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

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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