The Stark Reality of Today’s Mortgage Markets

It has been clear for quite a while the mortgage market is being challenged with obstacles that directly impact homeownership rates.  This article isn’t written with the intent to solve for these challenges it is written to provide a perspective on key themes that arise in social media to “fix” the housing crisis and open the conversation up about the practicality of what can work.

The homeownership path is no longer seeking out a lender, being able to look at an ample supply of homes that are at reasonable prices and find financing at attractive rates.

Today’s prospective homeowner is faced with multiple challenges: a) the available supply of homes, b) affordable price points c) large increases in home insurance rates d) rising property taxes e) income levels that do not match other cost factors and f) inflation.

These pain points along with the various shock headlines that continue to hit social media  makes the work of any firm involved in the mortgage financing life-cycle, more than complex. The challenges cited above won’t be solved using a traditional mind set of ‘lower interest rates will drive increased production’ and the idea that the cost of housing will balance itself out is nowhere close to happening in the years ahead.

So, what is the answer? It is evolving. Let’s look at some of the topics that the current Administration, FHFA, and others have put into the “thought pool.”

Removing the 401k Penalty Withdrawal fee: When the funds are used for mortgage downpayment.  Early withdrawals generally trigger a 10% penalty plus ordinary income tax. Currently, only IRA funds have a limited $10,000 exemption for first-time homebuyers.

Potential Result: Yes, this change could entice the 30+ aged homeowner to think twice about the returns generated in the 401k when compared to achieving homeownership. Borrower benefits include the likelihood of appreciation in the home’s value that could be greater than the 401k return and income tax changes.

Ability to Implement: Reasonable – doesn’t require huge changes in the underwriting and approval of the loan per FHA, VA, RD, GSE standards.  Administrators of 401k accounts would need to modify their processes and systems, and tax reporting would need to be addressed.

Changes to Fannie Mae and Freddie Mac Loan Level Pricing Adjustors: The real question should be what and / if LLPA adjustors make sense based upon current and projected risk-based loan default performance – the outcome impacts the final decision.

Potential Result:  Homeowner’s can benefit by receiving a lower interest rate and/or a reduction in discount points charged on the loan which then pays for the Loan Level Pricing Adjustors.

Impact: A simple analysis on a high LTV loan, mid-range fico score on a $450k loan amount where a reduction in the LLPA would be one-half of current published discounts would reduce the rate by ¼ of 1% - resulting in a monthly payment savings of $73 based upon current market. A change of this amount helps, though, is not significant.

Ability to Implement: LLPA’s are matrix driven which makes the timeline to implement reasonable. Whether it be a POS, Pricing Engine, LOS or Capital Markets pipeline management system the ability to implement is flexible.

Changes to FHA Single-Family MIP Premiums: Periodically the lending industry asks the question – why is an FHA borrower required to pay both an up-front MIP (typically at 1.75% of the original loan amount) and a monthly MIP premium?  This structure increases the loan amount as the up-front MIP is typically financed and the monthly MIP has specific rules for borrowers with a higher LTV as to when the insurance can be dropped. FHA borrowers find it easier to wait for the market to change, refinance the loan into a conventional loan without PMI.

Historical Perspective: The last change to single-family monthly MIP rates occurred in 2023 when the annual MIP for most single-family loans was reduced from 0.85% to 0.55%.

HUD’s Reserves: Discussions should focus on the size of HUD’s capital reserves (FHA Mutual Mortgage Insurance Fund) as this calculation results in the MIP requirements. Information from a web-google search showed:

• Capital Growth: The capital held increased by $16.1 billion compared to fiscal year 2024.

• Cash Reserves: Of the total capital, over $100 billion consists of cash or cash equivalents.

• Capital Ratio: The MMI Fund's Capital Ratio stood at 11.47%, which is more than five times higher than the 2.0% minimum mandated by Congress.

  
  

Potential Impact: If HUD were to reduce or change the structure for its up-front MIP program and/or monthly MIP requirements the cost of homeownership would change.   The combination of both financed (larger loan amount) and monthly MIP increased the monthly payment.  At an estimated$458k loan amount, 30-year 6.00% interest rate this combination is roughly $257 per month.   The combined cost basis is nearly 9% of the monthly mortgage payment.   Additionally, FHA should consider developing an  analysis that determines if the MIP structure were to change, would borrowers remain in their home longer thus reducing prepayment speeds on the MSR asset?  The combination of these two concepts could be beneficial for the borrower, and for those firms that invest in MSR’s for the future servicing life-of-loan income stream.

ARMS as a viable financing option: Arm programs can be a reasonable  financing option.   However, the negative mindset that was produced from the  creative ARM financing from the mid 2004 – 2006 era needs to be changed.  ARM programs have  changed to have longer terms, such as the 5/1 and 7/1 Hybrid ARM programs, with consistent underwriting and loan terms.   Gone are the days of negative amortization, balloon payments, no income / no asset criteria and interest only features.  

A recent comparison between a $450k loan amount, 30-year fixed rate conforming conventional financing at 6.25a% -vs- a 5/1 Hybrid ARM at 5.50% shows the yield curve has begun to steepen making an ARM loan attractive.   Borrower benefits equal approximately $215 monthly, a significant number! In the first five years of the loan, which  equals a cost savings of nearly $13,000.  Numbers of this magnitude do make a difference in how you serve your customer base.

In conclusion, while the hype of various loan program changes rages on to try and help spark housing industry growth, I wanted to provide some real-world insights into the realistic expectations of these potential changes. So that you can reset expectations accordingly.

Other Ideas?  It is also with great relief to also hear that at the 2026 MBA IMB conference in Amelia Isalnd, Florida, thanks to the Mortgage Bankers Association continued education with  the current White House Administration – the talk of a 50 year Mortgage or a Transportable Mortgage is finally being recognized as unattractive for ALL parties involved – and they should remain in the graveyard of mortgage ideas. As was concluded at the conference, with little to no rate changes ahead, even with a new Fed Chair, there is no silver bullet on the table to dramatically shift today’s mortgage markets.

With that said, lenders, please know there is still a smorgasbord of good, solid, profitable, loan programs available in today’s marketplace. Are you missing out? We recommend you reach out to us at BlackFin to request a Mortgage Program Analysis. Our Capital Markets team has more than 70 years of direct lender experience that you will benefit fromOur team at BlackFin remains dedicated to your firm’s success, we work with our clients on customized solutions that fit with immediate needs and long-term strategic planning.

Luana Slettedahl is a Principal Consultant with BlackFin Group in the Mortgage Strategy Practice. Luana brings forty years of diversified experience in Capital Markets, Mortgage Servicing Rights, GSE and Ginnie Mae relationship management and Seller / Servicer requirements.  Her understanding of how to successfully do business with the GSE’s and Ginnie Mae, has made her a significant asset to her clients. For more information contact info@blackfin-group.com