About Government Refinance and Home Purchase Programs

Treasury secretary Paulson recently made some optimistic comments on the US economy and included these comments on recent and pending FHA reforms:

In addition, the Administration continues our on-going efforts to minimize the housing market’s impact. We have made progress. Last Friday the HOPE NOW alliance, a coalition representing over 90 percent of the subprime servicing market, as well as non-profit mortgage counseling organizations, trade associations and investors, announced promising developments. This industry-wide effort employs multiple tools to reach and help struggling homeowners, including streamlining subprime borrowers into refinancings and loan modifications. According to HOPE NOW, the industry assisted 370,000 homeowners in the second half of 2007, and mortgage servicers modified subprime loans during the fourth quarter at a rate three times faster than in the third quarter.

As I have said, entire industries do not adjust easily or quickly, even when markets are calm. This alliance is demonstrating that an industry can, through coordination, make a difference and do so without forcing American taxpayers to pay the bill. I look forward to regular progress reports in the coming months. As we learn more, we will look for additional measures to reach more borrowers and prevent as many avoidable foreclosures as possible.

The Administration has also, through FHASecure, expanded affordable mortgage options. Working with Congress, we have increased funding for mortgage counselors who assist struggling homeowners. We have also temporarily eliminated taxes on forgiven mortgage debt. But more action is needed in the housing sector, action just as urgent as a broader short-term economic boost.

Congress needs to pass legislation to modernize the FHA, to increase availability of affordable FHA mortgages. It needs to strengthen regulatory oversight of Fannie Mae and Freddie Mac to ensure they will continue to fulfill their affordable mortgage financing mission. And as part of this reform, to temporarily raise the loan limit on conforming mortgages for securitization. Congress should also allow states to issue tax-exempt bonds to raise funds for innovative refinancing programs.

Congressman Barney Frank and other Democrats are pushing to get FHA reforms into the new White House Economic stimulus package. Here is an excerpt from a recent Bloomberg report on the subject:

Jan. 22 (Bloomberg) — Congressional Democrats want to expand availability of federally insured mortgages for subprime borrowers as part of the economic-stimulus plan being negotiated with the White House, Representative Barney Frank said.

Frank, the chairman of the House Financial Services Committee, said today in a telephone interview it’s “very likely” legislation to overhaul the Federal Housing Administration will be part of the $140 billion to $150 billion plan for jumpstarting the U.S. economy amid increasing signs of a recession. The measure would help homeowners refinance mortgages to keep from losing their homes, Frank said.

“You would not ordinarily think of a bill to restructure the operations of the Federal Housing Administration as stimulative, but in this case it is because we’re talking about foreclosure avoidance,” said Frank, a Massachusetts Democrat.

Frank and other Democratic lawmakers are working with the Bush administration to develop an economic plan as the subprime- mortgage crisis continues to roil markets and squeeze consumers. Senate Majority Leader Harry Reid, of Nevada, said today he wanted to get the plan through Congress and to President George W. Bush within three weeks.

Lawmakers are also considering a provision that would temporarily let Fannie Mae and Freddie Mac buy home loans above $417,000 for packaging into securities, Frank said. The language is part of a Senate bill that would create a tougher regulator for the two largest U.S. mortgage finance companies.

The White House recently announced a major economic stimulus package. Here are the portions of it related to mortgage relief:

The Administration Has Taken Steps To Help Struggling American Homeowners

In September, the President and his Administration launched a new initiative at the Federal Housing Administration (FHA) called FHASecure. FHASecure expands the FHA’s ability to offer refinancing by giving it the flexibility to work with homeowners who have good credit histories but cannot afford their current payments. By the end of 2008, the FHA expects this program to help more than 300,000 families refinance their homes.

Treasury Secretary Henry Paulson and Housing and Urban Development Secretary Alphonso Jackson have facilitated the private-sector HOPE NOW alliance. HOPE NOW has developed a plan under which up to 1.2 million homeowners could be eligible for assistance. This plan will help subprime borrowers who can afford the current, starter rate on a subprime loan, but would not be able to make the higher payments once the interest rate goes up.

President Bush signed the Mortgage Forgiveness Debt Relief Act of 2007, which will help Americans avoid foreclosure by protecting families from higher taxes when they refinance their home mortgages. This Act created a three-year window for homeowners to refinance their mortgage and pay no Federal taxes on any debt forgiveness they receive.

Congress Has More Work To Do To On Measures To Help Families Stay In Their Homes

The President has called on Congress since August to complete work on responsible legislation modernizing the Federal Housing Administration (FHA). This bill will give FHA the necessary flexibility to help hundreds of thousands of additional families qualify for prime-rate financing.

Congress needs to pass legislation permitting State and local governments to help troubled borrowers by issuing tax-exempt bonds for refinancing existing home loans. Under current law, cities and States can issue tax-exempt bonds to finance new mortgages for first-time homebuyers, but States are unable to do the same for homeowners seeking to refinance. Congress needs to pass legislation to reform Government Sponsored Enterprises (GSEs) like Freddie Mac and Fannie Mae. GSEs provide liquidity to the mortgage market that benefits millions of homeowners, and it is vital that they operate safely and soundly. The President has called on Congress to pass legislation that strengthens independent regulation of the GSEs and ensures they focus on their important housing mission.

The President strongly believes that government assistance must be responsible — the wrong answer, such as a bailout, could actually prolong the problem.

