About Government Refinance and Home Purchase Programs

A very interesting article over at CNNmoney.com suggested that many lenders are not enthused about the new HOPE loan/FHA short refi program at all. This is in line with our predictions that HOPE loans will be seen as the very last option by banks when all other options look worse. Here are some quotes:

As part of the massive housing rescue bill passed by Congress in July, troubled borrowers will be able to refinance their home loans with the backing of the Federal Housing Authority (FHA) starting on October 1.

But at a congressional hearing today in Washington, lenders didn’t seem terribly enthusiastic about the program, dubbed Hope for Homeowners.

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One lender’s representative, Marguerite Sheehan, Senior Vice President for JPMorganChase (JPM, Fortune 500) Home Lending, testified about the drawbacks of Hope for Homeowners.

“Under the Program, [investors in the loans] will take a loss when the principal balance is written down,” she testified, adding that they won’t have a chance to make up that loss if home prices recover. Sheehan added that Chase can make borrowers’ monthly payments affordable simply by reducing their interest rates, rather than loan principle.

She added that JPMorganChase will use the program when it is deemed to be the best option for investors and borrowers, but that investors would prefer to use alternative loan workouts that give banks and investors the chance to share in any future home price appreciation. That’s similar to the program recently announced by the FDIC for IndyMac Bank.

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When asked whether the program would be considered a last resort by lenders, all the members of the panel, including Gross, agreed that it would be.

The good news might be that more and more banks will be looking to modify existing loans in efforts to avoid foreclosure in the next year. The value to a loan modification is that a bank still gets to collect the whole loan amount eventually rather than write down the loan by tens or hundreds of thousands of dollars.

So in the end it looks like the FHA short refi is just as we predicted — a last ditch escape hatch where banks lose less money than they would if they foreclosed and consumers get to stay at home. It is certainly better to have such an eject seat available than not, even if it won’t work for everyone.

As the fallout from the US mortgage crunch gets worse and worse (see the news today with Wall Street behemoth Lehman Brothers going under and Merrill-Lynch agreeing to fold into Bank of America) there is no question that the banking disaster is far from over. The Federal government has reached its limit when it comes to bailing banks out so expect more and more banks to fail.

What effect this will have on the mortgage industry is still unclear but the banking world will never be the same after 2008. More and more people are wisely looking into FHA-backed mortgages and that trend will likely continue until things turn around enough for irrational exuberance to take hold again. If you find yourself in a adjustable rate mortgage (ARM) and are feeling a bit nervous about it contact us about getting refinanced into a fixed rate loan. Rates are back down here is September of ’08 so the timing is looking very good right now.

While the overall impact of the Fed stepping in to take over Fannie Mae and Freddie Mac is still to be determined, the short term impact has been that interest rates have dropped pretty significantly this week. FHA loans that used to be in the high 6’s are now in the low 6’s. People with great credit and equity can even get loan in the 5’s this week.

For most of the summer rates were hovering between 6.5% and 7% so this drop in rates is a welcome change and it is spurred by the Fed action this weekend

The results from the second quarter came in on Friday from the Mortgage Bankers Association and they were sobering. Nearly 1 in 10 mortgages were 30 days or more late. It was news like this that prompted the federal government to take of Fannie Mae and Freddie Mac over the weekend. As drastic as that measure might seem, the Fed apparently saw the writing on the wall. This title wave of defaulting mortgages is far too big for Fannie and Freddie to handle on their own. Here is a link to a recent WSJ article on the MBA report and a few quotes:

The rate of U.S. home mortgages overdue or in foreclosure rose again in the second quarter as housing markets weakened, particularly in California and Florida, and more borrowers defaulted on so-called prime loans.

Among mortgages on one- to four-family homes, 9.16% were at least a month overdue or in the foreclosure process in the second quarter, according to the latest survey by the Mortgage Bankers Association, a trade group. That is up from 6.52% a year earlier and is the highest level since the MBA began such surveys 39 years ago.

