The Pending Home Sales Index,* a forward-looking indicator, dropped 30.0 percent to 77.6 based on contracts signed in May from a reading of 110.9 in April, and is 15.9 percent below May 2009 when it was 92.3. The falloff comes on the heels of three strong monthly gains as home buyers rushed to take advantage of the tax credit.

The data reflects contracts and not closings, which normally occur with a lag time of one or two months. However, many closings have been delayed recently from a rush of buyers into the system and slow processing of short sales, in addition to the heavy volume and a more thorough loan underwriting process. As many as 180,000 buyers who signed contracts by April 30 may have missed the June 30 closing deadline for the tax credit. However, Congress passed legislation yesterday to extend the deadline for delayed contracts and President Obama is expected to sign.

NAR chief economist Lawrence Yun said, “Consumers are rational and they rushed to meet the tax credit eligibility deadline in April. The sharp decline in contract signings in May is a natural result with similar low levels of sales activity anticipated in June,” he said. “Surprisingly, though, some local markets such as Portland, Maine, and Jacksonville, Fla., actually experienced an increase in contract signings from a year ago without the tax credit.

Rates on 30-year fixed-rate mortgage averaged 4.49 percent with an average 0.7 point for the week ending Aug. 5, a new low in records dating to 1971, Freddie Mac said in releasing the results of its weekly Primary Mortgage Market Survey. This week’s rate was down from 4.54 percent last week and 5.22 percent a year ago.

Rates on 15-year fixed-rate mortgages averaged 3.95 percent with an average 0.6 point, down from 4 percent last week and 4.63 percent a year ago. That’s a new low in records dating back to 1991, Freddie Mac said.

Rates on 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) loans averaged 3.63 percent with an average 0.6 point, down from 3.76 percent last week and 4.73 percent a year ago. That’s a new low in records dating back to 2005.

Not setting a record were 1-year Treasury-indexed ARMs, which averaged 3.55 percent with an average 0.7 point, down from 3.64 percent last week and 4.78 percent a year ago.

Rates surveyed by Freddie Mac are for prime borrowers taking out loans with 20 percent downpayments. Borrowers taking out loans too large or risky for purchase or guarantee by Freddie Mac can expect to pay more.

Faced with rising losses on FHA-guaranteed loans, the Department of Housing and Urban Development (HUD) hiked upfront premiums in April, raising them from 1.75 percent of the loan being insured to 2.25 percent.

Applications for FHA-guaranteed loans fell nearly 20 percent after the increase went into effect, according to a weekly survey conducted by the Mortgage Bankers Association.

But in detailing its plans in February, HUD promised it would roll back upfront premiums to 1 percent if Congress gave it the authority to raise annual premiums instead.

Legislation raising the statutory cap on annual premiums from 0.55 percent to 1.55 percent, HR 5981, passed the House on July 30 and was approved by the Senate by unanimous consent Wednesday.

If HUD follows through on the plan it laid out in February, upfront premiums will be lower than before, and annual premiums won’t be increased all the way to the statutory limit just yet.

HUD said in February that if the cap was raised, it planned to increase annual premiums for FHA mortgage insurance to 0.85 percent for borrowers with loan-to-value ratios of up to 95 percent and to 0.9 percent for borrowers with higher LTVs.

The way premiums are currently structured, a borrower taking out a $200,000 loan with the 3.5 percent minimum downpayment pays an upfront premium of about $4,500, plus $1,100 a year in annual premiums.

If HUD rolls back upfront premiums to 1 percent and increases annual premiums as previously announced, that borrower would pay an upfront premium of about $2,000, plus $1,800 a year in annual premiums. The $700 increase in annual premiums would translate into an additional $58 a month on their mortgage payment.

The Mortgage Bankers Association welcomed that prospect.

“We are encouraged that FHA Commissioner Stevens has indicated he may not need to raise premiums to the maximum, and we believe that that a small increase in the annual premium, coupled with a decrease in FHA’s upfront premium, will help stabilize FHA while lowering closing costs for many borrowers,” MBA Chairman Robert Story said in a statement.

The MBA also welcomed Senate passage of HR 5872, which increases FHA’s authority to insure multifamily loans by $5 billion for the remainder of the fiscal year.

The changes in FHA premium structure are one of several steps taken to stem losses.

An actuarial report revealed in November that FHA’s capital reserve ratio had fallen below the 2 percent minimum set by Congress, raising fears that the program would require a taxpayer bailout. HUD maintained that premiums collected on new loans should cover losses and that the program is unlikely to end up in the red except under the most dire circumstances.

But in December, HUD announced it would tighten underwriting standards on FHA-backed loans by increasing the amount of upfront cash homebuyers must bring to the table, raising minimum FICO scores for new borrowers, and reducing maximum seller concessions from 6 percent to 3 percent.

HUD published a notice in the Federal Register on July 15 outlining further details of those proposed changes, and is accepting public comments until Aug. 16. After reviewing the comments it receives, HUD will publish a final notice that will include the implementation date for the changes.

HUD and Congress had previously put in place a ban on seller-financed downpayment assistance on FHA loans, tightened underwriting guidelines for streamline and cash-out refinancings, updated FHA appraisal standards, and increased oversight of lenders.

In their latest quarterly report to Congress on the performance of FHA-guaranteed single-family home loans, HUD said this week that the credit quality of recent loans has improved, and claims have been lower than predicted by the actuarial report.

New 90-day delinquencies during the quarter ending June 30 were down 32 percent from the quarter ending Dec. 31, to 104,000, the report said, and FHA has received 19,310 fewer claims and paid $3.7 billion less than projected.

Average FICO scores, which were in the 630s during much of 2007 and early 2008, are now approaching 700, and less than 1 percent of loans rely on downpayment assistance, compared with about one in four loans in 2007 and 2008 (downpayment assistance from charities is still permitted).

The report said FHA is on a pace to insure 1.7 million loans in the year ending Sept. 30, and may insure more than 1 million purchase loans for the first time since 1987.