Mortgage Blog

Finally, - we have some details regarding the latest and greatest government plan to fix the housing market !!! Over the next few days you will hear news stories about it. As usual, most will be misleading, misinformed and wrong. Here are the latest details that I can dig up:

It’s called: “MAKING HOME AFFORDABLE” 

(no thats not a typo, someone flunked english class)

It is a “voluntary” program that rewards lenders to refinance or modify existing mortgages in order to decrease interest rate and payments for at-risk borrowers. This is primarily for homeowners that cannot refinance to today’s low rates due to lack of equity and/or income.

In order to qualify, the borrower must owe more than 80% of their current appraised value – up to 105%. It will not help anyone that owes more than 105% of appraised value. It will also not apply to anyone that has 20% or more equity in their home.

The existing loan has to be originally underwritten by Fannie Mae or Freddie Mac - this is not for sub prime loans or jumbo loans. It also applies to just 1^st loans, not second mortgages.

Borrowers must demonstrate that they have a financial hardship and will not have enough income to sustain payments in the future. Borrowers will be required to fully document income.

House has to be owner occupied

Sounds great, right? Here are some other details that make this a challenge to implement:

This program is “voluntary” for lenders. They don’t have to do this. They will receive $1,000 from the Treasury Department for every loan modification/refinance that is completed. And another $1000 per year for up to 5 years if borrower stays in home and continues to make on time payments.

The problem here is the lender/servicer has to use manpower to underwrite and prepare these modifications. Someone has to complete the paperwork, determine current value, etc… The $1000 up front fee is probably close to what it would cost the lender to complete the modification. That would be ok, except this is asking the lender to participate in a program that decreases the amount of interest that they collect from the borrower, (their profit). If a lender decreases the loan rate from 6% to 4% on a $200,000 loan, they will lose $4,000 per year in interest payments.

We have had similar programs implemented over the last year that have had good intentions that have fallen flat. I was skeptical of those programs then and I am skeptical of this one too. Don’t get me wrong, if this actually helps homeowners stay in their home and prevents foreclosures, and helps stabilize values for the overall housing market, I will be the first in line to admit I was wrong about this.

I just don’t see the real incentive for lenders to participate and I don’t know how many borrowers will actually fit into this tight range of requirements.

If you believe that you fall into this category, you should contact your existing lender directly, their phone number is on your mortgage statement – ask them what you need to do to qualify. This is not a program that a broker such as me can help you with. The link for more info is:

http://www.treas.gov/press/releases/reports/guidelines_summary.pdf

Several of my clients are applying for the program to see if they qualify. It will be interesting to find out how willing the lender is. I will keep you posted on the results.

Okay - this is a long one: There is a lot to discuss regarding the lower rates – The first part of the blog is related to why rates are dropping and what is in store for us in the near future. The latter part of this blog offers advice on how to best take advantage of these historically low rates. Yes, there is some self promotion that is directly related to my business operations, after all arranging home loans is how I pay my bills.

So, here goes…………

The recent rate drop really got started when the Federal Reserve announced in early December that they were working on implementing a program to purchase Mortgage Backed Securities backed by FNMA and Freddie Mac. The actual Federal Reserve quote: “the program is being established to support the mortgage and housing markets and to foster improved conditions in financial markets more generally”

What this means: The Fed wants to drive interest rates down to a level that will stimulate the housing market. By giving potential homebuyers an incentive, (low rates), to purchase existing homes at very low prices, this will create a “bottom” in our recent housing market decline. Lower interest rates will also allow homeowners to decrease their monthly mortgage expenses through refinancing. If a homeowner can save $200 to $300 on their mortgage payments, they will have extra money to put back into the economy.

How this works: This week the Federal Reserve became an investor in the home loan secondary market. They did this by purchasing Mortgage Backed Securities, (MBS), from banks and lenders. For example, the Fed purchased some of these packaged loans (MBS) which represent a 4.5%, 30 yr fixed mortgage. The bank or lender can now offer a 4.5%, 30 year fixed mortgage to a consumer and be able to sell that loan to the Fed. Once the loan is sold to the Fed, the bank has replaced their capital and can make another loan.

