FHA interest rates closed the week relatively unchanged last week, but it was anything but a steady week.  Rates improved Monday, Tuesday and Wednesday and then sold off Thursday and Friday.

These rates continue to confound the experts.  No one forecast this 5% range to have held steady for this long.  Thursday and Friday’s sell-off might be indicative of the speed at which rates will go up–and they will eventually go back up.

Last week’s big story was the Fed meeting.  Synopsis:  Fed Funds Rate unchanged, likely to stay low for a while, and things are improving.  Notably, we have improvements in the credit markets, businesses are spending, and the recession is behind us.

That’s not to say the economy is completely fixed. There are still looming threats that could slice into consumer spending and slow down this recovery.

FHA Interest Rate Predictions

This week, we are watching two things.  The Fed’s $1.25 trillion mortgage buyback program ends at the end of the month.  All indications are that rates will rise.  The Fed’s estimates are that the program lowered rates by about 1%.  The question is how quickly the market will absorb that 1% back in the form of higher mortgage rates.

We’re also watching the news:

1. The Existing Home Sales data for February is released Tuesday, along with the Home Price Index
2. The New Home Sales data for February is released Wednesday
3. Consumer Confidence data hits Friday

Strength in any — or all three — of these reports should put pressure on mortgage rates to rise.

Add one more wildcard:  Kansas Fed President Hoenig’s scheduled speech Wednesday morning. Hoenig was the lone dissenting vote at the Fed meeting–Hoenig voted to raise rates.  Normally, Fed members stay on topic in public appearances, but it wouldn’t be unprecedented for a Fed President to speak his or her mind.

His words could lead Wall Street to rethink its position on the mortgage bond market and that could cause rates to spike Wednesday afternoon.

Mortgage rates remain volatile and are still relatively low. If you’re unsure of whether now is a good time to lock in, consider that there’s a lot more room for rates to rise than to fall right now. Especially with momentum shifting for the worse.

Conforming and FHA mortgage rates improved last week on the combination of soft economic data and new talk from the White House about tightening up banking regulations.

The S&P dropped 4% in its worst week since October.  As money left stocks, it went into bonds, and pushed FHA loan rates lower.

Since a very ugly December, mortgage bonds have made up half of the losses and it is helping with home affordability and has opened the window on another surge of refinancing activity.

This week is loaded with news and could push rates back up in a blink.

Today, the December Existing Home Sales report came in and it was very weak.  This is because of a combination of factors including:

1. The initial tax credit expiration date of November 30, 2009
2. Sharply rising mortgage rates throughout the month of December
3. A general slowdown from the holidays and from the weather

Home sales are down 16%, but there are a lot of reasons.

Later this week, we’ll see the Case-Shiller Index – a measure of home prices nationwide — and the New Home Sales report. The Case-Shiller Index has registered mild home price improvement over the past 8 months and its latest report is expected to show the same.  New Home Sales should be similarly strong.

But, the biggest news of the week is the first Federal Open Market Committee meeting of 2010.

The Fed meets Tuesday and Wednesday this week and Wall Street will be watching closely.  The Fed is not expected to change the Fed Funds Rate from its current target range of 0.000-0.250 percent, so, instead, markets will watching for the Fed’s post-meeting press release.

As always, what the Fed says is almost more important than what they do. If the Fed says the economy is growing and everything is going as expected, mortgage rates should rise.  On the flip side, if the Fed says there are still significant risks, rates could drop a little lower.

Rates will be volatile all week, but once the Fed’s press release hits the wires, it’s anyone’s guess what will happen.

Securing an FHA mortgage is about to get more expensive.

The FHA announced Wednesday that it is making a few policy changes to reduce their overall risk.

It will mean tougher approvals and higher costs to secure a mortgage approval for those who wait.

As listed in the official announcement, there are 3 major guideline updates for the FHA:

1. Upfront mortgage insurance premiums are increasing to 2.25% from 1.75%
2. Minimum 10% down payments for those with less than a 580 FICO
3. Seller concessions are being limited to 3%, down from today’s allowable 6%

The FHA has also appealed to Congress to raise an FHA borrowers’ monthly mortgage insurance premiums.   The reason the FHA vs Conventional comparisons keep favoring FHA is that the premiums are so low.

It’s clear that the Federal Housing Administration needs to clean up their portfolio and yet balance their mission of creating affordable mortgage loans.

They are also going to start improving the quality of their lenders.  They are introducing a “termination clause” to attack the problem where it starts.  Should certain lenders represent a disproportionate number of the bad loans, they will lose their right to originate FHA loans.

As a result, home buyers can expect tougher FHA underwriting in 2010.  This won’t be as much due to the guideline changes, but more due to the “termination clause.”  For lenders to prevent being the “bad lender,” they will add overlays to insure that they do not have a disproportionately bad portfolio.  Examples of this already exist:  The FHA will allow 580 FICO scores, but nearly all lenders require at least 620 FICO.

The new guidelines don’t go into effect until spring, but acting now will save the up-front mortgage insurance premium monies plus lock in today’s monthly mortgage insurance payments before those too get more expensive.

Mortgage markets traded in a narrow channel last week.  There was very little data and wasn’t much volatility in general.

For rate shoppers, the momentum proved favorable for the second straight week.

There again isn’t much data this week.  The biggest report of the week will likely be the Producer Price Index set for Wednesday.

The Producer Price Index is essentially the business equivalent of the Consumer Price Index.  The logic is that inflation at the business level will eventually cycle to the consumer.  If there is one thing that guarantees higher mortgage rates, it’s inflation.

Should inflation come in hotter than expected, mortgage rates will rise the week.  Should inflation come in softer than expected, mortgage rates will improve this week.

Other influential data this week includes Housing Starts, Consumer Confidence and Initial Jobless Claims.