Don’t Panic – Housing relief is imminent

by Dan Krell © 2008
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Thumbing through an old copy of the late Douglas Adams’ very popular story “The Hitchhiker’s Guide Through the Galaxy,” I find the “Guide’s” message of “Don’t Panic” apropos for anyone concerned about the real estate market or in need of assistance. “Don’t panic,” help is on the way.

Help is imminent in the final form of HR 3221: the American Housing Rescue and Foreclosure Prevention Act. HR 3221 is comprised of a number of other bills that have been proposed over the past year (which started in July 2007), and has been passed in various forms in both the House of Representatives and the Senate. The hang-up on its passage has been differences between the House and Senate version. The Housing and Economic Recovery Act of 2008 (Banking.Senate.gov) is the latest proposed changes to HR 3221 and is to be voted on in the Senate in the coming week. The evolution of HR 3221, along with its many names and Acts, can be viewed at House.gov and GovTrack.us.

One of the most controversial issues in HR 3221 is the provision for tax credits to home buyers. Although home buyer tax credits up to $7,500 will be provided as an interest free loan over fifteen years, advocates and critics have argued over the tax credit’s virtues and shortcomings.

The newest wording of the American Housing Rescue and Foreclosure Prevention Act comes from the Senate’s Housing and Economic Recovery Act of 2008. Highlights of this new version include the improvement and regulation of the government sponsored entities (Fannie Mae and Freddie Mac), permanent modernization of FHA, and foreclosure protections.

Oversight of the government sponsored entities (GSE) will be through a new office that will be responsible for establishing capital and management standards (which will include internal controls, audits, risk management, and portfolio management); enforcing its orders through cease and desist authority, civil money penalties, as well as the authority to remove officers and directors; restricting asset growth and capital distributions for undercapitalized institutions; putting a regulated entity into receivership; and reviewing and approving new product offerings.

Improvements within GSEs will include the permanent loan limit increases in high cost areas and required affordable housing goals. To assist in meeting those goals a Housing Trust Fund and a Capital Magnet Fund will be created, which will used for the construction of affordable rental housing.

Modernization of FHA will allow for broader access and a streamlined process to provide mortgages to home buyers in all areas. Additionally, FHA loan limits will be raised to 110% of area median home prices (with a cap of 150% of the GSE limit).

It is anticipated that FHA will also assist home owners who are in foreclosure. Originally known as the FHA Housing Stabilization and Homeownership Retention Act (H.R. 5830), (AKA HOPE for Homeowners Act of 2008), the program will provide refinancing assistance to those homeowners who are in foreclosure. If the home owner’s lender agrees to participate, the program will provide a new loan that is the lowest of either 90% of the home value or what the borrower can afford to repay.

Given all the necessary modifications and changes to the legislation, help is hopefully near. But just in case you are in doubt, remember not to panic.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of July 7, 2008. Copyright © 2008 Dan Krell.

Will mortgage loan-limits increase?

by Dan Krell

Are you planning to buy a home this year? If you are planning to purchase a home that is priced more than $417,000, you could get a lower interest rate-if Congress raises conforming loan limits.

First, a very basic primer in mortgage jargon: “Conforming” refers to mortgages that correspond to Government Sponsored Enterprises (GSE) guidelines. GSE refers to those quasi-government enterprises that include (among others) Fannie Mae and Freddie Mac. Conforming guidelines include underwriting criteria that lenders use so they can sell the loans to Fannie Mae and Freddie Mac. The guidelines have strict borrower criteria as well as loan limits. The loan limit is set annually as a reflection of changes to the national average single family home price as determined by the Federal Housing Finance Board’s Monthly Interest Rate Survey. A “jumbo loan” is a mortgage that exceeds conforming loan limits; and usually has higher interest rates because of the higher risk involved.

Two large associations advocating for higher loan limits include the National Association of Realtors (NAR) and the National Association of Home Builders (NAHB). Both the NAR and NAHB argue that increasing conforming loan limits would solve liquidity problems in the jumbo loan market, which would make lending for loans up to $625,000 easier for home buyers who are looking to purchase a home over the current loan limit of $417,000. The NAHB suggest that loan limits be raised temporarily while secondary markets normalize, and be re-evaluated after a two year increase. The NAR cites the need for stimulation of the housing market and the lowering of interest payments to those obtaining loans over the $417,000 limit.

