Government Refinance Assistance

Kudos to the folks over at the New York Times for tackling the perplexing issue of how the new housing legislation will really play out when it passes. The idea of helping people who are upside down on their mortgages refinance into FHA backed loans is nice but there are lots of questions to be answered. Here is an excerpt from the recent NYT article:

The effectiveness of the bill will depend to some extent on how it is handled by the F.H.A., an agency created during the Great Depression to insure home loans. It will have several challenges: persuading the lenders who made second mortgages and home equity loans to cooperate; screening loans to make sure borrowers have a good shot at keeping their homes after refinancing; and weeding out those trying to take advantage of the system.

Second mortgages and home equity loans were popular during the housing boom and often allowed Americans to buy a home with little or no money down or let them take out cash against their homes as prices rose. Now, home values have fallen so much that there is little or nothing left to pay off these loans when homes are sold or repossessed. The Congressional Budget Office estimates that about 40 percent of riskier mortgages made in recent years are coupled with such secondary loans.

Under the Congressional plan, these loans would have to be eliminated before homes could be refinanced. People who negotiate loan modifications say holders of second loans have been reluctant to take losses, and lenders with first loans are often unwilling to give them enough money to secure their cooperation. Under the Senate version of the plan, the F.H.A. would have some leeway in negotiating with borrowers who have second loans.

Another challenge for the F.H.A. would be selecting borrowers who have the best chance of paying off new loans. The agency would have to make sure lenders are not unloading only their worst loans, and lenders and the F.H.A. would have to guard against borrowers who can pay their current loans but would like a cheaper, government-backed loan.

How will they guard against people trying to fake it and get a cheaper loan? I have no idea. I worry that no one knows. It seems likely to me that banks will end up playing “chicken” with borrowers they think are bluffing. It also seems like this new legislation will encourage people to play that kind of game. We’ll see.

The article later said:

“In this rush to legislate and with the lack of discussion of a lot of issues, people will look at this bill in the winter and say we shouldn’t have done this, we shouldn’t have done that,” said Mr. Ely, who closely followed the savings and loan debacle. “The politics are going to be so different come next year. There will be another administration, and who knows what the makeup of the House and Senate will be.”

…

An official for the Mortgage Bankers Association, a trade group in Washington, acknowledged that the proposal may not help the majority of troubled borrowers, but said it would be a good start and would help restore confidence in the financial markets and the economy.

“There is no silver bullet,” said the official, Steve O’Connor, a senior vice president of the association. “There is no single solution to the housing crisis. It will take multiple tools to turn the housing market around, and it’s going to take time.”

Part of the new housing bill is a provision that would eliminate the downpayment assistance programs that currently allow buyers to purchase homes with no money down. FHA will only finance up to 97% of the purchase price of a home, and the other 3% is officially not supposed to come from the seller. But a loophole allows for a non-profit charitable organization to pay that other 3%. So right now a buyer can legally get an FHA loan and have the seller donate the remaining 3% to one of these non-profits and then get the non-profit to give it as a gift toward the downpayment. If the seller is willing to cover the closing costs as well a person can still easily and legally purchase a home with no money down. FHA doesn’t like this loophole and wants to close it because they have data that shows that people who do not pay out of pocket to get in to a home are more likely to foreclose later.

This provision may be bad news if you were hoping to get a home with no money down but it is likely going to be healthy for the FHA.

It was close to passing before Independence Day but at the last minute a Nevada GOP senator decided to hold everything up by trying to sneak his pet project into the pending housing bill. House Democrats were furious and so should you be if you are in trouble with your mortgage. Here is a link to a Reuters article on the subject. Senate majority leader Harry Reid (also of Nevada) says that the bill will have to wait until the Senate reconvenes in early July as a result of this stalling.

After the overwhelming vote to limit delays on the pending housing bill yesterday there is little in the way of the Senate voting on the bill left. Reports are coming in that the bill could pass as soon as today. More to come as news of the progress rolls in.

After the bill passes the next step will be to reach a compromise with the similar bill passed in the House and then get it past the President who has threatened veto over some unspecified objectionable aspects of the bill.

