Stimulus plan also sparks housing market

The measures would make mortgages easier to get and reduce borrowing costs -- especially in hard-hit, high-cost housing markets.

By Les Christie, CNNMoney.com staff writer

January 25 2008: 12:37 PM EST

NEW YORK (CNNMoney.com) -- The economic stimulus plan announced Thursday by Congress and the Bush administration includes provisions that specifically address the mortgage crisis. It aims to make getting a mortgage easier and cheaper in high-cost markets, to facilitate refinancing and to prevent foreclosures.

The package proposes lifting the dollar amount of loans that are eligible for purchase by Freddie Mac (FRE, Fortune 500) and Fannie Mae (FNM) and that can be insured by the Federal Housing Administration (FHA). The cap limits for FHA loans, which offer protection to lenders against losses that result from defaults by borrowers, would be raised to $725,000 and would be permanent.

These government sponsored enterprises currently guarantee a secondary market for loans of less than $417,000, which makes lenders more willing to issue them. The stimulus package proposes raising that cap to $625,000 for twelve months in order to make it easier for buyers to get or refinance mortgages - especially in high-cost regions like California.

"It's about time," said Richard DeKaser, chief economist for banking giant National City Corp. "The idea has rattled around Congress for a year. Most analysts agree the market for "jumbo" loans [which exceed the cap limits] has been hurt by lender flight."

The increased cap should give a boost to some of the most sluggish markets in the nation, like Florida, where high home prices typically mean that mortgages exceed the $417,000 loan limits. When credit markets contracted last summer, jumbo loans over that amount became much harder to get and, as a result, home sales in pricey markets took a hit.

"This will have a big, immediate impact, especially in California where sales have been down most significantly," said Lawrence Yun, chief economist for the National Association of Realtors.

Homeowners with jumbo mortgages also pay higher interest rates because, with no guaranteed secondary market for the loans, lenders take on more risk, and charge borrowers more for doing so.

For instance, the interest rate difference between loans that fall within the cap limit and jumbo loans was more than 1 percent on Thursday -- 6.39 percent compared with 5.30 percent, according to Bankrate.com. On a $500,000 mortgage, the difference is about $350 a month.

Pain relief for mortgage fare-ups

"The 1 percent drop is a huge factor," said Yun. "In California, it could create a mini-boom."

Before the stimulus package was announced, analysts including Merrill Lynch had come out with dire forecasts for housing markets over the next couple of years.

But, said Mike Larson, a real estate analyst with Weiss Research. "[the raise in loan limits] could remove some of the inventory overhang and alter the buyer psychology a bit. Right now they're still waiting for prices to fall."

Yun added, "There's a lot of pent-up demand in the market. This will boost confidence among these potential buyers, and some of the people on the fence will start buying."

The National Association of Realtors recently projected that a higher loan limit, which the organization and other industry trade groups have been lobbying for, would boost home sales by nearly 350,000 a year.

It would also reduce the average period of time a home sits on the market by a month and a half, and lift prices by two or three percentage points.

Home price increases could help keep foreclosures in check by increasing a distressed owner's home equity, making it easier for them to refinance.

Will the FHA Loan Limit Rise to $635,100?

by Peter G. Miller
January 25th, 2008

Can you imagine if the FHA mortgage limit is increased from $362,790 to $635,100? It could actually happen in the next few weeks.

Rumors are swirling around Capitol Hill that the House will raise the conventional loan limit under a stimulus bill from the current $417,000 ceiling to $625,000 or even $730,000 in high-cost areas.

No one knows at this writing if such proposals will pass in the House, whether they will be acceptable in a Senate version of a stimulus package or whether the President would sign such a bill.

But, for the moment, let’s imagine that such an increase passed.

Under current rules, the FHA loan limit is equal to 87 percent of the conventional loan limit. Since the conventional loan limit is $417,000 at this time it follows that the FHA loan limit in high-cost areas is $362,790 for a single-family home. There is also an FHA loan limit for low-cost areas that is equal to 48 percent of the convention al loan limit for single-family homes, or $200,160. The conventional limits are 50 percent higher in Alaska, Hawaii, Guam, and the U.S. Virgin Islands.