The bank can keep doing this because they receive a commission by the investor, (in this case the Fed), of 1% to 2% of the loan amount. In theory, the bank or lender should be able to offer the 4.5% loan to the borrower with no points being charged because they are already earning a commission. The reality is that banks and lenders have recently been charging points and/or extra fees to consumers for loans in this range

One of the reasons that the banks or lenders have not been willing to offer the no points loans at this level yet is because they have too much business to handle properly. They are overwhelmed by the recent volume of loan applications submitted to them. For the last 2-3 years, banks have been drastically cutting staff in loan operations because of their lack of revenue. They have essentially been working with skeleton crews. Last week I spoke with a lender who said they had just hired 20 underwriters; however, they did not have enough office space and computers available for them. Now they are scrambling to set up for this onslaught of business. One of the concerns in offering these rates with no points are they realize they would surely be even more overwhelmed.

Another reason is that most in the industry believe that interest rates have the potential to drop even further. All of the fundamentals are there: low or non-existing inflation, economic recession, falling gas & oil prices, etc… Let's say, for example, a bank or lender makes a loan to a consumer at 4.5% with no points. The bank then sells the loan to an investor at 4.5%; thus receiving the 1% to 2% commission. One month later, rates decrease to 3.75%. The same consumer decides to refinance again and pays off the 4.5% loan. The commission that the investor had previously paid to the bank has a time contingency attached to it. Meaning if that loan is paid off too soon, usually within 3-4 months, the bank may have to reimburse all or part of their commission to the investor. In order to keep this from happening, the bank assumes the borrower will be less willing to refinance again if they pay points and fees for the original loan. The bank would have the points and fees compensation to offset the money it would lose should the borrower refinance again.

Bottom line is: Once the banks get caught up and have sufficient staff to handle the expected business, rates should improve further. Once the banks believe that rates have hit a floor, we will see more loans with no points and/or no points, no fees.

The big unknown is how long this will last. If there is any hint of the economy improving in the next few months due to this program or stimulus, rates could increase quickly due to concerns of inflation. Remember, we have witnessed several rate drops over the years that have only lasted a few days before they have shot up again.

Of course, the best scenario is for a borrower to lock in their loan rate when it hits bottom. The problem is no one knows where that bottom is. Is it 4.5%? Is it 3.5%? Will it hit 2.5% on January 28th at 11:32 am? And if it does, will you be able to lock in that rate before it climbs to 5.5% by 11:55 am? Even the highest paid experts do not know where that low is, why should you or I pretend that we have a crystal ball?

My solution: Have someone, (a mortgage professional like myself), help you calculate payment and interest savings so that you can see if it makes sense to refinance or not. Look at a couple of target interest rates; if it makes sense to refinance at 4.75%, no points, make that your “trigger rate”. When and if rates decrease to 4.75%/no points, your mortgage professional would be ready to lock that rate in.

What, you ask, do you do if you've locked in at 4.75% and 2 weeks later the rates drop to 4.25%, no points? Well, several lenders now offer a “re-lock”. This means that if rates significantly drop they will allow you to obtain the lower rate. Now you don’t miss out on a lower rate. If the market gets worse and rates increase, you will still have a great rate of 4.75%.

Another possible scenario: You close your loan in February at 4.75%. Rates drop in April. Now several banks and lenders will offer a streamline refinance program that will allow you to refinance again, dropping your rate even further, with little or no cost.

While there is no perfect way to take advantage of this low rate environment, the above examples give you the best chance of improving your financial situation with the least amount of risk.

Last - We would like to offer our condolences to Bob Moore's family. He passed away last week at the age of 56. He was a fixture of our small community. He was well loved and will be missed.

This morning the Federal Reserve and Treasury Department have announced that they will start buying 800 billion worth of bad debt from banks and lenders. This is a significant change from their earlier stance when they wanted to just invest in the banks. Since this announcement banks and lenders have dropped their lending rates drastically. On average, rates for home loans have dropped anywhere from ½ to ¾ percent overnight.

