An industry group lowered their forecast for 2009 home loan originations by more than 25% as higher FHA mortgage rates stifle mortgage refinancing activity.  The Mortgage Bankers Association estimates that lenders will make $2.03 trillion in new home loans this year, down by more than $700 billion from its forecast in March.  The Washington-based group attributed $84 billion to reduce mortgage lending on home purchases.  The rest of the decline would be from fewer FHA refinance loans and “very low” volumes on an affordability loan program overseen by mortgage agencies FHA, Fannie Mae and Freddie Mac, MBA said in a statement.

FHA mortgage rates have risen from record lows since the MBA’s prior forecast as have Treasury yields, which spiked amid a flood of debt issuance needed to fund federal rescue programs.

In March, the MBA boosted its forecast of mortgage originations by more than $800 billion but reversed most of that expected increase with Monday’s revision.  Average 30-year loan rates have slipped from recent peaks but at 5.38 % last week remain well above the record low 4.78 % set in April, Freddie Mac reported on Thursday.  The higher mortgage rates have quelled home refinancing demand.  The MBA’s index of mortgage refinancing applications in the week ended June 5 sank to 2,605.7 after hovering between about 5,100 and 6,800 from the March 20 week through the end of April.

Estimates of home loans moving through the Home Affordable Refinance Program, using Fannie and Freddie, have also fallen short.  According to Jay Brinkmann, MBA’s chief economist, “While generally accepted estimates were that around 1.5 to 2 million borrowers might avail themselves of this FHA loan program, with many more potentially eligible, to date only about 13,000 loans have been completed according to press reports.”

Though the FHA home loans created under this program should increase, volume is unlikely to come near forecasts, he said.  FHA home purchase loans are also expected to be less than expected in March. Falling prices mean lower loan sizes, and homes bought in foreclosure and by investors are often done for cash, the trade group said.

The MBA expects total existing home sales in 2009 to drop 1.2 % from last year to 4.8 million units. New home sales will slump about 27 % to 352,000 units, the group said.”Median home prices for new and existing homes will likely continue to fall, dropping by about 10 % from 2008 levels, but leveling off in 2010 as the economy improves,” Brinkmann said.

In a recent Washington Post article written by Kenneth Harney last weekend introducing new mortgage fee increases, for FHA loans and stricter down payment rules and higher credit score requirements from HUD, Fannie Mae and Freddie Mac as soon as April 1st.  According to the article, “Most major FHA mortgage lenders are already pricing in these higher fees, effectively raising costs to borrowers immediately and reducing the impact of housing stimulus efforts from Congress and the Obama administration.”

Falling FHA Mortgage Rates

The new FHA loan guidelines mean that even borrowers with good credit scores will be charged more for a mortgage loan unless they can make a down-payment of 30% or more.  Even someone with a 739 FICO -- once considered a platinum guarantee of the best rates available -- will get dinged with a quarter-point add-on.  Harney points out, fico scores in the upper 600s were deemed good enough for prime rate home financing just a couple of years ago. Now some borrowers with credit scores of 720 to 740 may not be enough to prevent an add-on fee to their FHA home loan, especially if they are buying a condominium or town home.

Potential home-buyers need to do all they can to increase their credit score and to accumulate enough funds for a more substantial down-payment, both moves which make good financial sense anyway.  But the best home loan solution is the basic FHA mortgage: Apply for an FHA loan, which requires a down-payment of just 3.5% and in most cases has lower credit score requirements.  FHA mortgage rates remain at record levels with national lenders reporting interest rates as low as 5.25% on 30-year fixed rate mortgages.

“In today’s weakened economy where access to credit is being restricted, we need to make home mortgages more available to households throughout the country, and especially in high-cost areas,” said Preston. “These new FHA loan limits will ensure HUD can to continue aid distressed homeowners with safer home refinancing featuring secure fixed rates from affordable government-insured loans that enable many first-time buyers take advantage of today’s buyers market”

FHA mortgage loan limits were increased recently back to 2008 FHA loan limits in high cost housing areas, too -- to a maximum of $729,750 in some areas. Visit the FHA website to check the FHA loan limits for your area.  This website enables consumers to look up the maximum FHA mortgage limits for your area or several areas, and then list them by state, county, or Metropolitan Statistical Area.

The Housing Wire reports that the Standard & Poor’s Ratings Services lowered Fannie and Freddie’s preferred stock rating to ‘BBB-’ from ‘A-,’ while cutting a host of other ratings as well, and warning that further cuts may be coming in the future. The ratings agency said it cut the ratings over “increasing uncertainty about whether government support will extend to these securities in the context of further deterioration” in each GSE’s assets. It further reports that it’s becoming clear that holding preferred interests in either GSE is going to be hazardous to Q3 earnings.

Shares of the two mortgage financing giants each hit a new 52-week-low. They’ve lost more than a fifth of their value on Wednesday as fears mounted that the companies will soon need government support. Regional banks and insurers hold the majority of Fannie and Freddie’s $36 billion in preferred stock, and any bailout would hang these stockholders out to dry.  Many financing experts wonder why Fannie and Freddie have not moved to a insured home loan platform like FHA.  The government has backed FHA home loans and FHASecure for fixed rate refinancing and foreclosure prevention

Dow components Bank of America (BAC, Fortune 500) fell nearly 4% while Citigroup (C, Fortune 500) was down 2.5%. Wachovia’s (WB, Fortune 500) stock fell 7%. And shares of the investment bank Lehman Brothers (LEH, Fortune 500), which is facing its own concerns about the need for more capital, plunged 9%.  “There’s a big negative feedback loop and there’s no way out of it,” Friedman, Billings, Ramsey & Co. analyst Paul Miller said in an interview. “As the stock falls more and more, it’s more likely the government steps in and more likely equity holders get wiped out.”

It’s looking more and more like the government bailout of Fannie Mae and Freddie Mac will become the taxpayers’ burden. JP Morgan Chase & Co.’s CEO, Jamie Dimon said in a Q2 earnings call that prime mortgages looked “terrible.” This is an indicator that it’s not just sub-prime mortgages with bad credit that are going sour. Even with all of the loan modifications, the home foreclosures are not stopping.

Fannie Mae has reported a loss for the past two quarters while Freddie Mac has posted three consecutive quarterly losses. Both companies are expected to report a loss in the second quarter as well.  Fannie Mae’s chief executive sought to reassure investors that no bailout is imminent. They haven’t offered anything and we haven’t asked for anything,” Fannie Mae CEO Daniel Mudd said in a public radio interview Wednesday morning. “I don’t anticipate that they will do that.”

Armando Falcon, who served for six years as Fannie and Freddie’s chief government regulator, expects a full-fledged government takeover before year-end. The companies’ financial picture is far worse than they have acknowledged, he said, particularly for riskier mortgage loans they purchased as investments.