Well, they finally did it! On Saturday, July 26, 2008, Congress finally got the photo op they were looking for: “Hey, look at us, your Congress at work. We are working on a Saturday to help all you poor homeowners out of the mess WE got you into.” Yes, Congress has passed the Housing and Economic Recovery Act of 2008. Sounds like a grandiose plan, doesn’t it? If we look closely, though, we’ll realize that it is all show and no substance. This plan is supposed to help hundreds of thousands of homeowners to get out of mortgages that they cannot afford, to help Fannie Mae and Freddie Mac to stay solvent, and to overhaul FHA lending. Let’s review some of the major points of the act:
The Bad
- Changes the minimum contribution on an FHA loan from 3% to 3.5%
Did they think they were helping to stimulate the housing market? What does adding a .5% down payment actually accomplish other than to exclude that many more buyers?
- Eliminates all seller-funded down payment assistance, i.e., no more Nehemiah, Genesis, AmeriDream, etc.
Once again, how is the average borrower helped? FHA loans are among the most affordable loans available for borrowers. This provision will effectively eliminate 40 percent to 50 percent of qualified buyers.
- Gives a tax credit of $7,500 for first-time homeowners
Credit? The last time I received a credit on an account, I did not have to pay for it. This is not a credit. It is an interest-free loan, so why even bother giving this so-called tax break? First-time home buyers will immediately be upside down $7,500 the first year because borrowers will have to repay it. If Congress were really trying to help first-time home buyers, why not use this tax credit as the down payment assistance they took away?
- Puts a temporary moratorium on FHA’s risked-based mortgage insurance premiums
Risked-based pricing is a good thing; it helps HUD to mitigate its risk and gives incentive to borrowers to have better credit while still allowing those borrowers with not-so-perfect credit to qualify.
- Hope for Homeowners Act of 2008
This part of the program is supposed to help homeowners who CANNOT afford their homes to refinance into an FHA loan. However, there are a few caveats: The current lender must first write the debt down to 90 percent of current market value. This provision is voluntary for banks, so they do not have to agree to do this. If they don’t agree to write down the debt, the homeowner does not qualify for the program. IF they do decide to write the debt down to 90 percent of current market value, the borrower can get a new fixed-rate FHA loan. Although this is a great deal, there is a problem: The homeowner now has a partner in his home. To illustrate, if the homeowner sells during the first year, HUD keeps 90 percent of the equity; and that steps down each year for the next five years, stopping at 50 percent. Therefore, if the homeowner decides to sell his house after 20 years, HUD will be entitled to HALF his equity! This is all well and good if it saves his home, but I doubt that many homeowners will see any benefit because most lenders will not voluntarily write the debt down.
The Good
- Loan limits will be permanently raised to $417,000, or 115 percent of an area’s median home price, which ever is higher, with a cap at $625,500 on all conventional loans.
- FHA loans will be 115 percent of the median home price. Any temporary increases that were already in effect will be kept in place.
- Licensing and registration will be required on a national basis for all mortgage brokers.
We are a full 12 months into the mortgage meltdown, which, unfortunately, has lined up with an election year. The sad truth is that this bill will once again lower the available buyer pool and make it difficult for a majority of Americans to fulfill their dream of home ownership. Here’s a message to Congress: Let the market take care of itself! Strong banks will survive, and borrowers who made good decisions will be rewarded.
All we can do now is to hope that the politicians have gotten enough photo and mic opportunities and will allow us to get on with fixing our industry.
It is going to be a longwinter . . . .