Even though I still do not like the idea of government bailing out or injecting money into private enterprise, this is one act that can have a huge impact on the recovery of our economy. By lowering interest rates for homes, cars and credit cards, etc… banks have created their own boost to the economy. They are betting on the consumer to pull us out of this financial crisis. Lower borrowing costs encourage consumers to purchase homes. When more homes are purchased, the supply of homes for sale decreases. More demand and less supply halts the free fall of home prices. If home equity is stabilized, then homeowners are not as likely to let homes go to foreclosure or short sale.

You may ask if the banks are willing to lend money in abundance now, will this create the same problem we recently had with bad mortgages? The answer is no. The difference now is that banks have tightened their lending standards. Only borrowers with verifiable income and assets and good credit history will qualify. Sub prime loans are essentially non existent, which is the way it should be. When the well qualified borrowers are the only ones able to obtain a home loan you will have less loans going to foreclosure. All of this instills confidence among the banks and lending institutions, allowing them to lend more money to consumers, thus reducing rates even more.

Of course I am somewhat biased and this development will help my industry, so there is probably more hope than the average analyst. It just makes sense to me that this is the one move that could actually help our economy for the long term.

Market Update: 30 year fixed rate mortgages have dropped to an average of 5.5% with 1 point. I expect some volatility in rates in the next few days as banks will be attempting to figure out where to price their loans to make a profit and encourage borrowing.

Don’t be surprised to hear radio ads saying rates have hit 4.75% , this is true for loans with very high closing costs, (points) or shorter terms like a 15 year fixed.

I have been waiting, (and procrastinating), to make a blog entry, mostly because I was awaiting the outcome of the election and the effect it might have on our markets. Now that the election is over, here’s a summary of some of the items that are newsworthy in the lending industry:

Lenders still hesitant: Even though the Federal Reserve has lowered bank borrowing costs and the Treasury department has pumped billions of dollars into the banking system, banks have been slow to lend money. All of the tangibles are in place, they have the money, they have the right margin spreads, they just don’t have the confidence. With all of the daily financial turmoil and fear of the unknown, it’s not a surprise. Again, we need stability and confidence in our markets before the banks will open up their lending practices. The catch is that without the banks lending money to individuals and businesses, the economy will get worse, which will cause even more lack of confidence in these markets. I believe that if our banks took the chance and substantially lowered interest rates and started lending money to businesses and credit worthy individuals, it would stimulate the economy more than the failed bailout and mortgage rescue plans.

Speaking of Mortgage Rescue Plans: So far, the highly touted mortgage rescue plans that were part of the housing bills passed this summer have not helped much. Borrowers have been hesitant to sign up for these programs due to the red tape and restrictions placed on the individuals that would qualify for these plans. My contacts in the lending industry are telling me that these plans are a joke. Borrower’s who are in trouble, have better options. Many lenders are willing to rewrite or renegotiate loans for people who are in trouble.

Speaking of Loan Modifications: I have noticed some new companies that are actively soliciting clients for “Loan Modifications”. Several have contacted me to become a representative for them. It works like this - for a fee of approximately $2,000, they will negotiate with your existing lender to reduce the payment or principal balance of your loan. I was intrigued and decided to get the details, here’s a summary of my recent conversations:

My first question: Ok so you want the $2000 up front from my client, what is your guarantee? They replied: “We guarantee a modification to the existing loan”. Ok, so how much loan modification do you guarantee? “We aim for a 30% reduction in your payment or principal reduction”. Ok, so are you “guaranteeing” that my client would receive a 30% reduction in the payment or principal balance? “Well no, it’s only a guarantee that there will be some kind of modification to the loan, but we aim for 30% reduction.” Ok, so what if you reduce the mortgage payment by only $10 per month, the client has paid you $2000 and you have fulfilled your part of the deal. That doesn’t seem right. “Well – technically that is correct, but we still aim for a 30% reduction.”

Now I am obviously getting nowhere, so I ask for references: “Well we just recently opened up in your area and we really can’t give out our client’s information….. But we really do try for a 30% reduction.”