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For prime loans, 5.35% of loans were past due or in foreclosure in the latest quarter. For subprime, the rate was about 30%.

In the latest quarter, 2.75% of all loans were in the foreclosure process, up from 1.40% a year earlier.

California and Florida account for about one in five mortgage loans outstanding, but 39% of loans that went into the foreclosure process in the quarter were in those two states.

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Among loans insured by the Federal Housing Administration, 14.87% were overdue or in foreclosure, up from 14.73% a year earlier. The portion of FHA loans going bad is likely to increase in the quarters ahead because of a surge in new loans insured by the federal agency.

The share of new mortgages insured by the FHA leaped to 23% in July from a low of 1.8% in 2006, according to Inside Mortgage Finance, a trade publication. Guy Cecala, publisher of Inside Mortgage Finance, said the FHA’s share might reach 30% by year end.

Wow. This is a big deal. Who knows what the long term fallout will be in the mortgage business. But this is a big deal. Here is a link to the recent AP article on the subject and a few quotes:

The government is expected to take over Fannie Mae and Freddie Mac as soon as this weekend in a monumental move designed to protect the mortgage market from the failure of the two companies, which together hold or guarantee half of the nation’s mortgage debt, a person briefed on the matter said Friday night.

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The news also followed a report Friday by the Mortgage Bankers Association that more than 4 million American homeowners with a mortgage, a record 9 percent, were either behind on their payments or in foreclosure at the end of June.

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Fannie Mae was created by the government in 1938, and was turned into a shareholder-owned company 30 years later. Freddie Mac was established in 1970 to provide competition for Fannie.

A government takeover could cost taxpayers up to $25 billion, according to the Congressional Budget Office.

But the epic decision highlights the size of the threats facing the housing market and the economy. On Friday, Nevada regulators shut down Silver State Bank, the 11th failure this year of a federally insured bank. And earlier this year, the government orchestrated the takeover of investment bank Bear Stearns by JP Morgan Chase.

A HUD spokesman recently spoke and warned Americans not to expect a housing rebound any time soon. Here are some quotes from a recent Reuters article on the subject:

A recovery in the U.S. housing market from the worst slump since the Depression is unlikely until “well into 2009,” Housing and Urban Development Secretary Steve Preston said today.

“I think we’re right in the middle of it, and I think we have a ways to go before we start seeing a turnaround,” Preston said today in an interview at the agency’s Washington headquarters. “We’ll be well into 2009 before we see some real energy in this market.”

There was an interesting article over at Forbes recently looking back at the utter failure of the FHAsecure program the Bush administration proudly unveiled around this time last year. We have posted on this failure here and here in the past .

At the time the FHAsecure plan was hailed as a way to help struggling homeowners avoid foreclosure by loosening the standards on getting into FHA loans. The problems with the program were manifold. First, the restrictions were very tight so only a small percentage of hopefuls could apply. For instance, a candidate had to already be 30+ days late on their mortgage to apply but the had to prove that they were late because an ARM reset and not because of other factors. Then the candidate had to find a bank willing to participate and most banks ended shrugging their shoulders and said “nah, no thanks” to the voluntary program. As a result only about 1% of the FHA loans over the last year had anything to do with the FHAsecure program at all.

Yet in recent press release from the White House we got this ugly bit of deception (as quoted from the Forbes article):

In a press release Friday, U.S. Housing and Urban Development Secretary Steve Preston bragged that his agency had helped more than 325,000 American families refinance into affordable mortgages since the housing crisis began.

“One year ago, the Bush Administration proactively provided an affordable safety net to homeowners who wanted to stay in their homes,” said Preston. “Today, with the expansion firmly in place, hundreds of thousands of families are in a better place thanks to FHA [Federal Housing Administration].”

Specifically, Preston cited the success of the FHASecure program intended to help borrowers who missed mortgage payments.

Will the “hope for homeowners” program be any better? It is actually law and was passed via some bi-partisan effort so there is that going for it. But we still have no word from banks on their policies concerning FHA short refinances. They have until October 1st before the program kicks in so with any luck we will see some positive developments on that front in the next 30 days.