Now, imagine that a $730,000 conventional loan limit passed with the stimulus package. And, imagine that the FHA loan limit remained 87 percent of the conventional loan benchmark. In this situation the maximum FHA loan would be increased from $362,790 to $635,100.

Will this happen?

There is huge pressure to pass a stimulus package — but not ANY stimulus package. The Senate is likely to strip out some of the provisions which appear in the House measure, either in its own bill or in conference.

The $730,000 conventional loan limit has been heard around Washington for much of the past year and it is a proposal which has gone nowhere. Ditto for higher FHA limits –
notice that ”FHA Modernization” has yet to pass. The reason: Concerns about risk to the FHA insurance pool and worries about Fannie Mae and Freddie Mac.

Moreover, there is substantial opposition to the loan limit increase since it would raise the amount of money Fannie Mae and Freddie Mac could provide for single-family borrowers. Fannie Mae and Freddie Mac are “GSEs” — or government-sponsored enterprises, companies that were once federal agencies which have now been spun off into the private sector.

The head of the federal agency that oversees Fannie Mae and Freddie Mac, James Lockhart, director of the Office of Federal Housing Enterprise Oversight (OFHEO) says “we are very disappointed in the proposal to increase the conforming loan limit as we believe it is a mistake to do so in the absence of comprehensive GSE regulatory reform. To restore confidence in the markets we must ensure that the GSEs’ regulator has all the necessary safety and soundness tools.

“Yesterday Chairman Dodd talked about moving a GSE reform bill early this year. We are ready to work with him and the Senate Banking Committee. We will also be working with Fannie Mae and Freddie Mac to ensure that any increase in the conforming loan limit moves through their rigorous new product approval process quickly and has appropriate risk management policies and capital in place.”

Take that last sentence seriously. It suggests to me that if the higher loan limits are passed they will only be available to borrowers with unusually-pristine credit.

Borrowers eye benefits of FHA home loans

By Jack Guttentag

January 08, 2007

"What type of borrower finds it advantageous to take an FHA loan?"

The answer to this question is a little different today than in 2000 when I first addressed it because FHA's market niche is smaller. This reflects developments in the conventional sector that have not been matched by FHA, including the growth in popularity of loans with no down payment, interest-only monthly payments, and option ARMs. Reflecting these developments, FHA's market share fell from about 15 percent in 2000 to about 5 percent in 2006.

The FHA Market Niche in 2006. An FHA borrower:

• Has blemished credit acceptable to FHA, but not strong enough for prime pricing in the conventional market.
• Doesn't need a loan larger than the FHA maximum, which varies by county. (In 2006, it ranged from $200,160 to $362,790 in the highest-cost counties.)
• Can put 3 percent down in cash.
• Doesn't want an interest-only mortgage or an option ARM.

Credit Requirements: At risk of oversimplifying, credit standards in the conventional market range from A+ to D-, and within that range, FHA would be about B- or C+.

FHA credit requirements overlap the higher levels of subprime requirements. A good illustration is the underwriting rules applicable to a prior foreclosure. With exceptions, FHA won't accept a loan applicant who has had a foreclosure within the prior three years. Subprime lenders may have a three-year rule for their best credit grade, but the period scales down by degrees and might be only one year for the lowest grade.

Similarly, the maximum ratio of total debt service to income acceptable to FHA is 41 percent, which is generally high relative to prime standards, but well below what passes in the nonprime sector.

A borrower who meets FHA credit standards will usually do better with an FHA loan than with a subprime loan, despite having to pay a mortgage insurance premium. The rate will be lower, the borrower will have access to a large menu of mortgages, and there are no prepayment penalties. Most mortgages in the subprime market are 2-year adjustables with large margins, which means a high probability of a rate increase after two years, and they have prepayment penalties, usually for three years.

Loan Limits: The loan limits on FHAs are a major deterrent. HUD has asked Congress to allow the same loan amounts on FHAs as on loans purchased by Freddie Mac and Fannie Mae. In 2006, this would have meant an increase to $417,000 uniform across the country.

Down Payment Requirements: In 2000, FHA's 3 percent down payment compared with 5 percent on most conventional loan programs. In 2006, however, zero-down loans were widely available in the conventional sector, while the FHA minimum of 3 percent remained unchanged. Since zero-down loans have long been available under the VA program, FHA is now the only sector that does not have them.

