The Real Estate Market has just turned for the better.
Earlier this year congress approved raising Fannie-Mae, Freddie-Mac and FHA loan limits to $729,750 in high cost areas of the country such as Washington DC. For Fannie and Freddie this was an increase from a limit of $418,000. For FHA it was an increase from $362,000. The increase is temporary and due to last only through December 2008 when, if it is to continue, it will need to be extended. Since the loan limit increase, the financial markets, poisoned by the sub-prime credit crisis, have been reluctant to lend at all. Increasing the loan limits did nothing to loosen availability of funds. To date, the few lenders willing to stray into this uncharted territory have been charging in the range of 2-3 points to originate these new loans. One point is equal to 1% of the loan amount; therefore a $600,000 loan could cost a borrower $12,000-$18,000 additional cash up front. Alternatively a borrower could opt to finance the points into the loan by paying a higher interest rate of approximately 1-1.5% more for loans at or below the loan limits noted above. In addition for Fannie and Freddie loans borrowers have been expected to contribute 10-20% down payments. FHA loans, by contrast, have been equally costly, but accept lower credit score requirements and downpayments. For the past several months FHA has been the best game in town for those short on cash. Sadly, FHA has been virtually moribund for the past several decades and HUD hasn't the man power to handle a significant surge in loan underwriting requests.
Today Fannie-Mae announced, in their earnings conference call that for the remainder of the year, in the effort to "take-share" in what is for them a new market opportunity, they will offer the new higher loans at the same costs as are available on the older loan limits. They have increased the Capital they have available with which to create loans. In addition they have stepped up their efforts to track down troubled borrowers and help them renegotiate their loans. Further, for existing borrowers who are current in their payments, and who would like to refinance ahead of the re-set of their adjustable rate mortgages but cannot because their property values have declined, Fannie-Mae will be offering funding up to 120% of appraised value. Finally they are starting a program, in association with lenders holding foreclosed properties, designed to offer these properties on a rent with option to own basis.
What this means is that we now have an infrastructure which can be used to stabilize the real estate market by slowing and gradually turning the tide on foreclosures while, at the same time, offering new borrowers vastly improved financing terms on properties which, for the most part are more moderately priced than they were several years ago. No doubt it will take another several months to put the infrastructure into play but considering the market was in complete shambles three months ago, this has been a remarkable effort and I believe marks the turning point. With more loan products in place the market is bound to recover more quickly than could have been envisioned in January.
Amy Fisher, CRS
VP. Realty Group Inc.