Hold on tight folks — things may get a little bumpy. Recent comments by the Fed indicate that there are real concerns that a recession is coming for the US. Here is an excerpt from a report by Jeannine Aversa over at the AP:

WASHINGTON – Retailers, home builders and many manufacturers should brace for even more rough times ahead, a somber Federal Reserve suggested Wednesday amid growing fears that the U.S. might be sliding into recession.

The Fed’s snapshot of business conditions showed a national economy losing momentum heading into the new year and a future riddled with uncertainty. The persistent housing slump and harder-to-get credit are making people and businesses ever more cautious, it said.

…

The Fed report was the unwelcome icing on a recent batch of economic indicators — ranging from a plunge in retail sales to a big jump in unemployment — raising concern that the country is heading for its first recession since 2001.

At the beginning of last year, many economists put the chance of a recession at less than 1-in-3; now an increasing number say 50-50 or even worse. Goldman Sachs, the biggest investment bank on Wall Street, thinks a recession is inevitable this year.

Andrew Housser over at KOAM TV in Kansas recently filed this useful overview of the recent and pending changes to the FHA program:

In August, President George Bush proposed a series of programs, called “FHA Secure,” to help homeowners who are overburdened by their mortgages. Since then, the program has been modified to include additional provisions.

…

To address some of those concerns, homeowners may find it helpful to understand some of the key modifications to the President’s plan:

* A rate freeze for borrowers who will not be able to afford their adjustable mortgages. This will help some borrowers on the margin, but will not help the majority of subprime borrowers facing foreclosure. Several requirements will exclude most subprime borrowers. For instance, the borrower cannot be more than 30 days past due on the account at the timethe loan is changed, cannot have been more than 60 days late at any time in the past 12 months, must hold a loan whose interest rate will reset in 2008, and must demonstrate he/she is not capable of paying the new higher payment. Just about 100,000 to 250,000 loans will qualify for this program – fewer than 10 percent of loans whose rates will reset between now and the end of 2009.
* Tax relief for forgiven debt (cancellation of debt income). If the lender forgives a portion of the loan balance as part of the foreclosure process, the forgiven debt has been considered taxable income. For example, if a home is worth $400,000, but the owner has a $500,000 mortgage, and the lender lets the owner walk away without paying the difference, the IRS considers the homeowner as having received $100,000 in value. That $100,000 would be taxable. Now, Bush and Congress have provided tax relief to individuals in this situation. This will simply lessen the pain for some consumers already in the dire financial situation of foreclosure.

Other proposals are in the works in Congress. These include:

* Federal Housing Finance Reform Act. The House would strengthen oversight of Fannie Mae and Freddie Mac, companies that work closely with government to sell mortgages as securities. The Senate has not acted.
* Expanding American Homeownership/FHA Modernization Acts. The House and Senate have approved different versions of this act that would give the FHA more leeway to help needy homeowners refinance their mortgages.
* National Affordable Housing Trust Fund Act. The House has approved legislation to build or preserve 1.5 million low-cost homes and apartments over 10 years. The Senate has not acted, and Bush threatens a veto.
* Mortgage Reform and Anti-Predatory Lending Act. The House has moved, and Senate is considering, legislation to regulate the mortgage lending industry.

They say that time heals all wounds, and time may be one of the best cures for the nation’s mortgage woes. In the meantime, homeowners and investors alike are in for a bumpy ride — but now, Congress is coming along, too.

Deborah Donovan out at the Daily Herald in the Chicago area wrote an interest piece related to our post-subprime age in the US. Here is an excerpt:

What mortgage opportunities will you find when you want to buy a house in this post-subprime world?

Regardless of fears and stories you may have heard about tight credit, mortgages are available.

In fact, interest rates are low — 5 percent for a 30-year fixed-rate mortgage, said Paul Lueken, president of the Illinois Association of Mortgage Professionals.

Riskier loans that did not make sense according to traditional underwriting standards are gone or have become very rare.

These include subprime mortgages designed for borrowers with bad credit that require little equity or down payment and little or no proof of income. Rates for these loans often escalate over the years.

Now 30-year fixed loans are popular again, credit scores are important and FHA mortgages are a choice for those who don’t have large down payments.

Adjustable rate mortgages are less popular these days because rates are not much lower than 30-year fixed rate mortgages.

Experts recommend shopping around for rates and meeting with a mortgage representative to examine what options are available.

Remember, besides a down payment, with most mortgages there are $1,500 to $3,000 in closing costs and a few months of payments in savings required as a reserve.

Even the Canadians care about FHA reforms… The folks over at CEP news published a recent report on the recent comments made by Treasury Secretary Paulson. Here is an excerpt:

He noted that in his travels around the country in recent weeks, one concern he heard repeatedly was reduced availability of mortgages. Paulson said he and others at Treasury have been pushing Congress to pass an FHA modernization bill that would provide financing for roughly 250,000 borrowers, and would raise loan caps on jumbo loans, those mortgages above the conforming loan limit.

The primary focus remains “keeping the economy as strong as possible as we weather this housing correction,” Paulson said.

In a question and answer session following his speech, Paulson said President Geroge W. Bush has not yet settled on an economic stimulus plan. He also said that permanent tax cuts would give financial markets certainty, but acknowledged it is difficult to get Congress to make tax cuts permanent.

Paulson also reiterated comments that the housing slump has not spread to the broader economy and that the housing market downturn still has “further to run.”

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.