Yowell Team Blog

By Matt Carter, Wednesday, July 30, 2008.

Inman News

President Bush signed historic legislation today that props up mortgage financers Fannie Mae and Freddie Mac and authorizes a $300 billion expansion of Federal Housing Administration loan guarantee programs.

But the sweeping housing bill, HR 3221, inevitably has its critics -- including Housing Secretary Steve Preston, who's unhappy that Congress has placed a one-year moratorium on the use of "risk based" premium pricing for FHA loan guarantees. Home builders are also bracing for the elimination of seller-funded down payment assistance with FHA-guaranteed loans beginning Oct. 1.

Others in the housing industry are lamenting that a $7,500 tax credit for first-time homebuyers that will expire July 1, 2009, must be repaid over 15 years -- making it, in effect, an interest free loan. The National Association of Home Builders and other industry groups are nevertheless working to publicize the tax credit to consumers, with NAHB rolling out a dedicated Web site, FederalHousingTaxCredit.com.

“The tax credit is the best stimulative measure,” NAHB President Sandy Dunn said in a press release. “It will increase housing demand, get home buyers back into the marketplace and fight falling home prices, which threaten the economy as a whole.”

HUD Secretary Preston last week called HR 3221 "a mixed bag," because it places a moratorium on the use of risk-based pricing on FHA loan guarantees for one year. The moratorium begins Oct. 1, 2008 and ends Sept. 30, 2009.

Preston said FHA will now be required to increase prices on all customers “or eliminate its refinancing program for subprime borrowers at a time when they need it the most."

HUD just rolled out risk based pricing on July 14, saying it would allow FHA to operate more like other insurers, saving lower-risk borrowers money and averting the need for a taxpayer bailout of what has traditionally been a self-sustaining program (see story).

Under the old pricing structure, all borrowers paid 1.5 percent of their loan balance up front, and 0.5 percent a year for FHA insurance, regardless of their credit standing. Under risk-based pricing, the upfront premium ranges from 1.25 percent to 2.25 percent. On a $150,000 mortgage, the difference between the old 1.5 percent upfront premium and the maximum 2.25 percent "risk based" premium is about $7 per month.

The Bush administration had pushed for risk-based pricing as part of a larger "FHA modernization" package that, in various proposals put forward by lawmakers in recent years, would also have reduced or eliminated FHA's 3 percent minimum down payment requirement.

Instead, Congress ended up raising minimum down payment requirements for FHA-backed loans to 3.5 percent. Also, beginning in October, home buyers will no longer be able to rely on nonprofits that funnel money from homebuilders into seller-funded down payment assistance programs, as HR 3221 finalizes HUD's long quest to end the practice.

HUD claimed the practice artificially inflates home prices and triples the likelihood of default. HUD's attempts to end the practice through an administrative proceeding was thwarted by legal challenges filed by nonprofits that operate assistance programs (see story).

Now that Congress and the Bush administration have agreed to ban the practice through legislation, that battle appears to be over, and home builders expect to see the pool of eligible buyers shrink.

According to HUD, seller-funded down-payment assistance was used on more than 35 percent of all home purchase loans insured by FHA in fiscal year 2007, compared to less than 2 percent seven years earlier.

Home builder Lennar Corp. relied on down-payment assistance for one in three mortgages it originated in the second quarter, the Wall Street Journal reported. Housing research firm Zelman & Associates estimates that eliminating seller-funded down-payment assistance could reduce the homebuyer pool by 10 percent nationwide, and by up to 25 percent in lower-priced markets where they are used more often, the Journal said.

"It is certainly not in a builder’s interest to have a recently sold home to return to the market through foreclosure," NAHB said in a July 10 letter to Senate Banking Committee chairman Sen. Chris Dodd, D-Conn., and ranking member Sen. Richard Shelby, R-Ala. " That is why NAHB is committed to finding ways to continue seller-provided down-payment assistance in a manner that is in the best interest of home buyers, builders and the FHA."

Other key provisions of HR 3221 relating to FHA modernization include streamlined processing for FHA condos, reforms to the home equity conversion (reverse) mortgage program, and reforms to the FHA manufactured housing program, according to a summary by the National Association of Realtors.

A $300 billion expansion of FHA loan guarantee programs is intended to help troubled borrowers refinance into more affordable loans when their existing lenders agree to forgive part of their debt. Lenders would effectively write down existing mortgages to 85 percent of their current appraised value, and borrowers would have to share gains with the FHA if they later sold at a profit.

