About Government Refinance and Home Purchase Programs

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.

The FHA reform bill that passed in the House is a lot more aggressive than the bill that passed in the Senate. Here is an excerpt from an excellent article discussing the details of each from Les Christie over at CNNMoney.com:

NEW YORK (CNNMoney.com) — A Senate bill that would expand the functions of the Federal Housing Administration (FHA) could help upwards of 200,000 homeowners – though a similar House bill that passed last month is more aggressive.

Christopher Dodd (D – Conn.), the sponsor of the Senate bill, which passed last week, hopes to make low-cost, fixed-rate mortgages available to more homebuyers and to homeowners seeking to refinance out of expensive adjustable rate mortgages (ARMs).

“This measure can shield homeowners from harm by helping families find safe, fair and affordable mortgages,” said Dodd in a statement. It can help provide credit, both for new homeowners and those seeking a way out of abusive loans in which they are currently trapped.”

FHA-insured loans have become an important element in the proposed solutions to the subprime mortgage crisis. There is bipartisan Congressional support for the measures and from the Bush administration.

FHA mortgages are consumer friendly loans made by private banks that are insured by the government. That makes them especially attractive to lenders because the government guarantee enables the lenders to easily sell off the loans.

Michael Crittenden recently reported on the FHA reform bill that easily passed a vote in the senate. If it can get past the House and the President getting an FHA loan will become easier for quite a few people. See below:

WASHINGTON — The Senate passed legislation overhauling the Federal Housing Administration on Friday, a move lawmakers described as a “basic first step” to combat rising foreclosures and a broader housing crisis.

The legislation would increase the size of loans the FHA could insure, make counseling more available to homeowners and reduce down payments for borrowers getting an FHA loan. If enacted, it would be the first major piece of legislation passed this year addressing the problems in the mortgage markets.

The House passed its version of the legislation in September, and the White House has said it supports congressional efforts to modernize the FHA. House and Senate members will now have to resolve a number of differences between the two pieces of legislation. Of note is House language dedicating $300 million of FHA profits to an affordable housing trust fund that is a priority of House Financial Services Chairman Barney Frank (D., Mass.).

The Senate bill doesn’t include trust-fund language. At a news conference, Sen. Jack Reed, a Rhode Island Democrat, offered tepid support for adding it to the Senate bill.

“My sense is that if we can get a housing trust-fund mechanism through this vehicle it would be helpful,” Mr. Reed said. He said he would prefer creating a trust fund as part of legislation overhauling regulation of Fannie Mae and Freddie Mac.

Sen. Charles Schumer (D., N.Y.) played down the differences between the bills, saying it would be “pretty easy” to reach a compromise. Still, Mr. Schumer said the timing of such talks remains up in the air.

The Senate legislation would increase the size of loans the FHA is allowed to insure for first-time and low-income homeowners. The level would be set at the size of mortgages Fannie Mae and Freddie Mac are allowed to purchase, currently tabbed at $417,000 and referred to as the “conforming loan limit.”

Additionally, the Senate bill would require homeowners to make a cash investment of at least 1.5% in the value of a home. That is half what the FHA currently requires.

Another Fed interest rate cut might bode well for FHA loan rates. The Fed announced just such a cut today as reported by Martin Crutsinger for the AP:

WASHINGTON – The Federal Reserve cut a key interest rate by one-quarter of a percentage point Tuesday, trying to keep the country out of recession.

The reduction in the federal funds rate to 4.25 percent marked the third rate cut in the past three months. Fed officials signaled that further cuts were possible if a severe downturn in housing and a crisis in mortgage lending get worse.

Commercial banks were expected to quickly match the latest reduction by trimming their prime lending rate, which would reduce this benchmark rate for millions of consumer and business loans to 7.25 percent.

In addition to cutting the funds rate, the Fed announced it was reducing its discount rate, the interest it charges to make direct loans to banks, by a quarter-point as well to 4.75 percent. This reduction was aimed at encouraging banks to borrow more freely from the Fed at a time when there are worries that a rising number of bad loans will prompt banks to tighten credit conditions too severely, adding another strain on the already fragile economy.

The Fed embarked on this round of rate cuts in September in response to severe turbulence in credit markets around the globe as investors reacted to various reports of mounting losses from defaults in subprime mortgages, the latest fallout from the worst slump in the U.S. housing market in more than two decades.