Bottom line is that loan modifications can be negotiated without the help from one of these companies if you contact your lender directly. It is too early to tell if these “modification companies” are legit or are just trying to take advantage of homeowners. I will continue to monitor this and let you know how this plays out.

Bailout of the week:  This week it's the auto industry.  If our government bails out or gives money to the "big three" in order for them to stay in business, what will this accomplish?  it will allow these auto giants to continue with a failed business plan.  General Motors has an average hourly employee cost of $73.  That means GM has to spend an average of $151,000 per year per employee to fund their salary and benefits!!!

Meanwhile, Toyota spends an average of $48 per hour or $100,000 per year per employee.  It is no wonder that US automakers have to charge more money for a car in order to make a profit. 

By bailing them out we have essentially subsidized another industry, because they cannot compete in a fair marketplace due to the self inflicted high costs of salary and benefits. 

Bankruptcy would allow these companies to renegotiate these bloated union contracts that are main cause of the problem.

Other Lending news

Conforming loan limits for 2009: Fannie Mae/Freddie Mac recently announced the new conforming loan limits. Meaning any loan amount above these limits is classified as a “jumbo” loan and is subject to extremely high interest rates – the new limit for a single family home in the Sacramento, El Dorado, Placer and Yolo counties is now $474,950, (up from $417,000 in 2008). Higher cost counties such as San Francisco, Santa Clara, etc have a new conforming loan limit of $625,500. For the nationwide list of limits by State and County, click here: http://www.fhfa.gov/GetFile.aspx?FileID=134

Average interest rates for a normal 30 year fixed mortgage are still in the low 6% range. You can obtain rates in the high 5% range if you pay points.

Kevin

I was waiting for the final bill to be passed by the House of Representatives before I commented. There is so much "spin" around this bill, I wanted to see what the 700 billion dollar bailout plan really meant.

So I decided to try and read the document myself. What started as 3 pages originally put forth by our Treasury Secretary, Hank Paulson, evolved into 451 pages after congress got a hold of it. After a few pages of intense scrutiny and attempted comprehension, I realized that my own version of "speed reading" was appropriate. I basically skimmed each document and looked for important clauses that actually meant something. It was not that hard really, attorney talk is easy to omit while you are reading, so you are left with just the meat of the document. After the first 100 pages or so, it boils down to this:

This bill gives “absolute power” to our Treasury Secretary, to do whatever he thinks necessary to bolster our financial markets. Nicknamed TARP, (Troubled Asset Relief Program), it opens up a cash account, (taxpayers money), to buy bad mortgage debt from banks and other financial institutions. It lets the Secretary set the rules and decide what an appropriate price for the bad debt is. This is essentially what Hank Paulson wanted when he submitted his original 3 pager two weeks ago.

Congress has added lots of their own verbiage to the bill, mostly using terms and rules suggesting that they are protecting the taxpayer’s interest. They have also established two oversight committees to be the watchdogs over the program. Frankly, asking members of congress to make sure that this plan is implemented in our best interests does not instill much confidence.

There are plenty of other important items that the first 100 pages of the bill cover such as raising FDIC insurance protection to $250,000 per bank account ; Changing bank accounting rules ; Encouraging mitigation of foreclosures ; Curbing executive pay for banks that sell their troubled assets to the Treasury, etc…

However, the next 350 pages of the bill is the pork that everyone is talking about. These are all of the "gimmees" that the senate injected to buy votes from other congress members: A 39-cent tax break for an Oregon firm that makes children’s wooden arrows; $128 million of tax relief for the manufacturers of car racing tracks, aimed at congressmen in Nascar states, such as Virginia and North Carolina ; A provision to give $10 million in tax breaks to small television and film producers ; Tax credits for Alaskan fishermen who were affected by the 1989 Exxon Valdez disaster; What does the Exxon Valdez have to do with a bailout bill?

I guess that’s business as usual, they can’t help themselves. They just want to get reelected and the only way to do that is to show their constituents how much pork they bring to their state or district.

