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The Good News and Bad From The Housing Rescue Bill

Mortgage and Lending with Branch Manager NMLS 557050

July 24, 2008 08:28 AM

Today, the Senate passed a bill many are calling the "Housing Rescue" Bill. The main purpose of this legislation is to attempt to help 400,000 homeowners avoid foreclosure while preventing the collapse of troubled mortgage companies Fannie Mae and Freddie Mac.

Within this legislation there are two components that have the potential to seriously affect your real estate business...and very soon.

The first is positive. The bill includes a tax refund for first-time home buyers worth up to 10% of a home's purchase price but no more than $7,500.

Although the refund would be reduced gradually for single filers with adjusted gross incomes above $75,000 and for joint filers with adjusted gross incomes over $150,000, this is a very nice incentive for those looking to buy a home for the very first time.

Now the bad news. This legislation bans non-profit down-payment assistance programs for FHA loans.

This means Nehemiah and AmeriDream will soon be unavailable. My understanding is this ban goes into effect on October 1, 2008.

To make matters more challenging, the minimum down payment required on an FHA loan will now increase from 3% to 3.5%.

Over 300,000 people have used Nehemiah in the last decade. Nearly one in every three FHA loans today uses some form of down payment assistance. These will soon disappear. This has the potential to dramatically affect first-time homebuyers and lower income borrowers.

Some are predicting another 10-20% decline in real estate sales and further depreciation as a result of this change.

If you have buyers who need 100% financing, and you plan on the seller gifting the 3% down payment through a down payment assistance program like Nehemiah, you will likely lose this option very soon.

There is no word yet on when the last day to apply for Nehemiah will be.

Regardless, you want to call these buyers ASAP (like tomorrow) and tell them their time is limited.

After October 1, 2008, they will be required to put 3.5% of their own money down or that from a family member, close friend or employer.

The last time FHA banned down payment assistance programs, Nehemiah and the others sued and won. There is very little optimism that will occur this time.

There will still be some limited options of going 100% like VA or the your local State Bond Program.

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Katerina Gasset

Get It Done For Me Virtual Services - Wellington, FL

Get It Done For Me Virtual Services

Aaron- These bills are always such a joke. They get so entangled with egotistical if I give you this then you get this. Blackmailing in congress. I am with Glenn Beck, grab the pitch forks. Congress needs to all get fired and remember who they are working for,not themselves. I was hoping that the President would veto this bill but he succombed under pressure. I am sick of bailing people out of their own messes.

The down payment assistance programs are huge in our county, especially for school teachers and police officers. It is amazing how we all get screwed, yes, this will affect the first time homebuyers. What are they thinking???? Hmmm, I mean, well, gee, I was giving them too much credit to even think they think!

Jul 24, 2008 06:15 PM

James G. Pycha

James Pycha (R) - REMAX KAUAI - Princeville, HI

(R), REMAX Kauai Broker

Extraodinarily Insightful observations, Indeed. How do you think this will playout over the next 12 months? What do think about the consequences of the electiion. Republican vs. Democrat?

Thanks again for yor words of wisdom . . .

Best Regards

Jim

Jul 24, 2008 06:29 PM

Aaron Gordon

Branch Manager - Las Vegas, NV

Home Loan Consultant - Las Vegas, NV

Thanks, Jerry--- I dont see this being much more effective than FHA Secure.

Olan--- I agree. More than 50% of the defaults on DPA come from those with credit scores under 620. I cannot believe that wasnt the answer.

Thanks, Pam.

Nestor and Katerina--- I truly believe that Congress does their best to do the right thing but the problem is they jump into areas they dont understand and no one can properly explain to them. This bill is yet another attempt to try and avoid writing a check to make it all go away like they did on the S&L crisis. In my opinion, when this doesnt work either, we will see even more bills. And someday, in the not so distance future, a giant check will be written and you and I will pay for it for the next decade.

Jul 24, 2008 07:13 PM

Aaron Gordon

Branch Manager - Las Vegas, NV

Home Loan Consultant - Las Vegas, NV

Thanks, Jim--- let me summarize the next 12 months thru my crystal ball. Please save for me. :)

This bill, like the ones before it, will not work. Banks arent going to take the losses that would make this work. They will take back the homes first.

The Black Congressional Caucus and the Hispanic Congressional Caucus came out today and said they will fight the DPA ban but will likely wait until Bush is out.

The loss of DPA programs will force some large homebuilders out of business and drive prices down further in many high-cost areas. This will panic Wall Street, force rates higher, and result in many more foreclosures as people walk from their homes.

We will have an election and the new administration will start in January. Both candidates in the debates will have promised an even "newer, better" housing plan.

If its Obama, the Black and Hispanic Caucus' will celebrate as DPA will be back or at least some minimal down payment on FHA will be in place early in '09.

If its McCain, it will take a bit longer but it will be revisited and revised as well and back in some form.

