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.

FHA refinance loans now make up two-fifths of all the agency’s instant defaults, according to the Post analysis, and some lenders have singled out cash out refinance loans as especially risky. With conventional loans, many lenders now offer cash out mortgage only to borrowers with high credit scores and significant equity in their homes. The fear is that borrowers might otherwise take the cash and walk away from the mortgage.

Until now, the FHA has approved cash out refinancing for homeowners who have at least 5% equity in their properties and at least a one-year track record of on-time payments.  Starting with mortgage applications that FHA lenders receive April first, this type of mortgage refinancing will be restricted to borrowers with at least 15% equity in their homes.

The change will be temporary “while FHA further analyzes the housing and mortgage industry as well as its own portfolio to determine whether permanent measures should be taken,” said the letter, signed by departing FHA Commissioner Brian D. Montgomery.  The FHA does not lend money directly. It provides mortgage insurance for borrowers working with HUD-approved FHA mortgage lenders and uses the premiums to cover its losses.  The quick defaults suggest that some borrowers are taking out loans they do not stand a chance of repaying, raising questions about whether the abusive lending practices that helped topple the subprime mortgage industry are making their way into government-backed FHA lending.

The agency has come under increased scrutiny in the past years because its share of the mortgage market has shot up from about 2% three years ago to nearly a third of the mortgages made after the subprime market vanished and its loans became the only option for many borrowers who lack a hefty down payment or stellar credit.

But even before the FHA loan policy change, many lenders had moved beyond what the agency requires and instituted tougher qualifying standards for borrowers, especially those looking for cash-out refinance deals. Bank of America, which adopted tighter standards in the summer, yesterday applauded the agency’s decision.  “Safeguarding the FHA through this economic cycle is paramount to maintaining the liquidity FHA offers for home buyers today,” said Allen Jones, a government lending executive at Bank of America.

The average FHA mortgage rate for a thirty-year home loan dropped below 5% this week.  Mortgage Brokers Network executive, Steve Park said, “This is a rare opportunity to revive the mortgage industry because interest rates have dropped to record levels that have not been available for the last forty years.”  Homeowners across the country realize this rare financing opportunity, so thousands of borrowers are rushing to lock into this monumental era that could spur a much needed home refinancing boom. 

Today, the biggest obstacle for most borrowers is credit.  In many cases, conventional lenders have credit score requirements seeking credit scores over 680.  In this dried up credit markets, even professionals like doctors or lawyers have found it difficult to qualify for a traditional mortgage. If you’re interested in a refinancing mortgage, it is imperative that you have good or excellent credit and the ability to be able to provide documentation for income that lending underwriters deem sufficient. 

FHA still offer a refinancing opportunity for borrowers with good or bad credit can qualify for a FHA home loan that is fixed for thirty years.  The most popular FHA loan allowing refinancing is the FHA mortgage that requires borrowers to be at 97% loan to value for the standard FHA rate and term refinancing and 95% cash out refinancing would require home owners to have at least 5% left in your home equity.  However in some cases the FHA lender will require two appraisals for cash out refinancing above 85% loan to value. 

If you have no equity available because of the declining home value, consider the Hope for Homeowners program insured by FHA.  This unique program enables homeowners who have mortgage balances greater than the appraised amount.  If you are unable to qualify for Hope for Homeowners, consider a loan modification, because credit scores and late payments will not prevent you from renegotiating your mortgage rate.

To qualify, the FHA mortgage lender would have to cut the debt to no more than 85% of a home’s current appraised value. If the FHA refinance loans went into default, the FHA would pay the home loan lender the remaining principal owed.

While 1.4 million loans are likely to be eligible for such a program, the Congressional Budget Office estimates such a measure would end up insuring 500,000 borrowers. The CBO estimates the FHA expansion program would cost taxpayers $1.7 billion. “This bill is very time limited and limited in specifics to a subset of mortgages and meant to mitigate a market failure,” Frank said during the floor debate on Thursday.

Opponents of the FHA expansion contend it’s a bailout for lenders, investors and “speculators” who took on imprudent risk. And because participation in the program would be voluntary on the part of lenders, critics contend lenders would only unload their riskiest loans into the federally backed program.

Supporters note that the program is limited to loans for owner-occupied residents, not speculators. They also make the case that lenders and investors would be taking a loss on every loan, and that the borrower would be paying higher-than-usual premiums to the FHA to insure the loan and would share equity in their home with the government. “No borrower who goes through this process will say at the end of it, ‘Boy, that was fun. Where do I buy a ticket to get back on Space Mountain?” Frank said.

Supporters also say if the borrower still can’t afford the loan when it’s written down to 85% of appraised value, their loan won’t qualify for the program. If the bill is a bailout for anyone, they say, it’s a bailout for communities across the country, which suffer when home values and property taxes go down because of foreclosures.