The Senate voted overwhelmingly today to limit debate on the pending housing bill. This clears the way for the bill to pass in a timely manner and blocks any Republicans from trying to slow things down. In addition, massive support for this streamlining shows that the bill has a great deal of support among both Republicans and Democrats. Here is an excerpt from a recent AP article on the subject:

A massive foreclosure rescue bill overwhelmingly cleared a key Senate test Tuesday, drawing broad support from Democrats and Republicans alike.

The Senate voted 83-9 to speed up work on the $300 billion mortgage aid plan, putting it on track for a final vote as early as the end of the day.

The resounding vote reflected a keen interest in both parties in claiming election-year credit for helping homeowners amid tough economic times.

Of course the bill needs to get past the President but the broad support on both sides of the aisle make that seem more likely all of the time.

Apparently US Senators like to be re-elected. That could explain why the housing bill that would provide help to so many struggling homeowners is enjoying such strong bi-partisan support in the senate despite grousing from the White House. Of course President Bush could hardly get more unpopular so fighting against helping homeowners doesn’t change his status much; but his fellow republicans in the senate are realizing that unless they do something to help their struggling homeowner constituents their days in the senate will be short. There was a pretty good piece at Housing Wire on the bi-partisan support the legislation still enjoys. Here is an excerpt:

Various media reports have suggested in recent days that both the threat of veto, as well as questions about Democratic ties to Countrywide, have weakened support for the housing bill. The Senate’s own actions, however, are proving that bipartisan support for the housing proposal remains surprisingly strong.

Senators Jim DeMint (R-SC) and Jim Bunning (R-KY) had put to the floor Thursday a motion to recommit the housing bill; the motion would have effectively killed the bill, by pushing it back to the Banking Committee chaired by Christopher J. Dodd (D-CT). …

“As a member of the Banking Committee I also think we need to take a closer look at exactly who benefits form this bill and by how much,” Bunning said in a statement Thursday.

Yet the Senate quashed the move by a massive 70-11 margin in a floor vote anyway.

The attempt to recommit the bill wasn’t the only attempt made Thursday by Republicans to kill the housing proposal — the Senate also shot down two Republican-proposed amendments to the bill that also would have effectively killed it. One had sought to remove the $300 billion FHA expansion from the bill, while another proposed yanking the affordable housing fund that is the backbone for funding the proposed FHA expansion.

The two measures failed by amazingly wide margins of 69-21 and 77-11, respectively — evidence of surprisingly strong bipartisan support for the election-year housing bill. The margins are large enough, as well, to suggest that Congress may overrule any veto by President Bush.

There was an interesting article in the AP recently pointing out that there is intense political pressure on congress to get a useful housing bill passed in to law. President Bush has been threatening veto but his administration seems to realize that a veto (and thus scuttling the plans to help hurting homeowners) could deal a fatal blow to the republicans come election time so they seem intent on coming up with some kind of compromise. See this excerpt from the article:

Then there is the political reality for the president: Many Republicans are facing a darkening re-election outlook amid tough economic times and are reluctant to oppose a measure intended to address the crux of the financial crisis.

Sen. Richard C. Shelby of Alabama, the top Republican on the Senate Banking, Housing and Urban Committee, says he hopes Bush will reconsider his veto threat. Insiders said the tepid wording of the threat, combined with intense behind-the-scenes negotiating by Treasury Secretary Henry M. Paulson to reach a deal, suggest the White House may be doing just that.

It now appears that even if President Bush decides to veto there may be enough votes in the senate to override him anyway. Rep. Barney Frank who authored the House version of the bill seems optimistic that the two sides are close to a bill the President will sign (even if reluctantly so).

Dick Armey wrote a pretty good opinion piece over at the WSJ Online explaining why some people are opposed to the foreclosure prevention legislation. Here is an excerpt:

Hundreds of thousands of payment-option ARMs are scheduled to recast next spring, which everyone expects to cause a wave of delinquencies. The Dodd-Frank plan would allow Countrywide and others to cherry-pick their worst loans and roll them over to the FHA. The bill has been advanced in the name of homeowners, but it’s all too clear who is being rescued.

The FHA cannot handle a Dodd-Frank wave of $300 billion “in-distress” loans. The loan volume alone will nearly double the size of the FHA. Yet last week the agency, floundering under its existing portfolio, announced $4.6 billion in new losses. These losses destroy 22% of the FHA’s entire capital reserves and raise doubts about the agency’s solvency.

