Ben S. Bernanke’s success in pushing
mortgage rates to record lows is enabling Congress to fund last
month’s payroll tax cut extension by siphoning money from Fannie
Mae and Freddie Mac (FMCC), while homebuyers still benefit from the
cheapest borrowing costs in history.

The legislation mandated that Fannie Mae, Freddie Mac and
the Federal Housing Administration charge more to guarantee
home-loan debt, starting with an increase of 0.1 percentage
point at Fannie Mae and Freddie Mac in April. It will force
further increases of as much as 0.45 percentage point over the
next two years at the two U.S.-supported companies, according to
Nomura Securities.

Increases of twice that amount would leave 30-year home-
loan rates at levels unseen before 2009 after Federal Reserve
Chairman Bernanke kept the short-term lending benchmark near
zero and bought $1.25 trillion of mortgage bonds. The greater
fees suggest that Congress and President Barack Obama’s
administration are willing to bet the housing recovery is far
enough along to withstand the rise.

“Rates are so low right now, that additional cost is
marginal, said Mark Goldman, a mortgage broker at C2 Financial
Corp. in San Diego. ‘‘The only impact it will have is on people
who have a visceral reaction to being singled out to fund the
extension of the payroll tax cut.’’

The average rate on a typical 30-year mortgage fell last
week to a record low 3.89 percent, according to surveys by
McLean, Virginia-based Freddie Mac. The average over the past
decade has been 5.69 percent, with the high in the period of
7.18 percent reached in 2002 as home prices were rising.

More Households Created

Warren Buffett, the billionaire chairman and chief
executive officer of Berkshire Hathaway Inc. (BRK/A), has said that
housing will recover from its six-year slump.

‘‘We’re creating more households every day than we are
houses and we will come into balance,’’ he told Charlie Rose in
a September interview.

JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon,
whose bank is the second-largest U.S. mortgage lender, told
investors and analysts in a conference call on Jan. 13 that
housing is ‘‘getting closer’’ to a bottom.

‘‘We’re going to add 3 million Americans every year for the
next 10 years, that’s 30 million Americans who need 13 million
dwellings,” Dimon said. “Mortgage underwriting will loosen,
not tighten. If you put all those things together, you’re going
to have a turn at one point.”

Home Affordability

Falling rates and property prices pushed housing
affordability to a record high last year, according to a
National Association of Realtors index. The gauge showed in the
third quarter, the most recent available, that households with
the U.S. median income earned 184 percent of the money needed to
qualify for a mortgage to buy a house.

A “more rapid recovery” is being prevented by policy
makers failing to coordinate, he said. “There is no one really
in charge of all this,” Dimon said on the call.

An increase of 55 basis points, or 0.55 percentage point,
in guarantee fees at Fannie Mae and Freddie Mac, known as
government sponsored enterprises, or GSEs, would raise the cost
of a new $300,000 30-year mortgage by about $1,200 a year,
assuming current loan rates as the base level and that the
amount was fully passed on to borrowers.

“The increase in GSE fees is nothing short of a new
homeowner tax,” said John Robbins, a former chairman of the
Mortgage Bankers Association who’s starting Bexil American
Mortgage Inc. in San Diego. It’s “unbelievable” that “our
legislators and regulators propose real-estate stimulus out of
one side of their mouths and raise costs out of the other.”

Pricing Risk Effectively

Interest rates aren’t the biggest obstacle to a housing
recovery, said Sung Won Sohn, professor of economics at
California State University Channel Islands and a former chief
economist at Wells Fargo & Co. (WFC)

“I don’t know anybody who can’t buy or finance a home
because interest rates are too high,” Sohn said in a telephone
interview from Ventura, California. “The cost of borrowing
should reflect the amount of risk you’re taking. Fannie and
Freddie ran into trouble in the past because they didn’t price
their risk effectively.”

The decision to use revenue from Fannie Mae and Freddie Mac
to fund the payroll tax extension, represents a shift in the
government’s approach to Fannie Mae, said analysts at RBS
Securities led by Margaret Kerins. The legislation says that the
guarantee fees, known as g-fees, charged by the companies
“shall be increased to reflect the risk of loss, as well as the
cost of capital allocated to similar assets held by other fully
private regulated financial institutions.”

Complicating Wind Down

The higher fees must be used to pay the government until
October 2021, complicating any future effort to wind down the
companies, which have cost taxpayers more than $153 billion
since being seized by the U.S. in 2008. Directing revenue from
the enterprises to the U.S. Treasury “utilizes the GSEs in a
way we have not really seen before, bringing them closer to the
government,” the RBS analysts wrote.

The FHA, the U.S. agency that’s continued to insure loans
with down payments as low as 3.5 percent, also must raise its
premiums by 0.1 percentage point, or 10 basis points, in the
next two years under the law, which extended the payroll tax
relief for two months.

That some government mortgage policies are working at cross
purposes was highlighted in a Jan. 13 report by Barclays Capital
analysts led by Ajay Rajadhyaksha.

