What Consumers Need To Know About The New Housing Bill

HR 3221, The Foreclosure Prevention Act of 2008, passed the House of Representatives Thursday, July 24 and passed the Senate Saturday, July 26 by majority votes—the president is expected to sign it into law this week. Below are highlights of the 694-page bill that are most relevant for consumers.

No More $729,750 Conforming Loans As Of 12/31/2008
New conforming and FHA loan limits will be permanently increased to 115% of median home price by MSA, up to a cap of $625,500. This will go into effect after the December 31, 2008 expiration of the $729,750 conforming and FHA caps set forth by the Economic Stimulus Act of 2008 passed earlier this year. Right now the rate spread between the traditional conforming loan cap of $417,000 and Economic Stimulus cap of $729,750 is .125% to .25%. The good news is that this spread will wash out since there will no longer be two conforming tiers. The not so good (but likely) news is that inflation could push all rates up in the next 6-24 months.

Homebuyers pegging their purchase plans to the $729,750 limit will now need to consider buying before December 31, 2008, or at least add some inflation and jumbo loan pricing variables to your analysis (more on jumbos below).

Homebuyers who have been waiting for prices to drop further may now have a timing predicament—do you wait for home prices, or do you take the better conforming financing while it lasts? Even though financing is likely to get more expensive as we move into 2009, you should resist timing the market. You should work with your Realtor to assess fair value for your desired area, and this assessment should include forward looking price projections.

If for example you want to buy a home this year to be within the existing maximum conforming cap but your projections reveal that prices could drop 5% by early 2009, then you can write an offer with a lower price, a seller credit provision, or both as a way to compensate. If your analysis (along with the advice and representation you’re getting) is credible and market relevant, a seller will take this offer seriously.

FHA Refis For Troubled Homeowners
The FHA will back $300 billion in refinanced mortgages to help stop foreclosures. Homes must be owner-occupied, and all loans are full doc with a debt-to-income ratio of 45% or less. This fund is targeted at homeowners who are at risk of losing their homes because of impending ARM adjustments.

Existing lenders must agree to a payoff based on 85% of the home’s existing value. So if a $500,000 home has a $500,000 existing loan, the existing lender would have to agree to a $75,000 loss. Then the borrower could get a new FHA loan for up to $450,000 (or 90% of appraised value), which carries a 1.5% annual insurance premium (as opposed to the traditional .5% annual insurance on a traditional FHA loan), and FHA would also get to share in appreciation on a tiered basis for sales that occur in the next 18 months.

This is obviously complicated on the implementation, but existing lenders could lose a lot more than $75,000 in foreclosure situations, not to mention borrowers can lose their homes. So this isn’t a panacea, but it’s certainly going to help lenders and homeowners once implementation becomes more clear.

No More FHA Down Payment Assistance
FHA down payment assistance programs will be eliminated. These decade-old programs allowed nonprofit groups like Nehemiah to contribute up to 6% (which actually comes from seller) for down payment assistance on FHA loans up to 97%, meaning buyers could finance up to 103% of a home’s value. The FHA said borrowers who take part in these arrangements go to foreclosure at nearly three times the rate of borrowers who put their own money down. Now borrowers have to put their own money down.

First Time Buyer Tax Credit
First time buyers who make purchases from April 9, 2008 and July 1, 2009 will receive a tax credit of $7500. But this has to be repaid over 15 years, so really it’s more of an interest free loan than a tax credit. Not much benefit here in my opinion.

Fannie/Freddie Oversight & National Lender Licensing
Because Wall Street is gun-shy on financing mortgages, Fannie and Freddie are more important than ever—they are funding more than 70% of the nation’s mortgages. By providing a backstop to the mortgage giants, the bill should help bolster confidence in them and increase liquidity for home buyers.

The newly created Federal Housing Finance Agency will be led by a person appointed by the president, and will oversee capital controls for FNMA/FHLMC and also implement national licensing for loan officers. The licensing is a necessary barrier for under qualified people to enter this business and is long overdue. Ostensibly, this agency will also make sure that Treasury’s new authority to back FNMA/FHLMC with tax dollars doesn’t get out of hand.

Overall Market Impact
In general, nothing will start to improve until home prices stop dropping. These measures are all designed to slow the flow of foreclosures which bring prices down faster and further.

The other question is whether this is socialist economic policy—privatizing gain and socializing risk, as pithy pundits like to say. It’s tough for taxpayers to hear we have to contribute to the FNMA/FHLMC aid, but the alternative is that the whole financing market breaks down, rates spike drastically, and home prices drop even further.

I think that it would be ideal to privatize the entire mortgage market, but that can’t happen until the private market is given enough confidence to re-engage. Backstopping FNMA/FHLMC (if they need it) is part of that process. The next step to try to revitalize the private-label securitization process through a developing ‘covered bond’ program led by the nation’s largest banks in conjunction with Treasury and the FDIC.

Under this program, banks would sell bonds and use the proceeds of these bond sales to fund mortgage loans. Monthly mortgage payments received from borrowers are used to make bond repayments to investors. If the homeowners default on their mortgage loans, the bank issuing the covered bonds must make up the shortfalls to investors. This is a good solution, but again, it’s going to take time to develop this market—a couple years in my opinion. Since FNMA/FHLMC can cover the (now expanded) conforming market for now, it seems logical that covered bonds will get their kick start in the immediate future with jumbo mortgages, and perhaps bring this market back online.

If covered bonds for jumbos are successful and HR3221 measures do their job in helping find a floor for home prices, the home market could find a bottom by early to mid 2009.