Rules, Rates Keep
Housing in Deep Freeze

There were signs of spring last week in housing, with home-builder sentiment and home construction showing glimmers of improvement. But two developments -- tightening lending standards and a surprisingly mixed interest-rate environment -- suggest a real thaw is far from near.

In December, Fannie Mae began demanding bigger down payments from borrowers in housing markets where prices were declining -- which would describe every one of the 20 biggest U.S. housing markets tracked in the S&P/Case-Shiller home-price index.

Last week Freddie Mac, for the second time since November, raised the fees it charges when it buys riskier loans from mortgage lenders. Lenders can either eat these fees or pass them on to borrowers, sometimes in the form of higher mortgage rates. It doesn't take an M.B.A. to guess which choice the lenders will make.

Freddie's new rules mean lenders will have to pay a small fee for mortgages that cover more than 80% of a home's value. The fee would turn a 6% mortgage rate into roughly a 6.05% rate, according to Freddie Mac spokesman Brad German. That alone doesn't make a huge difference, but such fees can pile up, chipping away at housing affordability.

Freddie Mac says it wants to be compensated for the risk of taking on a mortgage -- setting the lending bar higher to keep defaults low. If it didn't do this, Freddie says, it could be forced to take on more capital, reducing the amount of money available to finance new home purchases.

"We're in one of the worst housing-market reversals in 80 years, and that's going to have an impact on credit risk," Mr. German said. "We're going to have to align our fees with the real risks in the marketplace."

Meanwhile, the Federal Reserve's rate-cutting efforts are having a mixed effect. The three-month London interbank offered rate has come down significantly thanks to Fed rate cuts. That is a boon to many borrowers whose mortgage payments shift with Libor. The average five-year adjustable-rate mortgage interest rate on "conforming" mortgages, those that Fannie and Freddie are allowed to buy, has fallen to 5. 57% from 6.43% when the Fed began its credit-loosening campaign in September, according to HSH Associates, a Pompton Plains, N.J., publisher of mortgage-rate data.

That will help hold down the monthly mortgage bills of many homeowners. Still, these rates haven't fallen nearly as much as the 2.25 percentage points in Fed short-term rate cuts.

Longer-term rates have fallen even less since August -- down only about half a percentage point. And longer-term rates have been rising lately amid worries about inflation. From a January low of 5.61%, the average interest rate on a conventional 30-year conforming mortgage increased to 6.24% last week, according to HSH.

This week will bring a barrage of housing news, including reports of preowned- and new-home sales, along with S&P/Case-Shiller and Office of Federal Housing Enterprise Oversight home-price data. Also due out are earnings reports from Freddie Mac, housing-focused retailers Lowe's and Home Depot, and home builder Toll Brothers. Each of these numbers is expected to move in the wrong direction: lower.

Despite the Fed's efforts, in other words, there is really little reason to think the sector is near a clearing from this storm.

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