In the first quarter of the year, we will get the Housing Revitalization Act of 2009, sometime in the summer we will get the Foreclosure Avoidance Act of 2009, and by year's end we will get the $500 billion Make It All Go Away Act of 2009, which will have a tax increase on the middle class nestled within.

Then, and only then, can we all go back to work and not worry about this junk.

Jul 24, 2008 07:26 PM

Anonymous

Yona Bello, Studio City, California Real Estate

Aaron-

Thank you so much for the clarification, but, why is NAR backing this bill if it's obvious that this will not be beneficial to home buyers and us as well?

Jul 24, 2008 09:00 PM

#47

Lenn Harley

Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA

Real Estate Broker - Virginia & Maryland

This bill has sparked the cynic in this real estate broker.

"The rich get richer and the poor get poorer" was never more vividly exhibited.

If you're a rich U.S. Senator, you can be a VIP borrower.

If you're a poor home buyer, you can just rent and support your local landlord.

Jul 24, 2008 11:04 PM

Lewis Poretz

Apex Home Loans - Annapolis, MD

Business Development Manager

Lenn - Wait until a few of the rich U S Senators need to refinance and realize there is no such thing as stated income loans anymore and they are denied. What happens then?

Jul 24, 2008 11:22 PM

Lucy Doroshenko Slobidsky

NP DODGE Real Estate - Omaha, NE

Aaron,

Thanks for the explanation of the bill. It appears that it will take time and patience for the real estate market to stabilize.

Jul 25, 2008 12:49 AM

Paul Hodosh

Equity Advisory Group - Cranston, RI

Lenn is all too right. Unfortunately.

Jul 25, 2008 12:49 AM

Anonymous

Bob Gilbert Your Home Loan Consultant

Clarification: Down Payment Assistance has not been ended. SELLER-FUNDED down Payment Assistance has been ended. INTERESTED-PARTY down-payment assistance has been ended.

Lender's point of view: it is a BIG measure of how much risk a loan represents, HOW MUCH the buyer puts into a deal out of their own pocket. BIGGER than credit score.

Anyone old enough to remember that prior to VA lending after WWII GI Bill, no one could buy a house without 20% down?

Then mortgage insurance was invented.

NOW because of low DP excesses, MOST of the private MI companies are gone altogether, or have rolled up their sidewalks so far that only really stirling borrowers can get a high LTV loan with PMI.

Which leaves FHA to be adversely selected, as they say, when you cannot get PMI - if you can get an FHA approval, they don't have any choice but WILL give you a loan with MIP.

Now HUD got the Congress to protect the FHA program with a little bit larger DP requirement, and took away the dangerous interested party DP assistance program.

I am a lender who wants FHA to be here more than a few more months - so I am glad when they make moves to protect the FHA insurance system, and moves that make FHA loans less risky for the lenders.

I don't want to do more loans - I want to do more loans that don't go into default.

There is more to this law - but the increased DP requirement and the elimination of seller funded DPA are two of its good features.

Jul 25, 2008 12:52 AM

#52

Anonymous

Im sorry, but...

DAP buyers default at a higher rate than those who are able to actually put money down. I'm sorry that it makes realtors' jobs harder, but DAP is bad for the economy. People need to learn how to save up for things again.

What many agents do not understand (or are unwilling to admit), is that when you make it possible for a person to buy before they are economically viable, you hurt the economy. Just look at this slump in housing. It was all caused by prices being bid up with easy credit.

I shake my head whenever I hear an agent tell me that exotic mortgage products were a response to rising prices. Wrong, wrong, wrong. Without access to this much credit, none of these people who overpaid would have been able to bid up prices so high. The vast majority of homes are purchased with credit. Therefore, access to credit drives prices. That is the 'demand' of the supply and demand equation. As credit is justifiably tightened to SUSTAINABLE LEVELS, houses will find their true market value.

You should be glad that DAP is going away. DAP is just another hurry-up method for getting people into a huge financial decision before they have demonstrated the ability to manage money.

What many agents don't understand is that loosening credit might get you more buyers TODAY, but it is much like tailgating the car in front of you. You FEEL like you are getting to your destination quicker, but you are not. And you are more likely to cause an accident.

DAP is nothing more than economic tailgating. Agents must be patient and let this market sort itself out, instead of clamoring for more of the same medecine that cause this mishap in the first place.

Jul 25, 2008 01:43 AM

#53

Aaron Gordon

Branch Manager - Las Vegas, NV

Home Loan Consultant - Las Vegas, NV

Yona--- I am sure NAR is backing it because of the tax credit and redevelopment component as well as the possibility of keeping 400,000 people in their homes. The Seller assisted DPA part, I would be shocked if they are in support of.

Lenn--- Sad but soooo true.

Lewis-- As well as the nation's top businessmen.

Lucy--- Recovery will come when lending stabilizes.

