Now, facing a $16 billion shortfall, the FHA has raised premiums and will raise them yet again next month. FHA loans are becoming increasingly expensive.

(Read More: Housing Jobs Jump, Where Are the Workers?)

Meanwhile, as the housing market improves, private mortgage insurers are starting to remove overlays on higher loan-to-value loans, meaning the percentage of the home value that is mortgaged. Low LTV’s and high credit scores were the rule recently for the private insurers, but that may now be loosening, making these loans cheaper than FHA.

“FHA is certainly becoming more expensive,” noted Craig Strent, CEO of Apex Home Loans in Bethesda, Maryland. “The increase in low down payments is reflective of first time buyers coming off the sidelines and entering the market. We’re going to see more of this trend in the next couple of years as the economy improves and renters start to once again see the benefit of buying over renting. FHA has become more expensive and the mortgage insurance companies are the beneficiary of that, which is really not a bad thing as it means the private market is insuring the lower down payments rather than the government.”

(Read More: Home Buyers Are Back, but Where Are the Houses?)

The stocks of mortgage insurers like MGIC and Radian spiked in the first months of this year, as home prices improved and FHA policy changes designed to shrink its share of the market were announced. There is currently a bipartisan effort in the U.S. Senate to reduce the FHA’s role, and in the House of Representatives a hearing is being held Wednesday looking at, “the competitive advantages the Federal Housing Administration has relative to private mortgage insurers and how those advantages contribute to the crowding out of private capital in housing finance,” according to the House Financial Services Committee release.

Despite the advantages, FHA’s share is already shrinking, as Fannie Mae’s is rising. In the first quarter of 2012, loans with between 3 and 10 percent down payment made up 15 percent of Fannie Mae’s business for home purchase loans (not refinances). In the second quarter it rose to 17 percent and in the third to 18 percent. Fannie Mae has not reported its fourth quarter yet, but that share is expected to rise again. While a credit thaw is part of it, as mortgage interest rates rise and fewer borrowers apply to refinance, lenders are simply looking for more business.

Article source: http://www.cnbc.com/id/100548913

“There is a huge population that have benefitted from adjustable rate mortgages. When the rates adjusted, they adjusted down. Those homeowners have been riding those low, one-year arms. If they start to hear about rates going up, they may come out of the woodwork to lock into fixed rates,” says Strent.

That may be, but 88 percent of loans outstanding today are fixed, according to the Mortgage Bankers Association. Just 12 percent are adjustable rate. Even if rates do not rise any higher than they are today, which they may not, they would have to fall below last year’s lows to see the high refinance volume of 2012 continue in 2013.

(Read More: Link Between Credit and Mortgages: Not What You Think)

“The refi apocalypse is upon us,” says Mark Hanson, a mortgage analyst in Northern California. “The thought is that there are a bunch of homeowners on the fence who haven’t refi’d who will all jump in thinking they will miss out. The theory is 100 percent nonsense. The series will simply plunge. That’s because after 16 months of sub 4 percent rates — and every bank loan officer and mortgage broker doing everything they can after a long mortgage banking income drought that ended with Twist — there is nobody left to refi. In fact, the only reason refi applications stayed flat in Q3 and Q4 was because they passed a new law allowing refinances regardless of the LTV [loan to value]…the HARP unlimited LTV refi.”

While the Federal Reserve does not set mortgage rates, a signal that the economic recovery is improving and even the slightest hint that the Fed could end its purchases of mortgage-backed securities, could push rates slightly higher.

“The Fed likely won’t use its statement to markets to finger a specific date on which QE3 will end, but that won’t stop investors from guessing. If the herd believes that QE3 will terminate within the next 6 months, mortgage rates will likely rise. If QE3 is believed to extend into 2014 and beyond, mortgage rates will likely fall,” writes Dan Green of Waterstone Mortgage in his blog.

(Read more: What to Expect from Interest Rates This Year)

While refinances may suffer under even slightly higher rates, more important to the housing recovery is new mortgages to purchase homes. Purchase applications are still running at half the rate they were in 2007, when last the Dow hit a new high. Small moves in mortgage rates do affect purchasing power, but lending standards are a far bigger driver today. New regulations for lenders and a consolidation of lending overall to the mega-banks are certainly slowing, and in some cases stalling, the process for some would-be buyers.

(Read More: Cities That Are Most Prepared for Retirement)

Article source: http://www.cnbc.com/id/100420382

After a summer of significant monthly jumps in confidence among the nation’s home builders, fall appears to be bringing in a chill.

Builder sentiment edged up just one point in October, according to an industry association index, but credit issues still plaguing the market appear to be holding sentiment from making the final move from negative to positive.

(Read More: Are Big Home Builder Stocks Too Hot?)

“The slight gain in builder confidence this month is an indication that, while still moving forward, the speed at which the housing recovery is proceeding is being moderated by the various constraints such as tight credit, difficult appraisals and more recently, the limited inventory of buildable lots in certain markets,” explained National Association of Home Builders’ chief economist David Crowe. “These are the complicating factors that make it difficult for builder confidence to reach and surpass the 50-point mark, at which an equal number of builders view sales conditions as good versus poor.”

Buyer traffic continues to improve, marking the only positive move in the NAHB’s monthly index. Both current sales conditions and sales expectations over the next six months were unchanged, both still below the positive mark. Regionally, confidence improved in all but the Northeast region.

(Read More: How to Play the Housing ‘Boom’)

Record low interest rates are bringing buyers back to the market, tempting them, but often turning them away at the same time. The rates are great, if you can get them, but a lot of potential buyers, especially much-needed first-time home buyers, cannot.

“You have to have substantial down payment. The minimum down payments are difficult,” says Jane Fairweather, a real estate agent in Bethesda, Maryland. “The people that can manage them run into appraisal problems, banks are still squirrely, so mortgage money is still an issue in the marketplace.”

That is not likely to improve any time soon. Details on new regulations in the mortgage market are beginning to leak out of the Consumer Financial Protection Agency, and while they appear to be less onerous than once expected, they are not exactly benign.

“For us the biggest issue with QM (the Qualified Mortgage rule that will be issued by the CFPB as part of financial reform legislation) remains that banks have an incentive to be more conservative in their underwriting until they are confident on how the Qualified Mortgage safe harbor will protect them from borrowers trying to avoid foreclosures by claiming that they never should have gotten the loan in the first place,” writes Jaret Seiberg of Guggenheim Securities. “This is why we believe we remain at risk for a purchase mortgage credit crunch in 2013.”

(Read More: Homebuilders Rise as Market Continues Recovery)

While credit is an obstacle to the home builders, dramatically low supply of existing homes is a near-term boon.

“October is going rather well. What I see as an interesting story is that realtor listings of existing homes keeps dropping,” notes Stephen Paul, executive vice president of MidAtlantic Builders in Rockville, Maryland. “I think the reason for this is that we are past the big short sale and foreclosure problem, and the balance of people are remaining in their homes with upside down mortgages, making their regular payments. They are not moving, not defaulting, just standing pat. That has shrunk the existing home inventory and will help the new homes market.”

CNBC Realty Check producer Stephanie Dhue contributed to this report.

Sector Watch: US Home Builders

• Toll Brothers
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• DR Horton
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• Hovnanian Enterprises
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• PulteGroup
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• Ryland Group
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• Lennar Corp
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• Beazer Homes USA
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• Meritage Homes
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• KB Home
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Questions?  Comments?  And follow me on Twitter @Diana_Olick