The Congressional Budget Office has estimated the program might help 400,000 borrowers, and cost $680 million over 10 years. HR 3221 creates a new assessment on Fannie Mae and Freddie Mac that’s expected to cover those costs and also provide money for affordable housing.

The bill also creates a new independent regulator for Fannie Mae and Freddie Mac and authorizes the Treasury Department to buy the companies’ debt or stock. The Congressional Budget Office estimates that there’s a better than even chance Fannie and Freddie won’t require government assistance, but that the cost to the government might be $25 billion if they do.

The bill allows Fannie and Freddie to purchase or guarantee loans of up to 115 percent of the local area median home price in high cost areas, up to $625,500. The conforming loan limit for normal markets remains $417,000.

The bill increases the floor for FHA loans to a minimum of $271,050, and allows it to guarantee loans in high cost markets up to 115 percent of local area median home price, with a $625,500 cap.

The caps in high cost markets go into effect on Jan. 1, when the current, temporary cap of $729,750 for Fannie, Freddie and FHA expires.

William Brown, president of the California Association of Realtors, welcomed the extra leeway for Fannie and Freddie to buy mortgages above the old $417,000 conforming loan limit in high cost markets.

“Although we would have liked Congress to make permanent the (temporary) $729,750 loan limit, C.A.R. is pleased with the new permanent loan limit of $625,500,” Brown said. “It will allow California homeowners to refinance their loans into safe affordable loan products and allow first-time home buyers to enter the market.”

Here's a great article that we think accurately describes the current market and has some good advice for sellers...

By Dian Hymer
Inman News

 July 07, 2008

Buyers aren't the only ones holding back in today's housing market. Many sellers are postponing putting their homes on the market because they are convinced that now is not a good time to sell. They would prefer to wait for a better market.

Waiting could be risky if you need to make a move within the next year or so. Most areas of the country are mired in a slow market where sellers are finding it difficult to sell, at least at a price they'd be willing to accept. There's no guarantee that if you wait to sell that the market will be any better than it is now, at least in the short term.

However, the market isn't slow everywhere. Some areas, like San Francisco, Palo Alto (Calif.) and parts of the East San Francisco Bay Area are still suffering from a lack of inventory. Or, lack of the right kind of inventory.

Recently, there were six offers on a hot new listing in Piedmont, Calif., a city adjacent to Oakland. Multiple offers are commonplace in Palo Alto and San Francisco. What these areas have in common are a coveted location and very low inventory of homes of sale.

Negative press about the real estate market is keeping sellers who could do quite well selling now from doing so. If you'd like to sell, but have been scared off by bad news, don't make a decision until you find out more about what kind of homes are selling in your local market.

HOUSE HUNTING TIP: Supply and demand set the pace of any real estate market. When there are more homes for sale than there are buyers willing to buy, it takes longer to sell and prices are often soft. When there is a shortage of homes for sale and plenty of buyers wanting to buy, good homes sell quickly and there is often an upward pressure on prices.

Even though the overall market might be soft, there can be pockets that are hot. The hot spots needn't necessarily be a specific location. They can be a certain type of house within a location.

For example, the Piedmont listing mentioned above took 13 days to sell. It would have sold more quickly except that the sellers decided to expose the property to the market before entertaining offers. The home was a good size and had broad-based appeal. It had eight rooms, a two-car attached garage, a level-out backyard, and it had been completely remodeled with high-end finishes. It was priced competitively.

Contrast this with another Piedmont listing that did not sell in the three months it was on the market. It was a smaller six-room house with no garage and without a level-out backyard. It had limited appeal in comparison to the listing that sold quickly. And, it was significantly overpriced for the market.

The current market is extremely price-sensitive. An Oakland, Calif., listing was on the market earlier in the year priced approximately $100,000 above what the market would bear. The listing was removed from the market and listed several months later at a realistic price. It sold then with three offers for over the asking price.

Selling in this market is not easy. But, sellers who understand the market can do well selling today. They must be realistic about what they need to do to prepare their home for sale. Property condition is more important to buyers today than it was several years ago.

Sellers also must be committed to the process. There is no margin for error when it comes to pricing.

THE CLOSING: If you can't bring yourself to price to sell, you're not a committed home seller.

Dian Hymer is author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books.