Mortgage Blog

Last week I discussed the main points from the new housing bill. Having received great response and insight from many, I thought that we should discuss the FHA loan rescue program a little more. I was very curious about the opinions of people in my industry, mainly lenders who will have to implement or comply with the new program. The candid “off the record" comments by a few told me a lot. It was obvious that the program was met with skeptism. These major lenders are not sold on the idea that this FHA program will work. The challenge is committing staff, resources and marketing to promote something that they are not sure of. They have major concerns that this is just one more rescue plan full of "good intentions" that will be ignored once again.

As I discussed in the previous blog, this will allow FHA to refinance the homeowner’s current loan to a fixed rate. It will require that the existing lender voluntarily reduce the current loan amount to 90% of the current appraised value. The homeowner would then have to pay additional fees in the form of a 1.5% of loan amount annual mortgage insurance premium. The homeowner would also have to "equity share" with FHA if they sell the home, that is - give FHA at least 50% of any appreciation of the home (90% to FHA if they sell within the first year of the program.) I do believe that these borrowers should have to shoulder some of the load and not be given a "freebie"; however, the practicality of someone actually participating in this complicated and restrictive plan is doubtful, especially when it would be easier and probably less costly to just walk away.

Other items of the housing bill that may affect you are:

Create home-buyer credit. The bill includes a tax refund for first-time home buyers worth up to 10% of a home's purchase price but no more than $7,500.

The refund, however, serves more as an interest-free loan, since it would have to be paid back over 15 years in equal installments.

My Take: It could help generate some activity in the real estate market for first- time homebuyers, as this is a real credit against your tax bill in the year that you purchase the home. However, since the homebuyer will have to pay back the credit over the next 15 years, it could cause some financial hardship. The homebuyer is essentially receiving a tax refund that they will probably spend, not save, and then have to repay. It seems like a gimmick.

Bar down-payment assistance for FHA loans. The bill eliminates a program that has allowed sellers to provide down payment assistance. The bill would also increase to 3.5% from 3% the down payment requirement for borrowers getting FHA loans.

My Take: The elimination of the Nehemiah down payment assistance program and others like it was long overdue. These programs were a loophole in the FHA loan program that let the seller pay for the buyer’s down payment through a separate party. For example, the seller would pay a service fee to Nehemiah Corporation equal to 4% of the sales price of the home. Nehemiah would then gift 3% of the sales price to the homebuyer as part of the down payment assistance program, (they would keep the remaining 1%). The seller would then be able to write off this expense as a cost of the sale. It was an unwritten rule that the selling price of the house was often increased by 3% to 4% to cover this expense to the seller, thus inflating the "fair market value" of the home.

Create an affordable housing trust fund. The bill establishes a permanent fund to promote affordable housing. The fund would be paid for by fees from Fannie and Freddie.

My Take: Still waiting for more info, not sure how this will affect anything.

Give grants to states to buy foreclosed properties. The bill would grant $4 billion to states to buy up and rehabilitate foreclosed properties.

My Take: Still no real details on how this program will work; however, my first reaction is that if you give the government money to buy homes, then expect them to refurbish, rent out, or sell these homes -- looks like a disaster in the making. I envision stories of grossly overpaying for services, complicating the process by excessive paperwork, rules and regulations. I would bet that it will take three or four times longer for a government agency to fix up a home for sale versus a private investor.

I realize that the intention is to decrease the amount of foreclosed homes on the market. I just think that if we let things run their course we will be much better off.

Market Update:

As expected, the Federal Reserve kept short term interest rates steady at 2%. Their statement cited that the threat of our economy slowing down and the uncertainty of inflation made them leave rates alone. Basically, they are confused as to which way the economy will go, so they took the easiest path and just left things alone. Due to the detailed discussion regarding inflation, our mortgage rates are increasing just a bit on the news. An average 30 year fixed loan, no points, is 6.625%.