Down Payment Assistance Programs - Gone But Not Forgotten

A key provision of the Housing legislation just passed by Congress is the elimination of the down payment assistance program. The principal advocate for eliminating the program was the FHA. Their reasoning is that these types of loans have failure rates two to three times the rates of other loans that they insure. That coupled with the fact that down payment assisted loans today account for 1/3 of all loans that FHA insures.

In Congress, members of the Black caucus and Hispanic legislators are already making plans to introduce legislation to once again allow for these seller assisted loans. With the anticipated gains by the Democratic Party in Congressional seats this November, these legislators are confident in reinstating these programs.

Another element of the legislation, effecting primarily lower income buyers, will institute risk based pricing for insurance premiums paid by the borrower. The FHA wanted this pricing action implemented immediately. The version just passed will delay implementation of risk based pricing for one year, until October, 2009.

Housing (Foreclosure Relief) Bill / Fannie – Freddie Bailout Bill

A real mouthful with the potential of costing taxpayers billions. And, Congress is already considering doing more; more to bailout potential foreclosures as well as another stimulus package. This must be an election year.

One key point that you need to understand and get the message out to clients:

Effective October 1, 2008, Down Payment Assistance Programs for FHA will no longer be allowed.

Well, here are the other key points that will be included in the Legislation.

• The government will back up to $300 billion in refinanced mortgages.
• Gave Fannie and Freddie access to government funds to keep them solvent but the bill also included additional supervision over Fannie and Freddie.
• Allow for a permanent increase in the conventional loan limit to $625,000.
• Provides approximately $4 billion for local governments to buy and rehab foreclosed properties in principally inner city neighborhoods.
• Allows for $15 billion in tax breaks for low income housing and up to $7500 for first time homebuyers.

This bill could be signed by the President as early as tomorrow.

The Ever Changing Landscape

Wachovia has announced their intention to discontinuing their use of mortgage brokers effective July 25. Mortgage applications will only be accepted at one of their retail branch locations.

Wachovia is now added to the list along with Bank of America (soon to include Countrywide) and National City as major South Florida banks to only offer retail mortgage lending.

Congress is close to finalizing the “foreclosure” legislation. As soon as we get more information on that, we will pass it along to you.

Where do we start?

The Treasury Secretary, Mr. Paulson announced that the Federal Government will be the bank of last resort for Fannie Mae and Freddie Mac. The Government has said to the World that it will not let the two principal institutions supporting our housing industry fail. Failure of these two financial giants would probably have led to a global depression. What choice did he have?

But, we are far from being out of the woods on this. We have seen estimates that up to 150 banks may fail in the coming year, many of them local and regional banks that put a disproportionate amount of their business into mortgages.

The Federal Reserve announced their new rules on home mortgages designed to protect consumers in securing home loans. The Rules have a number of provisions. 1) The Rules will require escrows for property taxes and homeowners insurance on first lien mortgages. 2) Verification of income and assets will be required as well (bye-bye stated loans.) 3) Lenders will be required to assess the borrower’s ability to repay a loan. 4) Finally, there is a ban on prepayment penalties if the monthly payment can change in the first four years of a loan (two years for higher priced loans.)

Interestingly, the majority of the rules won’t take effect until October, 2009, with the escrow provision not going into effect until 2010.

Indy Mac Bank was taken over by Federal banking officials on Friday, adding to the list of major sub-prime lenders that have failed. The Federal Deposit Insurance Corporation (FDIC) will now operate the bank while searching for a buyer.

We expect that Congress will finalize the Foreclosure bill and forward it to the President this week. We suspect that the President will work out his differences with Congress prior to a possible veto, since both Houses of Congress overwhelmingly approved their version. Obviously, a Presidential veto would be overridden.

We will keep you updated on future announcements. As always, if you have any questions, let me know.

Have a great week.

The Power Behind the Throne

A month ago we advised you that Fannie Mae and Freddie Mac were eliminating their “declining market programs.” Well, no sooner than some Banks and other Lenders were announcing programs with 95% Loan to Value’s (5% down payment), along come the Mortgage Insurance companies announcing that they will NOT underwrite loans (with few exceptions) at less than 90% Loan to Value in Florida, California, Nevada and Arizona.

The facts are that credit will continue to tighten for the foreseeable future. Lenders and Mortgage Insurance companies are continuing to write down their loan portfolios as foreclosures continue to increase. The $300 billion bill aimed at mitigating the foreclosure problem, which Congress is set to approve and send to the President, is not expected to significantly impact the default rates on loan programs. Representative Frank, one of the authors of the current legislation, is already on the record that more debt relief is likely.

Conventional loan programs (remember those) that are available are generally requiring 680 FICO scores and 10% down. As we have written previously, your best bet for loan programs are FHA, VA, USDA, hard money for investors and loans that Banks / Lenders will portfolio. We have also seen a tightening on Construction loans due to significant losses by Lenders, primarily, local and regional banks.

Not much good news, but there are options available.

If I can answer any questions for you, let me know.

To a Better Second Half of the Year

My goal over the past six months has been to provide you with as much useful information as possible regarding the housing market. As painful as it has been, homes continue to be sold, even if in fewer numbers and significantly different financing methods.

In the coming months we will continue to provide timely and pertinent information that will make you more knowledgeable. Similarly, if you are aware of something that you would like more information on, let me know.

Have a safe and happy 4th of July. If you are like me and my family, it will be closer to home this year.