Brian Louis with Bloomberg recently wrote the following report on some of the skepticism being expressed about the recent rate freeze plan from President Bush. (See and excerpt below and the full article here.) Let’s hope congress comes through with some useful tweaks to the FHA program to further help…

Dec. 7 (Bloomberg) — U.S. Treasury Secretary Henry Paulson’s plan to prevent as many as 1.2 million people from losing their homes by freezing interest rates on subprime adjustable-rate mortgages will bring no benefit to the depreciating housing market.

“At best, it may stop some of the hemorrhaging of the housing market, but it doesn’t necessarily turn things around,” said Nicolas Retsinas, director of Harvard University’s Joint Center for Housing Studies in Cambridge, Massachusetts. “The fundamental problem with housing is oversupply.”

Existing home prices may fall as much as 15 percent by 2009 from their peak last year, even if interest rates are frozen on one fifth of 2006 subprime loans resetting next year, said Mark Zandi, chief economist at Moody’s Economy.com, a unit of New York-based Moody’s Corp. About 2.8 million mortgage loan defaults will occur in 2008 and 2009, Zandi said in Dec. 5 testimony before the U.S. Senate Judiciary Committee.

President George W. Bush agreed yesterday to a plan led by Paulson that freezes interest rates on some subprime mortgages for five years. The agreement focuses on borrowers who will fall behind on payments as low rates reset at higher levels.

“It’s long overdue that someone puts something on the table that’s enforceable and real and not just a press release,” said Prentiss Cox, a former assistant Minnesota attorney general who prosecuted predatory lending cases. He’s now an associate professor of clinical law at the University of Minnesota in Minneapolis.

Jeannine Aversa, an Economics Writer for the AP, recently wrote the following about the newly announced White House plans to help alleviate the mortgage problems many Americans are facing. It is worth your time:

WASHINGTON – Be ready to wait if you want to get information from a toll-free hot line about freezing the interest rate on your subprime mortgage.

Minutes after President Bush outlined a plan to help strapped homeowners, callers were told to have patience until a counselor could answer their questions and “devote as much time to you as necessary.”

But, once they do get through, homeowners may not find the answers they sought.

One caller to the hot line (1-888-995-HOPE) was told there would be “lots of hoops to jump through” to obtain the five-year freeze. The rate hold goes to the heart of the relief effort for people with subprime mortgages, which are loans offered to borrowers with tarnished credit or low incomes.

Even President Bush acknowledged the plan is “no perfect solution.” Treasury Secretary Henry Paulson said it was not a “silver bullet.”

Only a fraction of the homeowners who face huge jumps in their mortgage payments appear likely to be helped by the plan, negotiated by the Bush administration, to freeze the low introductory rates on their subprime loans for five years. After that, they could be in the same position again.

Homeowners dialing up their mortgage company to get their current rate frozen could be disappointed. The White House plan does not force mortgage companies to give eligible homeowners a break. It is voluntary.

There is decent news today for those of your with adjustable rate mortgages. President Bush just announced a plan to freeze rate hikes on ARMs going forward for a few years. However, the freeze would only apply to people who stay on time with all of their mortgage payments so do not get late if you want to keep your current interest rate! Here is a quote from from the article:

The mortgage companies will offer to freeze the loans at the lower introductory rates as long as the borrowers did not miss any payments at the lower rate.

Also:

Under the administration plan, the rate freeze will apply to loans made at the start of 2005 through July 30 of this year and will cover loans that had been scheduled to rise to higher rates between Jan. 1, 2008, and July 31, 2010.

The plan represents an about-face for Paulson, who until recently had insisted the mortgage crisis could be handled on a case-by-case basis. However, he and other administration officials became convinced the tide of foreclosures threatened by the mortgage resets represented such a severe threat that a more sweeping approach was needed.

Read the whole article here.

It’s true. See the report by Associated Press reporters Deb Reichmann and Nedra Pickler here:

WASHINGTON – The Bush administration has hammered out an agreement to freeze interest rates for certain subprime mortgages for five years to combat a soaring tide of foreclosures, congressional aides said Wednesday.

The aides, who spoke on condition of anonymity because the details have not yet been released, said the five-year moratorium represented a compromise between desires by banking regulators for a longer time frame of up to seven years and mortgage industry arguments that the freeze should last only one or two years.