The issue of raising GSE loan limits is not as simple as stimulating a sluggish housing market; as Federal Reserve Board Chairman, Ben Bernanke, made clear to Congress in September 2007. His statement to Congress implied that any increase in loan limits could provide false security to investors on the secondary market – increasing risk to those investors, their companies, and the government. Additionally, Dr. Bernanke implied that if Congress is inclined to increase the loan limits that it should be done quickly, temporarily, and ensures that any increase will function as intended.

What’s the risk? A recent report from the Office of Federal Housing Enterprise Oversight (OFHEO.gov) (the government entity whose mission is to ensure the safety and soundness of Fannie Mae and Freddie Mac) entitled “Potential Implications of Increasing the Conforming Loan Limit in High-Cost Areas” reports that any loan limit increase would only help those in high cost areas as most jumbo loans tend to be geographically centered (California had almost forty-nine percent of the jumbo loans originated in 2007). One unintended consequence from raising loan limits to lower mortgage interest payments may be that home prices will increase to make high-cost areas actually cost more. Additionally, anticipated savings benefit may not be achieved as Fannie Mae and Freddie Mac have to charge for taking any increased risk.

As for now, it appears that loan limits for 2008 will remain the same as 2007. It is clear that although there are benefits, there may also be too many questions left unanswered before Congress can act quickly to raise GSE loan limits.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of January 21, 2008. Copyright © 2008 Dan Krell.

Mortgage Guidelines Get Tougher

by Dan Krell
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Like bears awakening from their hibernation, home buyers are slowly emerging from the holiday season and begin to look for a home to purchase. Many home buyers will find that that the challenge of buying a home this year will be more than finding the perfect home, but finding financing. Many home buyers expecting the mortgage process to be quick and painless may find that it is neither quick nor painless; others, expecting to be approved with a sub-prime mortgage, will be turned down. In the recent past, most home buyers found a way to obtain financing; this year may be different as the mortgage crisis fallout has changed the way lenders underwrite their programs.

Ask anyone in the mortgage industry and they will tell you that the entire mortgage landscape has changed. Some popular mortgage programs are no longer available, while other programs have been significantly changed. It may be a challenge for home buyers to locate a lender that offers a reduced documentation mortgage. These programs still exist, but have more restrictive guidelines; reduced documentation mortgages are requiring more verifications, higher credit scores and larger down payments.

Self employed home buyers will find that the popular “No Doc” is no longer available. The “No Doc” loan required no documentation or verifications from the borrower, hence the name. Although the program typically required a higher credit score, the “No Doc” loan was popular with self employed borrowers because employment, income, or asset verifications were not required.

Home buyers who need a low or no doc loan will have to look hard for alternatives. Most “liar loans” are no longer offered, or are offered with some type of verification. If you come across a stated income mortgage program, be prepared to sign an IRS form 4506 that will allow the mortgage company to verify the stated income. You should also expect a higher down payment and a higher than average interest rate.

As a way to assist home buyers with less than perfect credit, Fannie Mae and Freddie Mac created their expanded criteria programs in the mid to late 1990’s. These programs offered these home buyers a mortgage with minimal down payment and a reasonable interest rate; however the interest rate varied on the borrower’s credit score. However, like other mortgage programs, these expanded programs have also changed their requirements which include, among other items, increasing credit score requirements.

As the sub-prime mortgage industry has all but dried up, the FHA mortgage (HUD.gov) has picked up the pace. But even the venerable FHA loan is changing; FHA approved lenders are also tightening up their lending guidelines (in anticipation of new FHA guidelines). Some of the changes include credit score driven approvals as well as variable loan pricing (the interest rate will vary based on the borrower’s credit score).

For home buyers considering purchasing a home this spring (or any other time), talking to a lender should be their first priority. The mortgage crisis has changed the way mortgage lenders operate, including how lenders view borrowers. Home buyers should be prepared to provide more documentation and information to their lenders, as well as a possible higher down payment.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of January 14, 2008. Copyright © 2008 Dan Krell.