In one section of the report, they said a decision by
lawmakers to allow homeowner tax breaks for mortgage-insurance
payments to lapse on Dec. 31 may further reduce refinancing
among FHA loans that was already depressed by separate
administration moves.

HARP Improved

At the same time, regulators have in recent weeks improved
the effectiveness of the Home Affordable Refinance Program, or
HARP, for Fannie Mae and Freddie Mac borrowers with little or no
home equity, the analysts wrote, exceeding their initial
expectations for the expansion.

Fannie Mae and Freddie Mac last month reduced the one-time
fees they charge for riskier borrowers under HARP adjustments
that also include cutting lender risks.

Bernanke underscored the importance of housing to the
broader economy when he sent Congress a study by his staff on
Jan. 4 laying out a range of proposals for lawmakers or the
Obama administration to consider, from steps that could further
loosen lending standards to programs for turning foreclosed
homes into rental properties.

The Fed has helped restrain borrowing costs by holding its
benchmark for short-term rates near zero, and with a program in
which it may buy about $200 billion of government-backed
mortgage bonds this year by reinvesting proceeds from previous
purchases, or more than 20 percent of new loans, estimates
compiled by Bloomberg show.

Property Values

Still, an S&P/Case-Shiller index of property values in 20
cities dropped 3.4 percent in the year through October, bringing
declines since the 2006 peak to 32 percent. Existing home sales
remain about 20 percent below their 10-year average, while New
York Fed President William Dudley estimates that properties
seized by lenders may rise to 1.8 million this year and the same
number next year, from about 1.1 million last year.

Fannie Mae, Freddie Mac, the FHA and other government
agencies help finance about 90 percent of new mortgages,
according to newsletter Inside Mortgage Finance. Fannie Mae’s g-
fees for new business averaged 29 basis points in the first nine
months of last year, according to a filing with the U.S.
Securities and Exchange Commission.

Reforming Housing Finance

Edward DeMarco, acting director of the Federal Housing
Finance Agency, had already said in a September speech that he
planned to increase the fees, following up on the Obama
administration’s paper last February that described the step as
an interim measure that could reduce the government’s role in
the mortgage market.

In a comment made in December before Congress approved the
fee, DeMarco said relying on long-term revenue from the
companies for short-term tax cuts “seems inconsistent with the
need to end the conservatorships and reform our housing-finance
system.” The agency “will implement whatever Congress
directs,” DeMarco said at the time.

Future increases at Fannie Mae and Freddie Mac after their
April l hikes probably will range between 15 basis points and 45
basis points over the next two years, the New York-based Nomura
analysts Ankur Mehta, Dhivya Krishna and Ohmsatya Ravi wrote in
a Jan. 13 note to clients. The exact amount is “subject to
interpretation,” they said.

If fees increase by about 75 basis points to 100 basis
points that would reduce Fannie Mae and Freddie Mac’s role in
the market because banks may opt to keep the loans on their
balance sheets, JPMorgan analysts led by Matt Jozoff said in a
Jan. 6 report.

Easing Refinancing

Since the initial details of the HARP expansion were
released in November, Fannie Mae has removed language in its
guidelines referencing a borrower’s “ability to repay” the
loan. Analysts at Barclays said this would help assure lenders
they won’t need to buy back soured debt for underwriting errors.

Freddie Mac loosened standards in its streamlined
refinancing program for borrowers with loan-to-value ratios of
less than 80 percent, which Bernanke’s paper cited as a barrier
to refinancing. It removed a restriction that blocked
refinancing of loans it already guarantees if homeowners are
underwater because of second-lien home equity debt, and ended a
requirement that the borrowers have credit scores of at least
620.

Insurance Tax Deductions

The expiration of mortgage-insurance tax deductions, which
covered homeowners with less than $109,000 in income and loans
taken after 2007, will hit FHA borrowers, potentially costing
someone with a $200,000 loan almost $500 annually, according to
the Barclays analysts.

It also reduces incentives to refinance, because of
previous fee increases by the agency, the New York-based
analysts said. The FHA boosted its annual premiums in two steps
starting in October 2010, to as much as 1.15 percent from 0.55
percent.

Borrowers paying the previous premium can’t maintain it on
a new loan. It’s possible the agency could allow a
grandfathering of borrowers’ existing premiums by saying doing
so would reduce defaults, according to JPMorgan analysts. Brian
Sullivan, a FHA spokesman, declined to comment.

The agency’s capital ratio fell last year to 0.24 percent
from 0.5 percent in the prior fiscal year. The FHA has failed to
meet the legal minimum 2 percent ratio for three straight years
after expanding as private lenders retreated.

FHA Acting Commissioner Carol Galante has said that her
agency will consider raising its premiums, an additional cost
for borrowers, to avoid a taxpayer bailout if housing worsens.
“We continue to keep our options on the table,” she said in a
November letter to Congress.

To contact the reporters on this story:
Jody Shenn in New York at
jshenn@bloomberg.net; or
John Gittelsohn in Los Angeles at
johngitt@bloomberg.net

To contact the editor responsible for this story:
Rob Urban at
robprag@bloomberg.net