On June 9, FHA Commissioner Brian Montgomery told reporters that he opposes the Dodd-Frank approach, saying that the FHA “is not designed to become the federal lender of last resort, a mega-agency to subsidize bad loans.” Last week the Congressional Budget Office (CBO) projected that banks will use the program to offload their “highest-risk loans” to the taxpayer, and that a stunning 35% of all of the loans refinanced through Dodd-Frank will eventually default on the FHA.

We think the problem with these “bailout” claims is that borrowers will still need qualify for the new FHA loans, including the the debt to income requirements. That means that no one should get a new loan if they can’t easily afford the new payments. We’ll see if these complaints will be enough to veto the bill because it looks likely that it will make it past the Senate.

There was a good article over at the National Journal recently explaining how progress is coming along with the Senate version of the housing assistance bill we have been covering. Here are some excerpts:

Senators are expected to revise their housing-assistance package to set loan limits for mortgage giants Fannie Mae and Freddie Mac at $625,000 in an effort to split the difference with House negotiators on a final package and help steady an increasingly rattled home mortgage market.

Senate Banking Chairman Christopher Dodd made a few significant changes to the bill he introduced with ranking member Richard Shelby and that was approved by their panel last month. They hope to strike a deal with a competing version sponsored by House Financial Services Chairman Barney Frank, according to an outline of the proposal circulated among lobbyists Monday night.

Dodd’s office was expected to release details of the bill today as it should come to the Senate floor this week.

The most important change would set Fannie and Freddie loan limits at $625,000, according to the outline, which is $75,000 more than called for in their original bill.

By contrast, the Frank bill would maintain the loan limits at approximately $730,000, a benchmark that was established in the economic-stimulus package passed in February but lasts only through the end of the year.

The Senate version would set loan limits for the Federal Housing Administration’s mortgage insurance program at $625,000 as well, according to the outline.

An article over at CBS news indicates that the Senate is working hard to pass the FHA-powered housing bill in the next couple of weeks. Here are some excerpts:

Sen. Charles Schumer (D-N.Y.) said Wednesday that major housing legislation may hit the Senate floor this week, as Democrats are hoping to complete work on the issue before the Fourth of July.

“Housing is at the nub of the problems in this economy,” said Schumer. “Housing problems are getting worse. And everyone you talk to, from Wall Street to Main Street, says do something. No one can figure out why we can’t.”

There was an interesting article in the Seattle PI recently on how some people are using the newly increased FHA loan limits as an alternative to traditional loan over $417,000, or “jumbo loans”. The issue is that over $417,000 the rates have become quite high — higher that FHA rates. In some high cost areas FHA loan limits exceed $700,000 so in those places FHA is an interesting alternative to conventional loans. Here is an excerpt from the article:

He could use the FHA for his $444,000 loan thanks to February’s federal stimulus package, which temporarily raised the agency’s cap from $362,790 to $567,500 in King County. The new limit also applied to conforming loans, which go to borrowers with better credit and bigger down payments, are backed by federally sponsored mortgage giants Fannie Mae and Freddie Mac, and had been capped at $417,000.

The new, bigger FHA loans have started catching on in recent months in the Seattle area and elsewhere, according to local lenders. But generally borrowers have avoided the larger conforming loans because, at first, they imposed much higher interest rates and extra restrictions.

“It was just, in my opinion, a really big flop,” said David Hatlen, vice president of Home Street Bank.

But terms for these conforming jumbo loans have improved just in the past few weeks.

“It’s a great program now,” Hatlen said. “The problem is, a lot of people don’t know about it.”

The FHA announced last week that, from October through May, it insured 2,658 loans in the Seattle area and 11,924 statewide — up 78 percent and 50 percent, respectively, from the entire 2007 fiscal year, which ended Sept. 31, and more than any of the previous three fiscal years.

But only a small part of this was due to the higher-limit loans, which carry interest rates about half a percentage point higher than traditional FHA mortgages, according to local lenders.

“I don’t think the word’s out on the FHA jumbo (loans) yet,” Hatlen said.