The bottom line of all of this is: if our Treasury Secretary, Hank Paulson, is a good guy, a smart guy, that makes wise decisions with our money then this could turn out ok. . If he is just a politician like most of our congress, it will be a tough road ahead for all of us. We are betting our future on the performance of one individual, I hope we picked the right one.

Market Update:  Now that the bill is passed, we are all waiting patiently for the banks and othe financial institutions reaction.  if the banks think the details of the plan are good, our interest rates will get better.  if they think this plan is not feasible and does not benefit them our rates will get worse. There is talk that the federal reserve is ready to lower the fed funds rate again, due to signs of the slowing economy.  Currently our 30 year fixed rates are still in the low 6 poercent range with zero points. 

This year our financial markets have been on a wild roller coaster ride. The last 10 days have been especially dramatic. First our government bails out Fannie Mae and Freddie Mac – result is mortgage rates drop quickly, stock markets feel good about the move. A few days later – Lehman Brothers announces bankruptcy and our government does not bail them out – result is our stock market drops and our mortgage rates start climbing. Then AIG insurance announces that they are in trouble as well –government bails them out with an 85 Billion dollar loan- result is stocks tumble – our mortgage rates increase slightly.

Now we learn about the latest and greatest bailout of them all – our government is setting up an entity to allow banks to dump their garbage loans. This organization will absorb the bad mortgages, rework or refinance them and sell them back again over time. The idea is to essentially take the bad mortgage loan risk out of the markets. The impact to us tax payers could be enormous.

The big question is will it work? All of the other bailout/rescue plans were band-aids. This plan is surgery. If it works - our housing and stock markets will start on their recovery. If it does not work – we don’t have many options left. Our markets are still digesting all of this and no one really knows the outcome yet. (Will have more on this next week).

I still believe that under normal circumstances, good old capitalism would have worked without government intervention, however in this case “government intervention” is what got us into this mess in the first place. And unfortunately it will take government intervention to get us out. If Fannie Mae and Freddie Mac had not loosened their lending standards 10 years ago, we would not be facing this problem. These government agencies encouraged home ownership to such a degree that basic logic regarding borrower’s qualifications for a loan was completely ignored. Fannie and Freddie wanted to make as many loans as possible to as many people as possible. As we all know – too much of anything has consequences. If we had still kept our normal loan qualifications based on time tested criteria for income, assets and credit history – these bailouts would not have been necessary.

I find it insulting when our politicians claim that the private sector was the problem and that our government has to fix it. It is becoming very clear that the people that governed Fannie Mae and Freddie Mac escaped this crisis themselves with tens of millions of dollars in their pockets. It is also clear that execs had strong relationships with politicians in Washington. Where is the outrage? When Enron executives ran their company into the ground, they were condemned and prosecuted quickly. This mess at Fannie and Freddie dwarfs Enron, yet we do not hear anything from our politicians to take some kind action against these execs. I wonder why?

Over the weekend, our federal government seized Fannie Mae and Freddie Mac.  The implications for our industry are encouraging.  When I left work on Friday the average 30 year fixed loan with no points was approximately 6.375%.  This morning, several of my lenders have reduced their rates by almost half a percent, down to 5.875% no points.  This is one of the largest one day decreases in rates that I can remember.  Of course its still early but this is clearly a good sign.

The reason behind this drop is that mortgage investors have been nervous and scared about the financial condition of Fannie Mae and Freddie Mac.  These investors demanded a higher margin or rate of return on their mortgage investments.  This directly affected our mortgage rates, pushing them artificially higher than normal.  Now that the federal government is backing the mortgage giants, investors do not require the same rate of return.  Thus our rates have already fallen sharply in one day.

This development may have a big impact on our housing market.  If interest rates are lower, more people will be able to or want to purchase homes, especially now that home prices have dropped as well.  This could be just what our housing market needs to recover.

We shall see how this plays out,  I will update rates next week hopefully with something good to report.

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%.

