About Government Refinance and Home Purchase Programs

Treasury Secretary Henry Paulsen made some comments today to urge congress to move quickly on the FHA reform bills they are working on. Here is an excerpt from a report that the AP put out:

Paulson in the CNBC interview also called on Congress to quickly pass pending legislation that would reform the Federal Housing Administration, which he said would help 250,000 at-risk homeowners who have adjustable rate subprime mortgages refinance to more affordable loans and another piece of legislation that would expand the availability of so-called “jumbo” mortgages, loans higher than $417,000.

The two giant government-sponsored mortgage companies, Fannie Mae and Freddie Mac, cannot presently back these jumbo loans, which restricts their availability.

On Monday, Paulson had said in a speech in New York that the current housing correction was “inevitable and necessary” following five years of an unsustainable boom which saw sales and home prices hit record levels.

There was an interesting article recently from the folks at CNNmoney.com. The gist of it was that we shouldn’t expect or count on housing values to bounce back any time soon. Here is some of it:

NEW YORK (CNNMoney.com) — The United States is deep in its worst housing slump since the Great Depression, and according to a new report, it’s not going to get better any time soon.

In a new survey, Moody’s Economy.com says many metro areas will record losses of 20 percent or more during the downturn, with the national median price for single-family homes dropping 13 percent through early 2009. Factoring in discount offers from sellers, the actual price decline would be well over 15 percent.

Eighty of the 381 metro areas covered by the report will record double-digit losses, according to the report. Most of the worst-hit markets are in once high-flying areas, such as California and Florida.

The steep losses were bound to arrive sometime. Throughout the housing slump, which began in the summer of 2006, experts kept expecting prices to tumble, but it wasn’t until recently that they dropped substantially, according to Mark Zandi, chief economist for Moody’s Economy.com.

“There has been a sea change in seller psychology since the subprime shock this summer,” he said. “Sellers now realize they have to drop their prices to make a sale and prices are coming down very rapidly in some markets.”

Here is an excerpt from a recent AP write up related to the pending FHA reform bills:

Government officials and real estate industry groups say the current size of mortgages the FHA can back is too small to attract borrowers in expensive housing markets.

While FHA loans are insured by the government in the event of default, the mortgages themselves are made by major lenders such as Bank of America Corp. and Wells Fargo & Co., and are typically offered to investors as mortgage-backed securities by federal housing finance agency Ginnie Mae.

Brian Montgomery, the Housing Department’s assistant secretary in charge of the FHA, said the housing market’s woes warrant the overhaul. “The entire mortgage market needs the stability that FHA brings,” he said Thursday.

The Senate bill would raise the maximum mortgage the FHA can insure in high-cost areas from $362,790 to $417,000 _ the same level as loans backed by Fannie Mae and Freddie Mac.

The House overwhelmingly passed a similar bill this fall.

Fair Isaac Corporation, the company that is responsible for the credit scoring system used to determine the credit worthiness of borrowers (known as FICO scores), is planning to tweak their scoring system in 2008. This may be good news for some borrowers looking to refinance their homes. While there are no credit score requirements in the FHA program some lenders look at credit scores anyway when deciding whether to fund an FHA loan application or not. The simple fact is that a higher FICO score is always useful even when applying for an FHA loan. Here are some excerpts from an recent article by Jane Kim of the WSJ online:

The company that cooks up credit scores for millions of Americans is changing its recipe — and that could affect how easily you get credit in the future.

Fair Isaac Corp., maker of the popular FICO credit score used by most lenders, says its new scoring model will do a better job predicting the likelihood of a borrower defaulting on a loan. For one thing, the new model, dubbed FICO 08, will be more forgiving of occasional slips by consumers, but will take a harder line on repeat offenders. Fair Isaac predicts its new system will help lenders reduce default rates on their consumer credit by between 5% and 15%.

The rollout of the new credit-scoring system comes at a time when lenders say they are eager for more-accurate measures of credit risk, in part because of rising loan defaults as subprime mortgages go bad and housing prices fall. And there are signs that delinquencies are creeping into other types of consumer debt, including auto loans, further prompting lenders to tighten up on credit.

An interesting recent article by Jeanne Sahadi over at CNNmoney.com indicated that the White House will be applying the pressure here at the start of ’08 for congress to get a FHA reform bill for him to approve. Here is an excerpt:

NEW YORK (CNNMoney.com) — Criticized for not doing enough to stave off foreclosures, the White House seems prepped to put on a full-court press in dealing with the housing crisis.

President Bush last weekend said he will push Congress this year “to act quickly” on proposals he supports.

Some of them are designed to have an immediate impact, such as efforts to make the refinancing of subprime loans easier and more affordable, and to make it easier for all homebuyers to get financing. Another proposal focuses on putting a stop to abusive lending.

Efforts implemented so far include a Treasury-coordinated rate-freeze plan for some subprime borrowers, and tax relief on breaks that homeowners get from lenders in foreclosure.

It’s not likely all of the proposals that Bush would support will gain passage in 2008. Here’s a look at the prospects for four such initiatives:

FHA reform

One initiative with a very good chance of being sent to President Bush’s desk for his signature in the first half of the year is reform of the Federal Housing Administration loan program, said Jaret Seiberg, an analyst at the policy research firm Stanford Group.

The FHA program is intended for home buyers and home owners with weak credit. Borrowers with FHA-insured loans – which they get from private lenders as they would any other mortgage – pay a small premium to the FHA every month. The FHA, in turn, uses those premiums to cover the lender in the event of foreclosure and requires lenders to pursue viable ways to help borrowers avoid foreclosure.

FHA reform would liberalize the loan program guidelines by lowering down payment requirements, increasing the cap on loans eligible to be FHA-insured and lowering origination fees, among other things.

Both the House and Senate have passed their own versions of FHA reform, and Seiberg expects lawmakers will come to agreement on a consensus bill in the first few months of the year.

Here is an excerpt of a recent Reuters report by Patrick Rucker. It explains the loan limit differences between the FHA reform bills going through the House and Senate:

Many of these troubled borrowers cannot benefit from the FHA program currently because their homes are valued higher than the current FHA loan limit of $362,000. The cap means FHA loans help very few borrowers in states like California that have high property values.

“Raising the loan limit can not only help current homeowners refinance into a fixed-rate loan but it could jump-start the housing industry in California,” said Dustin Hobbs, a spokesman for the California Mortgage Bankers Association.

The bill passed by the Senate would raise the current loan limit from $362,000 to at least $417,000, which is the same cap on loans that binds mortgage finance companies Fannie Mae and Freddie Mac. The House bill would lift it as high as $829,750 in some areas.

One question that could make a compromise difficult to reach is whether FHA should contribute to a new housing trust fund that would be established if provisions of the House bill hold. The Senate legislation has no such provision.

The FHA is a Depression-era program conceived in 1934 that was designed to insure the mortgage payments of low-income borrowers who might have trouble winning a loan.