This disadvantage of FHA is partially offset by down-payment-assistance programs available to FHA borrowers. One form of such assistance is second mortgages at preferential rates, which is the preferred method of public agencies at the city, county or state levels. These agencies have their own eligibility rules independent of FHA.

A second form of assistance is cash contributions from nonprofit corporations. These have no repayment obligation, but the funds provided come from home sellers who take account of the contribution in setting their sales prices.

Neither type of assistance is a good substitute for a zero-down program, a bill for which was introduced in Congress in 2004. So far, however, it has not been passed.

Interest-Only Mortgages and Option ARMs. These instruments exploded in popularity after 2000, but were not available under FHA and there is little likelihood that they ever will.

Prospects For a Revival in FHA's Market Share. Congressional authorization of no-down-payment loans and a rise in loan limits would increase FHA's market share. So would an increase in public awareness that some subprime borrowers would qualify for, and do better with FHA loans.

A marked increase in FHA's market share would result from an explosion in foreclosures, which would cause a drastic restriction of lending terms in the conventional sector. This is not something I would care to see, but if it happened we will be pleased that FHA was there to help cushion the blow.

Copyright 2007 Jack Guttentag

FHA increase to $829,750…

Posted January 11, 2008

FHA reform reached an important milestone on Friday when the U.S. Senate overwhelmingly approved its version of the legislation, the bill passed by a vote of 93-1.

The new FHA reform will raise the limit on FHA loans from $362,000 to at least $417,000. Some areas of the country will see an increase go as high as $829,750. This FHA increase will help some 200,000 people countrywide who are facing foreclosure refinance under these new terms. But the biggest stumbling block to a compromise is a feature of the House bill which establishes a new housing trust fund for troubled borrowers and would require FHA to contribute to it. One can’t help to wonder if the increases are fair and just across the entire country. What happens to the people that live in God’s Country?

Also, the Senate passed a separate bill which would end, but only for three years, a provision in the tax code which has haunted so many homeowners after foreclosure or a loan workout. The Internal Revenue Service requires mortgage companies to send borrowers a 1099 for any loan amount written off by the lender after a foreclosure, short sale, or loan restructure. The IRS treats that forgiven debt as income and taxes the borrower accordingly.

Frank Wible
REMAX ALL PROS

FHA vs. Conventional Financing

Most applicants are inundated with a variety of terms describing mortgages that are available on the market. The most popular include, Fannie Mae, Freddie Mac, and FHA.

FHA was created by the Federal Government to provide affordable housing financing for qualified borrowers. FHA insures the loan, limiting the lender's risk. The borrower pays an upfront insurance premium which is approximately 1.5% of the loan amount. This money can be financed directly in the loan amount. The borrower also pays a monthly premium of .5% of the loan amount divided by 12 months. FHA requires down payment of 3%. This money can be a gift. No reserves are required.

Borrowers must provide proof of sufficient income to show ability to pay the mortgage. FHA guidelines are more relaxed, such as; a bankruptcy that was discharged at least 2 years ago, the use of alternative credit (utilities, cable TV, auto or medical insurance premiums, child care, school tuition, furniture or appliance store accounts) in lieu of traditional credit, and higher debt to income ratios. FHA interest rates are extremely competitive with conventional rates.

Fannie Mae loans are conventional loans made at the risk of the lender without benefit of any government guarantee or government insurance. A conventional loan with an LTV (loan to value ratio) of greater than 80% requires primary mortgage insurance, which can be paid monthly. The borrower must have 5% of his/her own funds for the down payment and 2 months reserves on deposit. Closing costs must be paid by the borrower.

Requirements of a conventional loan applicant include excellent credit, job stability with sufficient income, a sizable down payment, and low debt to income ratios. Borrowers who meet Fannie Mae guidelines are rewarded with an interest rate only slightly lower than an FHA interest rate.

FHA Streamline Refinance

The Federal Housing Administration (also known as FHA) has allowed FHA streamline refinances on federally insured mortgages since the early 80's. Since then, many FHA homeowners have utilized this program to lower their interest rate with relatively low costs. There is much confusion on the term "streamline" as some borrowers think there are no costs. It simply means there is very little documentation and underwriting that needs to be performed by the lender, but there are still costs involved in the transaction.