Well, they did it, and to no one’s surprise: The Senate approved the $300 billion housing rescue bill on Saturday. President Bush has already publicly stated that he will sign it. Effective October 1st - most of the provisions in this bill will become law.

I am still trying to obtain all of the details of this bill; it does not help that many of the news stories are contradictory. This much I do know: This new law is an enormous undertaking, with several different aspects that will affect all of us to some degree. I will highlight what I know about the main provisions, and try to give a realistic view as to the probable outcome. As more news is forthcoming, I will continue updating my mortgage blog.

NEW: Fannie Mae and Freddie Mac, these quasi government/private organizations that purchase the majority of home loans available in the secondary mortgage market, are now formally being backed by our government. The Treasury Department will allow an unlimited line of credit to both organizations, and will have the authority to buy stock in the companies for the next 18 months.

MY TAKE: With more capital available to Fannie Mae and Freddie Mac, there will be a larger supply of money to lend to homeowners. However, because lending regulations have tightened, fewer borrowers will qualify for Fannie Mae and Freddie Mac loans. More supply and less demand will mean lower home loan rates in the future. The backing of these organizations by our government will also help to calm market fears regarding the solvency of Fannie and Freddie.

NEW: Fannie Mae and Freddie Mac will permanently raise their loan limits from $417,000 to $625,000.

MY TAKE: This will allow borrowers needing loan amounts above $417,000 to obtain lower rates than what was offered before (previously any loan over $417,000 was considered a "jumbo" loan which incurred a higher interest cost because it was not available for purchase by Fannie Mae or Freddie Mac.) This should help increase home sales and give some interest rate relief to the borrowers who fit into this category.

NEW: FHA will be allowed to insure up to $300 million in new 30 year fixed rate mortgages for at-risk borrowers. If the existing mortgage lender agrees to write down the existing home loan to 90% of the current appraised value, then FHA will make a new loan up to 95% of the current value, paying off the previous lender and financing closing costs. FHA will insure the new loan if the borrowers can prove the following:

1. Borrowers must have obtained the original loan from January 2005 through June 2007.
2. Borrowers must live in the home.
3. Borrowers must spend at least 31% of their gross monthly income on mortgage debt.
4. Borrowers must prove that they will not be able to keep paying their existing mortgage and attest that they are not deliberately defaulting just to obtain a lower payment. (I have no idea how this will be enforced)
5. Borrowers cannot have any additional debt secured by the home, such as a second mortgage or equity line.
6. Borrowers will not be allowed to obtain a home equity line or second loan for the next 5 years, unless it is for home improvement.
7. Borrowers must pay an annual 1.5% premium to FHA for insuring the loan. (This does not sound right--maybe reported incorrectly.)
8. Borrowers must agree to share any profits from future home price appreciation with FHA. These range from: 100% of profits will go to FHA if borrower sells within the 1st year, 90% of profits go to FHA if house is sold in the 2nd year. The percentage keeps dropping in 10% increments to a permanent 50% of profits going to FHA in years 5 and beyond.

MY TAKE: Whew!!! This is the part of the law that keeps people at the IRS employed. Like our tax code, this is one more convoluted formula that is extremely hard to calculate. Even if you fit all of the above criteria, you would still have to convince the existing lender to take less money than what they are owed. That lender is under no obligation to do this. Plus, if you sell the home, the annual premiums and profit sharing with FHA would be very complicated and possibly create a new haven for fraud. I am skeptical if this program will actually work with the way it is currently structured, I expect more modifications to this in the future.

In summary, Our Government is trying anything and everything to throw against the mortgage mess. Even though I do not agree with all of the details, I can’t blame them for trying. The ultimate goal is to decrease the amount of foreclosures. Foreclosed homes drive down real estate values. If more borrowers can stay in their homes, it will stabilize our housing market and we will recover from this. It seems like this is a step in the right direction.

There are additional provisions that I will address in the next blog. I am sure that additional information about this bill will be made available in the next few days.

MARKET UPDATE: Interest rates are a bit better than last week - average 30 year fixed is approximately 6.625% with no points. I am waiting to see if this housing bill will drive rates down a bit more.