Paul--- Ditto.

Jul 25, 2008 01:48 AM

Susan Zanzonico

Berkshire Hathaway Home Services - Morristown, NJ

Sellers/Buyers Agent, Morristown NJ Real Estate

Aaron, thanks for the summary on this. We have a bit of a mess on our hands right now. It will be intersting to see how this plays out over the next year.

Jul 25, 2008 01:51 AM

Aaron Gordon

Branch Manager - Las Vegas, NV

Home Loan Consultant - Las Vegas, NV

Bob --- You are correct. You can still get the DP from a family member, employer or family friend.

I'm sorry--- I agree with your credit comments.

To both of you --- I am not advocating the return of exotic loan programs. This is a 70 year instutution we are talking about that was formed to ASSIST first time home buyers, those with low income, and minorities.

I believe they went too far. 3.5% is too much. This is no longer a program for first time homebuyers and those with low income. Its too expensive. They now have to turn to their state bond programs.

I would be OK with the elimination of seller gifted DPA if they did what they were originally going to do and lower the down payment requirement to 1.5%.

I complete disagree about the solvency of FHA.

FHA announced they will lose $5 billion this year. They also announced $3 billion of this is due to seller paid DPA. These numbers are not out of line when you consider the losses posted by every large mortgage company.

$3 billion is nothing to this government. Thats about a DAY or so of war. Small trade-off to make sure we protect our real estate markets, economy, as well as low income borrowers and first time homebuyers.

Once again, first time homebuyers are 30% of the market place. FHA loans are 50% of the my market today. One third of these FHA loans use seller paid DPA. You do the math.

Morgan Stanley is predicting another 25% depreciation in real estate values nationwide. I guess you can argue that's great for buyers. If we get all home prices across the country under $200,000, then a 3.5% required down payment becomes less of a big deal.

I also disagree with you about the need to cut off all "loose credit" which I assume means 100% financing and its ilk. There are effective ways to offer lower down payments for a certain kind of borrower. VA has done it successfully since day one.

Jul 25, 2008 02:02 AM

Edie Lomason

Michael Saunders & Company - Venice, FL

BA, ABR

Thank you for the clarification! My $200,000 are so happy!

Jul 25, 2008 03:13 AM

Travis Newton

Salem and Bend Oregon FHA, VA & USDA 503.931.4490 - Salem, OR

FHA, USDA, VA, LOAN EXPERT - Salem OR Homes For Heroes SALEM OREGON

Thanks for the post!!!

Jul 25, 2008 06:45 AM

Elizabeth Ward Small

REALTOR & CEO The 3B Method Seminars - Burlington, NC

Perhaps I don't understand this completely, but it seems that part of the problem has been people who never should have been given loans granted them. In some cases, buyers could get into homes with none of their money invested. Could the end of DPA help weed out the people who should be waiting a bit to purchase homes in the first place? Please explain further if I'm missing a piece of the puzzle on this. Not trying to cause an uproar; just playing Devil's advocate!

Jul 25, 2008 08:48 AM

Anonymous

I'm sorry, but...

Liz-

Bingo. If you can't scrape up 3% (ON YOUR OWN) , you have no business buying a house.

Everyone is in sucha blessed hurry to get, get, get. Realtors hate the 3.5% and elimination of DAP, because it means in the near term, houses will sell more slowly.

Too darn bad, I say. Easy credit ALWAYS leads (eventually) leads to market dislocations like we are having now.

Again, it is like tailgating. We must learn to delay gratification (including sales commissions) and not try to put people into houses before they are truly in a position of financial strength.

Personally, I get awfully tired of the whining from many in this industry. They need to take their lumps like adults.

That said, no amount of government intervention is going to bring back the agents' most valuble sales tool of all - rapid price appreciation of houses. I don't even need to debate that point. Realtors are going to have to WORK to sell houses and not be able to point to price-appreciation stats for an easy sales tool.

It's over for meaningful appreciation for the near to medium term. When thi market finally turns, we will likely have normal appreciation of 2-4%. That kind of appreciation will not have buyers tripping over themselves to get into bidding wars.

They may not be making any more land, but they don't need to. Dumb buyers who made dumb decisions are being 'encouraged to make other housing arrangements'. Supply will be plentiful for some time to come.

Jul 26, 2008 04:48 PM

#60

Rob Arnold

Sand Dollar Realty Group, Inc. - Altamonte Springs, FL

Metro Orlando Full Service - Investor Friendly & F

Wow, that is major news. I do agree that from a tax payer viewpoint that Nehemiah and such are not good for the industry. They help people who should never own a home suddenly own a home and thus eventually have a great chance of falling into foreclosure. From a Realtor, mortgage broker, a seller, and a first-time buyer viewpoint though, this news is pretty rotten.

Jul 27, 2008 05:53 AM

Anonymous

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Sep 07, 2015 03:47 PM

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