Finding Opportunity in Changing Times

"If we don't change direction soon, we'll end up where we're going." This quip by Prof Irwin Corey, an American vaudeville comic and actor, seems to mirror the mindset of many government agencies dealing with the regulation and facilitation of the housing and finance industries. Change is the name of the game, today, and some say it's barely half-time.

 

Congress passed, and the president signed into law, HR 3221 (the Housing and Economic Recovery Act of 2008) at the end of July. This law has many provisions and it's not my intention to discuss them all. Here's a highlight of some of the changes...

 

• Registration / Licensure of all originators: This provision requires all originators to be licensed/registered with the National Mortgage Licensing System and Registry (except Federally Chartered Institutions). Although this will be a logistical nightmare for some in the industry, it should help "clean up" the industry.
• Tax Credit for First Time Homebuyers: This provision allows for any first time homebuyer who purchases/purchased between the dates of April 9, 2008 and July 1, 2009 (it's in effect now) receive a $7,500 tax credit for the year in which they bought their home. This is a tax credit and not a tax deduction and is paid back to the IRS over the next 15 years (or sooner if the property becomes a rental home). There is no interest charged on the tax credit funds which are repaid. As always, there are some exceptions. I am not a CPA, but I was told on an industry conference call that this will not affect alternative minimum taxation and phases out above $150,000 combined, married annual income. I would imagine there are other implications, so check with your tax advisor to find out how it would affect you, specifically. Either way, an interest free loan from the IRS doesn't happen every day!
• Conventional Loan Limits Increased: The formula for determining loan limits in high cost areas was adjusted, but it shouldn't affect us here in TX.
• Fannie/Freddie Oversight: This provision establishes a new federal regulator with powers similar to a Federal Bank regulator to oversee the activities of Fannie and Freddie. The funding source for this regulator and the associated funds is being paid for by an additional 4.2 basis point fee added to loan interest rates.
• Fannie/Freddie Stability: This provision authorizes the Secretary of the Treasury to extend lines of credit and to, if necessary, purchase equity in Fannie or Freddie to ensure solvency and calm the credit markets.
• FHA Rescue/Hope Now: These two programs are designed, in different ways, to help those experiencing serious delinquency or feeling a serious house payment crunch. The exact details of how the plans will be administered (and the details of the plan itself) have not yet been ironed out. More to follow when it's known.
• FHA Modernization: Ok, here's the biggie. As of the end of September, FHA will no longer insure loans which involve Seller Funded Down Payment Assistance (SFDPA). This doesn't sound like such a big deal until you consider that over 1/3^rd of First Time Homebuyers who use FHA for financing utilize SFDPA, because if they can't pay the entire down-payment themselves, get a gift from a blood relative, receive Down payment Assistance from a community or grant based program (will be used up quickly), receive the money from their employer, or borrow the money out of their retirement, that's the only option left. So, in order to buy a home with little to no money down after the end of September, borrowers will have to be VA eligible, find and qualify for community grant money, have such high credit scores and reserves that they can qualify for one of the very few and far between portfolio zero down home loans, or have an employer or relative willing to GIVE them the down payment. As if that doesn't tighten up things, enough, they are increasing the minimum down payment requirement from 3-3.5%, while also raising upfront and monthly mortgage insurance payments. I can understand needing to change some of the requirements for SFDPA or providing a 1-2% down program which requires a stronger credit profile, but HUD insists that if these changes aren't made, then they will have to be supplemented by taxpayers to the tune of $1.4 billion in 2009.

HUD also sites that loans with SFDPA suffer almost 3 times the delinquency rates as traditional FHA loans. I'm not sure what the best answer is, but I do know that for millions of Americans who have the ability to reliably make a house payment and be responsible home owners, if they do not close on a FHA loan by the end of September, they will no longer be able to purchase a home without a sizeable down-payment, thus taking them out of the housing market until their savings or industry changes allow them to purchase. These loans are not inherently bad. Proper budgeting and planning before the purchase of a home and working with a mortgage professional who desires to see you in a good position go along way to ensuring a happy homeownership experience.

 

It's a buyer's market, San Antonio (and most of Texas) have seen stable real-estate markets (albeit a little slower), the IRS is offering $7,500 interest free "loans", you can still utilize SFDPA and move in with little to no money down up to $332,500, and all this while rates are historically low. Although no one can predict the future, it would seem that the rest of August and September would be an excellent opportunity for FHA buyers (especially first time homebuyers) to realize the American dream and become homeowners before the process becomes even more difficult.

 

So change is still (and will continue to be) the name of the game. The upside is that with change comes opportunity. Ramsay Clark once said, "Turbulence is life force. It is opportunity. Let's love turbulence and use it for change." I think he's got something there.