Christina Dunham's Random Real Estate Musings

The Housing and Economic Recovery Act of 2008 contains provisions that will transform major aspects of the mortgage industry. But it also creates opportunities for real estate investors and homeowners alike.

FHA Changes:

In order to take advantage of available Seller Funded Down Payment Assistance (DPA, Nehemiah), buyers must have their home loans submitted and locked before September 30, 2008. This type of DPA will not be available after September 30. Two out of every three FHA loans are currently using Seller Funded DPA. At the same time, FHA minimum cash investment requirements are increasing to 3.5%, from 3%.

Mortgage insurance premiums (MIP) will also increase after October 1, 2008. HR 3221 increased the cap on MIP from 2.25% to 3%. Per FHA policy, FHA has filed the amount they want the cap to be with the Office of Management and Budget (reported to be between 2.25% and 3%, but closer to 3%. Visit www.Hud.gov for FHA loan amounts in your area).

This means that for a short time longer, first time homebuyers can still take advantage of seller down payment assistance and lower minimum cash investment requirements. You may also be able to get double advantage with the new tax credits (see next section). With the abundance of homes in the market, buyers are in the driver’s seat when it comes to negotiations. If you are in the market for a home and need down payment assistance in order to qualify for a home loan, act quickly before this window of opportunity closes.

Tax Credits:

First-time homebuyers and people who have not owned a home in the past three years will get a $7,500 tax credit if they purchased a home on or after April 9, 2008 or if they purchase one before July 1, 2009.

Income limitations are:

• Married couples with incomes less than $150,000 qualify for the entire tax credit. The tax credit phases out for married couples with incomes between $150,000 and $170,000. Couples with incomes exceeding $170,000 do not qualify for the tax credit.

• Singles with an income less than $75,000 qualify for the entire tax credit. The tax credit phases out for singles with incomes between $75,000 and $95,000. Singles with incomes exceeding $95,000 do not qualify for the tax credit.

The tax credit is really an interest-free loan from the government that must be paid back over fifteen years, in increments of $500 a year.

• If you die, your heirs do not have to pay back the remaining balance.

• If you sell your home before fifteen years have passed and your home’s appreciation is less than the amount you have to pay back, the loan is forgiven.

• If you turn your home into a rental or investment property, you must pay back the balance due.

If you purchased a home on or after April 9, 2008, be sure to speak with your CPA or accountant to see if you qualify for this tax credit.

Conforming Jumbo Loan Limits:

The floor for Jumbo Loans will remain at $417,000, despite the depreciation in home prices. The ceiling for Jumbo Loans will decrease from $729,750 to $625,500 as of January 1, 2009.

If you have been thinking about refinancing or buying a new home and require a loan up to $729,750, take advantage of current jumbo loan rates before the loan limit drops at the end of the year.

Hope for Homeowners:

This program is intended to assist up to 400,000 homeowners who are currently upside down on their homes and owe more than their homes are now worth to refinance into fixed-rate loans with reasonable payments. Mortgages must have been originated prior to January 1, 2008.

Borrowers must:

1. Certify that they did not default intentionally (there is penalty of jail if they are found to lie here).

2. Have had a DTI ratio over 31% as of March 2008.

The bill requires lenders to work with the borrower to write down the mortgage to no more than 90% of the appraised value. For example, if a borrower owes $300,000 but the home is worth $250,000, the borrower will receive a new loan for 90% of $250,000, which equals $225,000. The $75,000 difference is forgiven.

The good news: if you refinance through the Hope for Homeowner’s Program, you instantly have 10 percent equity in your home. The bad news, you’ll have to share future appreciation with the lender. The lender shares equity in the property going forward, on a sliding scale:

1. If the home is sold within one year, the lender receives 90% of the appreciation and the home owner receives 10%.

2. If the home is sold within two years, the lender receives 80% of the appreciation and the home owner receives 20%.

3. If the home is sold within three years, the lender receives 70% of the appreciation and the home owner receives 30%.

4. If the home is sold within four years, the lender receives 60% of the appreciation and the home owner receives 40%.

5. If the home is sold after five years, the lender receives 50% of the appreciation and the home owner receives 50%.

This program is only available for primary residences, and is not for second homes or investment properties.

Licensing:

SAFE Mortgage Licensing Act was created to “encourage” a nationwide licensing and registry system. In the next few years, individual states will:

1. Establish a minimum net worth for recovery fund requirements.

2. Require originators to register with the National Registry and obtain a unique identifier number. This will help regulators track individuals and prevent originators who receive complaints in one state from starting a new origination practice in another state.

3. Develop a state license program.

4. Require pre-licensure education.

5. Require eight hours of continuing education every year.

This is great news for consumers, as stricter licensing and educational requirements will help discourage unscrupulous loan and real estate agents from proliferating like before. Since 2005, more than 65% of all loan officers have already left the business. With the new licensing restrictions, this figure is expected to increase even more in 2009.

Sweeping changes for turbulent times. Only time will tell if this rescue bill does what it intends. For more information about any of the provisions above, email me at contact@christinadunham.com.

Christina Dunham is a Mortgage Advisor with Dunham Group Mortgage. She has originated over $107 million in loans since 2003. She may be reached at contact@christinadunham.com. For a complimentary credit or mortgage loan consultation, contact Christina Dunham at 866.7.DUNHAM.

As expected, the Federal Reserve left short-term interest rates unchanged last week, keeping its target for the federal funds rate at 2 percent. The Fed’s policy statement did not contain any surprises.

The Fed remains concerned over both inflation and sub-par economic growth, citing that “tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help promote moderate economic growth.” Most analysts are growing more confident that the Fed will leave the Federal Funds Rate alone until after the elections.

