As I sit here, less than 24 hours from the next release of the much-followed monthly SP/Case Shiller Home Price Index, I’m confronted with all kinds of varying data and hypotheses on the future track of home prices.

Particularly interesting to me is a new breakdown, by Capital Economics (which watches our market from Toronto, Canada), on how prices are falling faster at the low end than the high end.

At face value I thought this was a no-brainer. Of course the low end is falling faster because that’s where the bulk of the foreclosures are, thanks to the subprime mortgage debacle, which of course targeted first-time and low-income buyers on the low end. I had no idea how large the discrepancy is:

“Since their 2007 peak, prices in the low tier have so far fallen by 45 percent compared with declines of 35 percent and 25 percent in the middle and high tiers respectively,” notes the report.

Even though most of the subprime distress has worked itself through the market, the pressure on the low-end continues because it is the low-end borrowers now who have the toughest entry to the oh-so-tight mortgage market. As the report reminds, proposed risk retention rules will likely mean a 20 percent down payment, which will price many borrowers out of the low end of the market.

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The share of distressed sales in May, that is foreclosed properties and short sales (when the property is sold for less than the value of the loan), fell to 31 percent of all sales from 37 percent in April. Investors, who purchase a large share of these distressed properties, also represented a smaller share in May. So what’s going on?

We know there is still a huge supply of bank owned (REO) properties, and we also know that banks are pushing short sales on many more properties than ever before. But they are also pushing REO sales, thanks to new sales incentives from lenders and the GSE’s (Government-Sponsored Enterprises).

“Realtors and mortgage loan officers nationwide are driving mid-to-high end organic, short and distressed sales on the fear that buyers will be unable to qualify for loans once the QRM (Qualified Residential Mortgage) rules are in place requiring 20 percent down,” says mortgage market analyst Mark Hanson, describing new rules being considered for risk retention by banks (part of the banking overhaul legislation passed last summer).

Some bloggers though, writing in to me after the existing home sales report, claimed that Fannie and Freddie are holding on to REOs, trying to game home prices. Fannie strongly disputes that.

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To call it an uneasy alliance is too simple, but that’s exactly what the characters were going for when they called their morning press conference in downtown DC.

The new president of the Mortgage Bankers Association, Dave Stevens, arrived carrying a message from Wall Street and Main Street money makers in the breast pocket of his navy blue suit; he was seated in a row just down from Ethan Handelman of the National Housing Conference, who sported a pony tail and an agenda favoring low-income borrowers.

In between them was Ken Edwards, of the Center for Responsible Lending, who referred to the group as, “an eclectic mix.”

Adversity makes strange bedfellows, and today’s mortgage market is nothing short of adverse. The group came together to argue against what Edwards called “draconian requirements” for a the proposed “Qualified Residential Mortgage” (QRM) standard. The QRM is part of new risk retention rules, mandated by the Dodd-Frank Financial Reform legislation of last year. The proposal, which is under comment period until the end of next week, includes a 20 percent down payment for a home loan to qualify as a QRM. If the loan does not meet the QRM standards, the lender must hold on to 5 percent of the risk.

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It’s no surprise that the private mortgage insurance industry is fighting hard against proposed new risk retention rules for the mortgage industry.

They are already trying to pick themselves up and dust themselves off from the near knockout punch the Federal Housing Administration (FHA) gave them, when the government mortgage insurer took over their market share while saving the housing market from complete and total bust.

The FHA became the only game in town for the less credit-worthy borrowers with lower down payments. Now, just when the private guys are trying to get back in the game, they’re getting battered again.

The proposal for a “Qualified Residential Mortgage,” which would be exempt from 5 percent risk retention by the banks, which of course the banks don’t want to retain, requires, among many things, that the buyer put 20 percent down on the home.

“We do not believe that affordability and sustainability are mutually exclusive goals,” Kevin Schneider, president of the Mortgage Insurance Companies of America testified before Congress yesterday (he’s also CEO of U.S. Mortgage Insurance of Genworth Financial [ GNW 12.26  +0.00 (+0.00%) ]). “We understand the drivers of sustainable, affordable homeownership because the private MI industry has a vested interest in assuring that low down payment homebuyers purchase homes with loans that they can afford to pay over time.”

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As federal regulators clamp down on foreclosure procedures at the big banks, and the government sets new lender requirements for risk retention in residential mortgages, the cry from the industry is that this will only hamper the housing recovery and price more borrowers out of home ownership.

“High down payment and equity requirements will not have a meaningful impact on default rates. But they will require millions of consumers, who are at low risk of default, to either put off buying a home or pay unnecessarily high rates,” according to a statement from a coalition including the Mortgage Bankers Association and the National Association of Home Builders. “The government is penalizing responsible consumers, making homeownership more expensive or simply out of reach for millions. We urge regulators to develop a final rule that encourages good lending and borrowing without punishing credit-worthy consumers.”

On the one flank you have the industry fighting these new regulations and on another they are fighting a potential settlement with the state attorneys general that could involve fines that would go toward lowering mortgage principal for troubled borrowers. They in fact funded a study that found such a settlement would prolong the foreclosure crisis and drive up mortgage interest rates. That enraged consumer advocates. Iowa’s attorney general Tom Miller, heading up the 50 state group looking to impose penalties shot back:

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When it rains, it pours, but we’re looking at a hail storm in housing finance this week, as government starts the business of taking itself out of the housing business. Tomorrow morning the FDIC will release and vote on proposed risk retention rules for the mortgage market. This includes the “Qualified Residential Mortgage” definition. A QRM would be exempt from risk retention, where the banks have to hold on to 5 percent of the risk when securitizing loans.

The QRM will likely require a 20 percent down payment on the loan, as well as other underwriting criteria, and loans sold to Fannie and Freddie (while still in conservatorship), as well as FHA loans, would be exempt. At the same time, Fannie, Freddie and the FHA are making themselves more expensive, as they try to shrink their currently overwhelming market share.

Barely a few hours after the vote, House Republicans will introduce a slew of, possibly six, bills designed to reform/shrink/eliminate Fannie and Freddie. Then comes more at a hearing on Thursday on housing finance. All of this begging the question: Without Fannie and Freddie, does the 30-year fixed still exist in a fully private market? And what are the dangers if it doesn’t?

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Yesterday morning I attended the FDIC’s background press briefing before the vote on proposed risk retention rules.

While the rules covered a vast ground, I was of course most interested in those that focus on the “Qualified Residential Mortgage.”

The QRM would be the exemption from risk retention, and therefore banks would want most borrowers to fall under the QRM standard.

A few moments after we reporters sat down at the big conference table, FDIC representatives clunked down a huge document in front of each of us. Then another, then another: Well over 200 pages of what these proposed rules are all about. Thankfully, they then had some other FDIC folks explain to us exactly what we needed to know. I then ran out onto the balcony camera and reported the three top points…20 percent down payment, debt to income ratio requirements and various servicer rules.

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