Until today a buyer had to wait 90 days after a property foreclosed to purchase that home with an FHA loans. Here is an excerpt from a recent AP article on the on the subject:

The Bush administration is temporarily suspending a 5-year-old rule intended to deter property flippers, as part of an effort to help speed the sale of foreclosed properties.

For one year, the Federal Housing Administration will no longer impose a 90-day waiting period before foreclosed properties can be sold to receive government-backed loans.

The policy was put in place in 2003 to deter property “flipping” schemes, in which buyers are overcharged for foreclosures or other distressed properties. But the surge in vacant properties resulting from borrowers who were unable to afford their mortgages has become a far more pressing concern.

“A glut of foreclosed and abandoned homes harms neighborhoods, frustrates homebuyers and delays a community’s recovery,” FHA commissioner Brian Montgomery said in a prepared statement.

The new policy “will allow homebuyers to purchase these homes in much greater numbers and ease the excess supply of unsold homes,” Montgomery said.

If you are a homeowner in danger of foreclosure the Bush administration may not be getting high marks from you right now. While the democrats are pushing hard to help people who are upside down on their homes or in danger of foreclosure to refinance to an affordable FHA loan, the members of the Bush administration continue to fight the legislation. See this from a recent Reuters article on the subject:

A congressional plan to save troubled U.S. homeowners from foreclosure could hurt the economy and affect the government’s ability to help deserving homeowners, a senior Bush administration official said on Monday.

“Some in Congress are advancing legislation that, while well intentioned, could be problematic for the economy and the country,” said Brian Montgomery, who heads the Federal Housing Administration, in a speech at the National Press Club.

Legislation due to be voted on later this month by the U.S. Senate would create a new FHA fund to insure up to $300 billion in home loans. The legislation, which could save 500,000 borrowers from foreclosure, has already cleared the U.S. House of Representatives. But it has not been wholeheartedly embraced by the Bush administration.

There was a pretty good article over on the National Journal site recently about the pending mortgage relief legislation and the effect it could have on US homeowners. Here is an excerpt:

The CBO estimates that a Senate bill allowing the Federal Housing Administration to insure up to $300 billion in new subprime mortgages would help about 400,000 struggling homeowners out of the 2.2 million borrowers who are expected to face foreclosure proceedings in the next few years. The agency also said the measure, sponsored by Senate Banking Chairman Christopher Dodd and ranking member Richard Shelby, ultimately cost FHA $729 million over a 10-year period to help guarantee new mortgages for those at risk of default. While the bill’s ceiling is $300 billion in new guarantees, CBO estimated that FHA would actually provide $68 billion in new loan commitments. The Senate bill has a narrower eligibility than a House version, sponsored by Financial Services Chairman Barney Frank, which would cost $1.7 billion and help an estimated 500,000 borrowers. The FHA refinancing program is part of a broader housing package that both sides are attempting to reach agreement on before July. The overall bill also is expected to revamp oversight at government-sponsored enterprises Fannie Mae and Freddie Mac, overhaul the FHA’s mortgage insurance program, and provide some housing-specific tax breaks.

The days of buying homes with no money down through the FHA may be going away if the heads of the FHA have their way. Today a home buyer can get 97% financing through the FHA, the other 3% a charitable organization (which is basically a loophole where the seller donates 3% to the charity and the charity gives it to the buyer for the downpayment), and the closing costs can be paid for by the seller as well. It all adds up to a buyer getting into a home with no money down.

About a third of FHA home purchases have been taking advantage of this loophole in the recent past. The FHA officials want it done away with because they say folks who buy homes with no money down are significantly more likely to foreclose later.

Here is an excerpt interesting article on the subject over at the WSJ online:

FHA Commissioner Brian Montgomery said Monday that the government-backed loans made to borrowers who receive down-payment assistance go into foreclosure at three times the rate of loans in which borrowers pay for their own down payment. Loans with seller-assisted down payments make up about 35% of the FHA’s loan portfolio, up from only 5% in 2001.

After a recent evaluation, the FHA estimates it will incur an additional $4.6 billion in unanticipated long-term losses, primarily due to loans involving seller-funded down-payment gifts.

“We are concerned about this business, because the substantial losses affect FHA’s bottom line and FHA’s ability to serve American citizens who need access to prime-rate home loans,” Mr. Montgomery said during a speech at the National Press Club.