There was an interesting AP article published recently with quick comparisons between McCain and Obama on all sorts of issues. Here is the bit on housing:

McCain: Open to helping homeowners facing foreclosure if they are “legitimate borrowers” and not speculators.

Obama: Tax credit covering 10 percent of annual mortgage-interest payments for “struggling homeowners,” scoring system for consumers to compare mortgages, a fund for mortgage-fraud victims, new penalties for mortgage fraud, aid to state and local governments stung by housing crisis, in $20 billion plan geared to “responsible homeowners.”

Not much meat there but perhaps of some interest to our readers nevertheless.

Unpleasant news just came down for FHA borrowers. For a long time the up front FHA mortgage insurance premium had been 1.5%. That meant that for anyone getting an FHA loan they had to pay 1.5% of the loan amount up front in order to offset the risk the FHA was taking to essentially co-sign on the loan. But as foreclosures rose over the last year the FHA found its reserves dwindling quickly. So in recent months the FHA launched a “risk-based” upfront mortgage insurance premium. Under that program borrowers with lower credit scores paid more of a premium up front.

The new housing legislation did away with the risk-based insurance premium plan and mandated that FHA charge the same premium to all borrowers. So in response the FHA recently announced that all FHA loans will now require a 1.75% up front insurance premium payment. See a Reuters article on that here.

How does this play out? Well on a $200,000 loan borrowers with decent credit used to have to pay a 1.5% insurance premium up front, or $3000. With the new standards that same borrower will have to pay 1.75% up front, or $3500. This premium is normally rolled into the new loan amount rather than paid out of pocket by consumers but that extra $500 is still extra debt. While this move probably helps the FHA stay solvent it is still painful for borrowers.

So far we have not seen any announcements from any banks on how they plan to handle the new FHA guideline that allows FHA to help people who owe more than their house is worth (aka are “upside down) and on the verge of foreclosure refinance into a new loans. The HOPE loan portion of the new financing law allows FHA to back loans for for people in that situation for up to 90% of the appraised value of the home. There is some real skepticism in the industry about the program because it is voluntary of the part of banks but only time will tell on this one.

We will update you as soon as banks start announcing their policies on the issue. The new law goes into effect on October 1, 2008 but there is no telling when banks will be ready to do anything about it.

For the last several years homebuyers have been able to take advantage of a loophole in the FHA rules that allowed them to buy a house with no money down. One of the the results of the new housing legislation that just passed is that loophole is closing. Homebuyers will now need to bring at least a 3% down payment when purchasing a house with an FHA loan.

But there is good news for homebuyers in the new legislation too. Homebuyers can now receive up to a $7500 tax rebate. The qualifications for that program are:

1. The buyer cannot have owned a home in the last three years
2. The income of the buyer cannot exceed $75000 per year if single or $150,000 if filing jointly
3. It applies to homes purchased after April 9th of 2008 and sometime before July 1st of 2009
4. Must be a primary residence
5. The rebate is 10% of the purchase price of the home with a $7500 cap

So basically if you qualify and purchase a home this year you can expect up to an extra $7500 showing up in your tax rebate check.

Before you get too excited please note that this rebate is really just a tax free and interest free loan. The principle must be paid back to the IRS over the course of 15 years. Nevertheless, tax free and interest free money is good stuff. If you would like more information about this program please contact us. We help buyers get into government backed loans.

The economic stimulus package increased the FHA loan limits in most part of the country. In the most expensive areas of the country FHA loans can be up to $729,000 in 2008. But those limits expire at the end of 2008. The new maximum limits (as a result of the newly passed housing legislation) will range from $271,000 in lower cost areas to a maximum of $625,000. The limit is calculated by multiplying the median housing price in a county by 115%. (The conventional loan limits with Fannie Mae and Freddie Mac have the same upper limit but have a $417,000 low end no matter what the median housing price is in a county.)

See here to search current FHA loan limits by county.