About Government Refinance and Home Purchase Programs

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.

There was a pretty good article in Forbes related to the subject. Here is an excerpt:

When Congress returns from recess next week, among the first orders of business will be completing work on the Housing Bill, which would allow the Federal Housing Administration to insure up to $300 billion of mortgages. The bill has been passed in the House and a bipartisan compromise reached in the Senate committee, but Congress has yet to settle how to pay for it.

…

All these maneuvers have created a plausible storyline and a low estimated cost. But the true cost of the proposal depends on the future of the housing market. Indeed, if the housing market recovers faster than expected, the Federal Housing Administration could enjoy a considerable upside. But if foreclosures occur at a greater than expected rate, the costs to the Federal Housing Administration could skyrocket. At the same time, unexpected foreclosures would further undermine the stability of the GSEs and make it difficult for them to pay the required fees, either for FHA expansion or for an affordable housing trust fund.

Right now everyone who gets an FHA loan pays an upfront mortgage insurance premium of 1.5% to get into the FHA program Coming as soon as July to amount you pay will depend on your credit score. Here is some info on that subject from an recent LA Times article:

Under the new system, according to the FHA’s outline of its plan, “a larger number of low-income borrowers [will] benefit from premium reductions than . . . moderate-, middle- and upper-income borrowers combined.”

On 30-year mortgages with down payments of 10% or more, applicants with FICO scores above 680 will qualify for the lowest premiums — 1.25% of the loan amount upfront and annual renewal premium payments of 0.5%. Borrowers with down payments of less than 5% and poor credit scores — FICOs ranging from 500 to 559 — will be charged premiums of 2.25% up front and 0.55% annually. All borrowers will continue to receive the same market-based interest rate. Under the current system, borrowers pay uniform 1.5% premiums upfront and 0.5% annually.

We’ll get more details to you as they emerge.

Even if the new FHA housing bill makes it past the President’s veto threat it now looks like it wouldn’t go live until October 1st. That is hard news for homeowners in trouble right now. See this recent CNNMoney.com article on the subject. Here is an excerpt:

In making its estimates, the CBO assumed a June 1 start date for the FHA program. But the Senate version of the legislation – considered more politically viable than the House bill – would start the program on Oct. 1.

That four-month difference is likely to flush from consideration a segment of the bill’s immediate target group: the 1.5 million subprime borrowers with adjustable-rate mortgages (ARM) whose loans are scheduled to reset in 2008.

Come Oct. 1, many of those whose ARMs reset between January and May might have already had their homes repossessed or left them during the foreclosure process.

…

“The people the bill will most likely help are those resetting in the third quarter and beyond.” Sharga said. “The people who reset in the first quarter will almost certainly be beyond help.”

In some states, however, it takes as long as a year to go through the whole foreclosure process, giving some borrowers whose loans reset early in the year a potential chance to use the Senate-proposed version of the FHA program should it become law.

The housing rescue plan in the Senate passed a panel vote today and now is moving forward to the whole Senate. If things work out there is hope that the bill will become law by July. Here is an excerpt from a recent Reuters story on it:

Both the Senate bill and a similar House bill call for creating a fund under the Federal Housing Administration to let thousands of distressed borrowers refinance into government-guaranteed loans.

The legislation would have the two government-sponsored enterprises cover a large share of the losses that the new fund is expected to absorb.

The committee passed the legislation on a vote of 19 to 2 after the top Democrat and Republican on the panel crafted a compromise that won broad bipartisan support.

Now, the legislation must pass the full Senate and then be reconciled with a similar plan that cleared the U.S. House of Representatives earlier this month.

Democratic Sen. Christopher Dodd of Connecticut, chairman of the Senate panel, has said he hopes to see the mortgage rescue package reach President George W. Bush by July 4.

The White House had threatened to veto the House bill, but has said it will take a close look at the version that cleared the Senate committee.

“I don’t believe the president will veto this. I hope not,” Sen. Richard Shelby of Alabama, the top Republican on the banking panel, told reporters after the vote.

In a statement made today Secretary of the Treasury Henry Paulson said:

The new FHASecure program has refinanced over 200,000 borrowers into affordable mortgages in the past eight months

As I understand the real numbers this is simply a lie. Apparently all but about 3000 of the 200,000 borrowers he is talking about were never late on their mortgages and got into FHA loans with no help from the FHASecure program at all (which is basically a loophole program to let people who missed mortgage payments after an ARM reset qualify for an FHA loan). I know Washington is all about Spin but this is blatant falsehood as far as I can tell.

If you are in trouble with your mortgage be sure to write to your Republican congressmen/senators today and insist they get on board with the Democrats to help you out. You can’t stop President Bush from vetoing a bill that will help you but enough pressure from his fellow Republicans goes a long way

Currently everyone who gets an FHA loan pays the same one-size-fits-all mortgage insurance rate (both up front at 1.5% and monthly after that). But soon people with lower credit scores will find themselves paying more in insurance than people with higher scores. That is good news to people who consistently keep up with their bills but it means people who haven’t done so will have face higher payments on their FHA mortgages. Here is an interesting story about that from the Chicago Daily Herald.

The AP published an interesting story today implying that a compromise on the new housing bill between the White House and congress is much more likely than a veto. Here is an excerpt:

When President Bush promised to veto Democrats’ homeowner rescue bill, it may have sounded like the measure was dead.

But in a competitive election year clouded by a crippled economy, Republicans are as anxious as Democrats to strike a deal on an issue that matters to their constituents. By threatening to veto the legislation, Bush gained leverage in what promises to be a high-stakes negotiation between the White House and congressional Democrats on a compromise.

So now the bargaining begins.

…

Behind the pitched rhetoric, however, the administration and Frank agree on the central concept of a homeowner rescue. Both want the Federal Housing Administration, the Depression-era mortgage insurer, to help more borrowers refinance into loans they can afford. Bush has twice relaxed the FHA’s standards to allow more such “workouts” for people facing default due to mortgage rate resets or other economic hardships.