Another person familiar with the matter said the rate-freeze plan would apply to borrowers with loans made at the start of 2005 through July 30 of this year with rates that are scheduled to rise between Jan. 1, 2008, and July 31, 2010.

The administration said President Bush will speak on the agreement at the White House on Thursday and the Treasury Department announced that Treasury Secretary Henry Paulson and Housing and Urban Development Secretary Alphonso Jackson would hold a joint news conference Thursday afternoon with mortgage industry officials.

The new FHASecure program is not offering much help to Californians. The problem is that loan limits on FHA still max out bout $362,000. How many houses in California are that price range? Not many. So while FHASecure is a lovely idea it leaves Americans in the more expensive areas of the country out in the cold still.

Here is an excerpt from an recent article on that subject written by Matt Wrye over at the San Bernardino County Sun:

The Inland Empire is ground zero for the housing meltdown.

But you’d never know it by looking at a new federal program that seems to slight California homeowners.

Figures provided by the Federal Housing Administration show that California homeowners make up only 3 percent of total loans offered nationwide under a new bailout program designed to help them avoid foreclosures. Inland Empire borrowers make up just under 1 percent – in an area that reports the third-biggest number of foreclosures in the nation.

Troubled Inland Empire homeowners looking at the possibility of losing their homes are finding it tough to qualify for the federal program.

The Federal Housing Administration promised in August to help 240,000 families avoid foreclosure through its so-called FHA Secure plan.

Experts say California’s higher- than-average loan amounts confound the issue.

“We have people calling, but when you look at what their real income is and what their debts are, it doesn’t pencil out,” said Will Herring, a local mortgage broker and board member of the California Association of Mortgage Brokers, Inland Empire Chapter in Rancho Cucamonga. “They don’t conform to FHA guidelines.”

So far, 290 subprime borrowers – 13 of them in default – throughout San Bernardino, Riverside and Orange counties have secured refinancing through the program.

Ruth Simon over at the Wall Street Journal put up the following excellent article regarding recent comments by Eric Rosengren, the president of the Federal Reserve Bank of Boston:

Many borrowers with subprime mortgages have reasonably good credit and may be able to refinance into a less costly mortgage by taking advantage of government programs, Eric Rosengren, president of the Federal Reserve Bank of Boston, said in a speech this morning.

Pulling from research conducted by members of the bank’s staff, Mr. Rosengren noted that 55% of subprime adjustable-rate mortgages, where the owner occupied the home, hadn’t missed a mortgage payment in the past year. That translates to about 1.2 million borrowers.

“These subprime borrowers may meet the credit standards required for FHA [Federal Housing Administration] guarantees or for similar state programs, with potentially a significant savings,” Mr. Rosengren said in his speech, delivered in Boston at a breakfast sponsored by the Massachusetts Institute for a New Commonwealth. In addition, half of borrowers nationally — and 71% of those in New England — had “reasonable credit scores” of above 620 when they took out their mortgage. (Read the full speech.)

We get this recent press release from Bank of America:

CHARLOTTE, N.C., Nov. 28 /PRNewswire/ — Bank of America today announced that it will create a second fulfillment center for government loan processing in Dallas, providing jobs to about 150 associates formerly supporting the bank’s wholesale fulfillment operations, which the bank announced last month it was closing effective Jan. 1.

“We will leverage the knowledge and skill of our Dallas-based wholesale associates to help the bank manage the strong growth in demand for our FHA and VA loan products,” said Bob Griffith, Bank of America Mortgage Fulfillment executive. “Texas is our strongest market for government loan programs, and we are thrilled to have the opportunity to grow our business there.”

Bank of America opened its first government lending fulfillment operations center in Jacksonville, FL, in June 2006. That facility employs about 300associates in its specialized government lending operations. Bank of America’s production volume for FHA and VA loans is expected to be nearly $2 billion in2007, more than double the volume from 2006.

Lawrence Yun, chief economist with the National Association of Realtors was quoted recently as saying:

“A trend away from subprime mortgages to FHA loans, which often carry much lower interest rates, is a positive development for consumers and the housing market going forward. Still, it will take some time for the change to yield a measurably higher closed sales volume in the aftermath of the subprime collapse. In the near term, we expect home sales to remain fairly stable.”