front and provides cash incentives for banks, sellers and even 2nd mortgage holders who participate in a short sale.

Sellers must meet eligibility requirements for the Home Affordable Modification Program (HAMP) in order to participate in HAFA. Lenders who are already participating in HAMP must agree to also participate in HAFA.

On paper, the program looks like it will expedite the process and take away much of the frustration and uncertainty that buyers, sellers and real estate professionals have endured over the past few years.

However, from what I’ve heard, many of the people working in the loss mitigation departments for many of the banks who are supposed to participate claim they’re not yet familiar with HAFA.

So implementation and compliance by the banks may not necessarily be an immediate thing.

3. Higher FHA Mortgage Insurance Costs As Of Today

Borrowers who are using an FHA loan to finance their purchase (which probably includes at least 90% of the first-time buyers in Solano County) will be subject to a costlier up-front mortgage insurance premium (up from 1.75% of the cost of the home to 2.25%). On a $200,000 home that works out to about a $1,000 increase.

However, since most buyers finance the up-front MIP, on a $200,000 home, increasing the loan amount by $1,000 really only adds about $6/mo. to the payment.

So in the big scheme of things, it’s not a big enough change to severely impact most FHA buyers.

4. Smaller FHA Seller’s Credits Starting Today, Too

This change could have a significant impact on many FHA borrowers. For starting today, the most a seller can credit the buyer in an FHA transaction is 3% of the purchase price, which is half of what it was yesterday.

Here in Benicia, Vallejo and vicinity, where so many homes continue to get multiple offers, those FHA buyers who were asking for large closing cost credits haven’t had a lot of success getting their offers accepted in recent times. So from a practical standpoint, the change may not be felt too much for right now.

But if the inventory continues to climb and gets to a point where multiple offers are no longer the order of the day, we could find some otherwise qualified FHA buyers exiting the market due to limited funds beyond their down payment.

5. Federal Tax Credit Going Bye-Bye

Barring a sudden change of heart by Congress, the federal home buyer tax credit will expire at the end of this month. The credit provides up to $8,000 for first-time buyers and $6,500 for move-up buyers.

In order to qualify, you must have entered into a purchase agreement by Apr. 30. You’re allowed an additional 60 days to close escrow. So the clock is definitely ticking.

If you’re not able to get into contract in time to get the federal credit, all may not be lost. For the day after the federal credit expires, California’s recently announced first-time buyer and tax credit goes into effect.

6. New Purchase Contract Coming

And finally, a new standard purchase contract is slated to come out at the end of April, which will change the way some parts of a real estate transaction are conducted.

The form is produced by our California Assn. of Realtors (CAR) and is used for most local real estate sales here in Solano County. It’s the first major change for this form in about 8 years.

One of the changes is that buyers will no longer have to write a deposit check up front. They’ll be able to wait to do so until after the seller has accepted the offer.

Another change: sellers will no longer be automatically on the hook to cover the cost of any lender-required repairs on FHA loans.

The new contract also does a good job of specifying what happens if a closing date or other contractual event falls on a weekend or a holiday. Up until now, that’s always been subject to interpretation.

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Is The Party Over For Low Mortgage Rates?

Rod Herman — Wed, 31 Mar 2010 23:28:43 +0000

Will Rates Skyrocket As Some Previously Predicted?

Today marks the end of an unprecedented era for the mortgage market.

That’s because this is the final day of the Federal Reserve’s 14-month program to buy up mortgage-backed securities (MBS) — a practice that has kept mortgage rates down in the 5-percent-and-below range.

The Fed’s MBS purchase program was initiated by the government in order to keep mortgage money flowing at the time our economy was suffering through its darkest hours.

Buoyed by a consensus that the economy was on the mend, last fall, the government proclaimed that it would end its MBS buy-back program by the end of the first quarter of 2010.

In other words: today.

A New Era Starts Tomorrow

So starting tomorrow, MBS purchases will fall on the shoulders of regular investors, which means that mortgage rates will again be determined by the free marketplace, without any governmental support.

Before I lose you with too much high-finance talk, let me explain what this really means to the average home buyer or mortgage consumer.

In a nutshell, if the people who purchase these mortgage backed securities don’t buy them at the same pace that the federal government has been purchasing them, then mortgage rates will climb.

For weeks now, many “mortgage scholars” have been predicting that we’ll see a spike in mortgage rates as soon as the government exits the MBS arena.

6% Mortgage Rates Overnight?

Some have said that rates, which have been hovering in the high-4% to low-5% range for months now, could rise to the mid-5’s or even 6% within a matter of days or weeks after the Fed’s program goes away.

In recent weeks, some of these experts have scaled back their doom-and-gloom predictions and said that rates will probably go up a bit, but not perhaps as high or as quickly as they previously envisioned.

Before the government started buying MBS’s in Jan. ‘09, the flow of mortgage money had reached a serious bottleneck, as back then, very few investors were excited about putting their money into an investment that was backed by the ability of American homeowners to make their mortgage payments.

And without anyone to invest in those MBS’s, the supply of mortgage financing would have dried up almost instantly, which would have devastated an already punch-weary housing market.

Uncle Sam’s $1.25 Trillion Life Preserver

So in an effort to keep mortgage financing flowing and prop up a weakened housing market, Uncle Sam announced in Nov. ‘08 that it would allocate $1.25 trillion to purchase mortgage-backed securities starting in Jan. ‘09.

The theory was that by the time that money was gone, the investment community would again have enough confidence in these securities to keep mortgage money flowing.

The big unknown at this point, of course, is just how much confidence investors really have in these MBS’s.

Or, more importantly, whether they’ll buy them at the same pace or at the same cost as the government has been doing for the past 14 months.

In anticipation of this day, the government started scaling back its MBS purchases last fall in order to hopefully create a gradual transition from governmental support to free-market investors.

Since rates have stayed in the same general range since the government’s phase-out began, that’s considered a good sign — and one which has convinced some of the doomsayers to reconsider their original predictions of interest rates climbing a full percentage point in a matter of weeks once the government buy-back program ended.

Tomorrow Is Day One

So now we’re at ground-zero. Tomorrow is Day One of a new era. Or should I say a return to the way things were done before the mortgage meltdown.

That means we’re about to find out just how much our economy has recovered.

Most experts seem to think that rates will probably go up at least a little bit — perhaps somewhere between 1/4 to 1/2 percent in the coming weeks.

If such an increase occurs over a 5-6 week period, I wouldn’t expect it to impact the housing market too much.

But if rates were to rise quickly or by more than 1/2 percent, then the real estate market could take a hit — especially since it would coincide with the end of the federal tax credit and the introduction of FHA’s tighter new policies.

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