Mortgage Blog

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.