Mortgage financing changes on tap as Spring market gets underway

The Treasury's program to buy Mortgage-backed securities comes to an end in March with an uncertain forecast of the resulting impact. Most predictions suggest mortgage rates are likely to rise somewhere between 1/2% to 1% by the end of the year, putting some pressure on the nascent housing recovery. Additionally, the homebuyer tax credit ends in April with virtually no chance (or expectation) of it being extended again.

These are just a couple of the significant factors at play as lenders, homeowners, and real estate practitioners look for increased signs of stabilization and a return to "normalcy." Other current and upcoming finance changes include:

• FHA will increase the mortgage insurance premium from 1.75% to 2.25% of the loan amount as of April 5th. Other actions are expected later this year, including increasing the down payment requirement for those with credit scores less than 580 and reducing the allowable seller concessions (e.g., closing costs) from 6% to 3%.
  
• Also on April 5th, a new program referred to as HAFA will begin that aims to ease the short sale process. Shifting rules and incentives to promote short sales and reduce foreclosures will likely continue for several more months. Many banks (and struggling homeowners) have been confused by the available options and oft-changing guidelines causing delays in closings and disrupting sales with potential buyers.
• Banks will write down loan balances. Bank of America was the first to come out and state that they will begin modifying the principal on its loans. This is a controversial move to be sure, but may enable some to keep their home that might otherwise end up in foreclosure. (Click to see the Wall Street Journal article.)
  
• Jumbo loans are getting a little easier. When the market for securities backed by jumbo loans broke down, the interest rate on these mortgages jumped, severely impacting the high end market. The door is beginning to open a little which should help sales and perk up pricing. In early March, jumbo rates fell to a 5-year low of 5.79%.
  

Expect the landscape to continue shifting for the foreseeable future. Until the housing market begins to grow without help, regulators and banks are likely to continue trying different tactics to keep things stabilized and minimize any losses.

Natural gas gets cheap with new technology

If you're a homeowner that uses a natural gas furnace to heat your home, you may have noticed your bills being a little lower this year (or at least offsetting the cost of this year's colder winter). Because of new technology to extract natural gas, there's now an overabundance of supply. So much so that all the surplus is difficult to store.

Surplus expected to continue

The expanded use of "fracking" to retrieve natural gas has caused a significant shift in the economics associated with the fuel. The huge finds of deposits already found in Texas and Louisiana have some predicting that natural gas supplies could easily last for 100 years and provide the means for reducing the need for importing energy resources - a strong national security argument.

Additional deposits are being targeted along the Marcellus shale from West Virginia to New York. While some concerns have been raised that the new extraction methods have uncertain environmental impact, there's no indications yet that they will halt this extraction process. Furthermore, since natural gas is cleaner burning than either coal or oil, many are suggesting its use as a "stepping stone" towards more advanced clean technologies.

Effect on homeowners

Those using natural gas furnaces, water heaters, and other gas appliances are likely to benefit in the near term from lower supply costs. However, we don't see the full extent of price drops due to additional "service fees" and other costs that get added onto our bills. Perhaps unfortunately, this is likely to reduce the incentive for homeowners to move towards more efficient appliances such as heat pumps and geothermal heating systems.

From a strictly cost saving standpoint, homeowners who have dual fuel furnace systems may be able to benefit a bit more by adjusting the temperature where the gas backup kicks in from the heat pump. I don't have any statistics to back this up, but my own experience did suggest I was able to reduce bills this year by selecting when to use the gas furnace during colder periods. If you have a hybrid system, you may want to check with your HVAC company about what temperature change point will work best for your home.

Lasting impact

If the supply continues as expected, you can probably expect power suppliers to look at it as an alternative to building coal-powered generation plants. Here in the Midwest, the use of coal is extremely cheap for electricity, but pending regulations and other factors could make use of natural gas an attractive alternative. Natural gas has also been touted as a possible fuel for cars and trucks in place of gasoline. (The well known oil magnate T. Boone Pickens has been stumping his plan to use natural gas for about a year).