In a typical FHA streamline refinance, there isn't any credit underwriting required, unless the principal mortgage balance is increasing, in which case, HUD will need to have a 12 month mortgage payment history. This mortgage loan allows new person(s) to be added to title on a FHA streamline refinance without a review of their credit report. If you want to remove someone from title on a streamline refinance, you may need to requalify for the loan. (certain exceptions may apply).

The standard requirements of a FHA streamline refinance are as follows::

1.) The mortgage you want to refinance has to be FHA insured

2.) All mortgage payments must have been paid current by the borrower

3.) The new principal and interest mortgage payment on a refinance must be less than the current mortgage payment

4.) Receiving cash back is not permitted on a FHA refinance

5.) If the borrower has a existing second mortgage it may remain as long as it is re-subordinated to the new mortgage loan. .

6.) To be eligibile, the borrower must own the property and have had the FHA mortgage for at least six months prior

7.) The term of the new FHA mortgage must be the lesser of 30 years or the unexpired term of the mortgage plus 12 years. A borrower cannot refinance from a 15 year loan to a 30 year loan.

8.) An appraisal is not required unless the closing costs are wrapped into the loan. Streamline refinances without an appraisal are limited to the unpaid principal balance, minus any refund credit of the mortgage insurance premium (MIP), plus the new upfront MIP if it is to be financed in the mortgage.

9.) The borrower cannot be late, delinquent, or in default of any federal debt.

A streamline refinance loan can be done in a couple ofl ways:

A.) A Streamline Refinance can include the closing costs into the new mortgage loan. This can only be done if there is sufficient equity in the property, to be determined by an appraisal. This program offers the best rate.

B.) There is a "no cost" Streamline Refinance which has no expenses or cost to the borrower. This streamline refinance is done without an appraisal and the new loan amount cannot exceed what is currently owed, i.e., closing costs may not be added to the new mortgage. These closing costs will be paid by the lender. Investment properties (properties in which the borrower does not reside in as his or her principal residence) may only be refinanced without an appraisal and, thus, closing costs may not be included in the new mortgage amount.

Foreclosure and the FHA

Many Americans have the unfortunate event of foreclosure occur to them at some point during the course of their life. There are many steps to avoid a foreclosure and one of the easiest steps to take is to pay your mortgage payment on time. Yes, you can be foreclosed upon after missing only one payment but this is generally not the steps taken. Do not ignore the letters from the bank as this would be one of the worst situations you can be thrust into. If you are having problems making payments you should contact your loan provider immediately. When contacting your provider you should be prepared to give them your monthly income and expenses as a payment can be arranged so that you will not be forced to move out.When foreclosure occurs you lose possession of your home and the lender legally repossesses your home. You will be forced to move out of your home immediately. If your home is worth less than the amount still owed on the loan a deficiency judgment will be issued and you could end up owing the HUD more money. So you would not only be without a home but you would also owe more money.
There are a few alternatives that can be taken:

Special Forbearance:You could get a temporary reduction in payments or even a suspension of payments based on your current financial standing.

Mortgage Modification:You may also be able to refinance the current debt or even extend the term of your current mortgage loan.

Partial Claim:A Partial Claim would bring your current payments current by obtaining a one-time claim from the FHA-insurance fund. There are certain qualifications that must be met for this to occur.

1. Your loan is 4 months but no more than 12 months delinquent.
2. You will be able to resume making regular payments.

Pre-foreclosure sale:This will allow you to sell of your home for less than the loan amount. There are 3 qualifications for this step.

1. Loan is 2 months delinquent
2. Be able to sell the home within 3 to 5 months
3. Appraisal shows that the value of the home meets HUD program guidelines

Deed-in-lieu of foreclosure:You may be able to give back your home to your lender. This will help your credit score and allow you to obtain a future loan. Qualifications for this step are:

1. You do not qualify for any of the other steps
2. You couldn't sell the home before foreclosure
3. This is your only FHA Mortgage that is in default

Foreclosure can make you homeless and it will hurt your credit greatly. If you are going to be late with payments or even think you might be, be sure to contact your lender to set up precautionary steps that can keep you in your home and out of credit problems.