The federal funds rate is the rate that banks pay to borrow from each other to fulfill reserve requirements. While a rate hike would help to fight inflation as well as help strengthen the dollar, it would also cause more slowing of an already sluggish economy because it increases the cost of borrowing for businesses and consumers.

A decrease in the Fed Funds Rate makes borrowing cheaper, stimulating business activity and economic growth. For consumers with credit card debt or adjustable home equity lines of credit (HELOCs), the Fed’s move is good news. Rates for consumer credit are primarily based on the Prime Rate, a rate pegged at 3% above the Federal Funds Rate. The Prime Rate remains at 5%, keeping the cost of borrowing low for the time being.

Long term interest rates remain in the balance, with the 30-Year Fixed rate teetering in the 6 ½ percent range since last week. If the Consumer Price Index (CPI) comes in lower that expected, we could see a slight trend downward for mortgage rates.

On July 30, 2008, President Bush signed into law H.R. 3221, the “Housing and Economic Recovery Act of 2008,” a sweeping $300 billion rescue plan to help struggling homeowners avoid foreclosure, and to boost confidence in the sluggish housing market. The new legislation also created changes to conforming loan limits, FHA guidelines, down payment assistance, and first time homebuyer programs.

Also known as the “Foreclosure Prevention Act of 2008,” the bill passed the House on July 23, 2008, by a vote of 272-152. On Saturday, July 26, 2008, the Senate passed the bill by a vote of 72-13. The bill will cost the American public about $4 over the 2008-2012 period. Below are some highlights of the bill.

• Federal Housing Finance Agency (FHFA) - newly established independent agency tasked to oversee Government Sponsored Entities (GSEs) Fannie Mae, Freddie Mac and the Federal Home Loan Banks, empowered with broad supervisory and regulatory powers over the operations, activities, corporate governance, safety and soundness, and mission of the GSE.
• Higher Conforming Loan Limits – permanently increases conforming loan limits in high-cost areas to $625,500 and establishes an affordable housing fund, commencing upon the expiration of the temporary Economic Stimulus limits of $729,750 on December 31, 2008. This enables homeowners in high-cost areas to avail of conforming loans with lower interest rates.
• Hope for Homeowners Program – enables at-risk borrowers to refinance their existing mortgages into FHA loans. Borrowers must certify that they have not intentionally defaulted on their mortgage or any other debt. Effective on October 1, 2008, qualified borrowers may be able to refinance into a new FHA 30-year fixed mortgage at 90% of the property’s appraised value, with all existing subordinate liens extinguished. Borrowers are prohibited from taking out new second mortgages for the first five years on the program and are expected to share 50% of all future appreciation with FHA. The loan limit for this program is $550,440 nationwide.
• Seller-funded down payment assistance – prohibits down payment contributions from (1) the seller or any other entity with a financial interest in the transaction and (2) any third party reimbursed by any of such parties beginning October 1, 2008. Other assistance programs provided by nonprofits or funded by other sources such as churches, employers, or family members will still be permitted.
• Loan Originator Requirements – sets minimum standards for loan originator licensing and establishes a nationwide mortgage registration system, thereby improving the oversight of mortgage brokers and bank loan officers, as well as strengthens mortgage disclosure requirements to ensure that borrowers understand the terms of their home loans.
• First-Time Homebuyer Tax Credit – first-time homebuyers will receive a $7500 tax credit for any qualified purchase of a principal residence between April 8, 2008 and June 30, 2009. A first-time homebuyer is defined as an individual who has not had ownership interest in a principal residence in the last three years. The credit is repayable over 15 years (making it, in effect, an interest free loan). Income restrictions apply.
• FHA Modernization – permanently raises FHA loan limits from $362,790 to $625,500, streamlines processing for FHA condos; expands opportunities for seniors who wish to access their equity through reverse mortgage programs, and reforms to the FHA manufactured housing program. The new legislation also calls for an increase on the down payment requirement on FHA loans from 3% to 3.5% of the appraised value of the property. The effective date for reforms is immediate upon enactment, but the loan limits will not go into effect until the expiration of the Economic Stimulus limits (December 31, 2008). Permanent
• Emergency Assistance for Redevelopment of Abandoned and Foreclosed Homes – allocates $30 million for the Neighborhood Reinvestment Corporation (NRC) to (1) make grants to HUD-approved counseling intermediaries; or (2) hire attorneys to assist homeowners who have legal issues directly related to foreclosure, delinquency or short sale.
• Tax-Related Provisions – allows the use of qualified mortgage bond proceeds to refinance subprime residential mortgages. Allows a one-time credit of up to $7,000 of the purchase price of a single-family residence in foreclosure.
• Clean Energy Incentives – extends through 2009 the tax credit for residential energy efficiency improvements and the production of electricity from renewable resources such as biomass, geothermal, landfill gas, marine, hydrokinetic and trash combustion. Tax credits for solar energy are extended through 2016.
• Mortgage Foreclosure Protection for VA loans – temporarily increases the VA home loan guarantee loan limits to the same level as the Economic Stimulus limits through December 31, 2008.

• Risk-based pricing – puts a moratorium on FHA implementing risk-based pricing through October, 2009.
• GSE Stabilization – includes language proposed by the Treasury Department to authorize Treasury to make loans to and buy stock from the GSEs to make sure that Freddie Mac and Fannie Mae could not fail.

Let’s hope that these changes provide a much needed boost to the continually sagging real estate and mortgage market. For more information about any of provisions above, drop me an email at contact@christinadunham.com.

Until next week, happy home loan shopping!

Christina Dunham is a Mortgage Advisor with Dunham Group Mortgage. She has originated over $107 million in loans since 2003. She may be reached at contact@christinadunham.com. For a complimentary credit or mortgage loan consultation, contact Christina Dunham at 866.7.DUNHAM.