An Open Letter to Congress from a Veteran Realtor
Regarding HR 6694 and a new Stimulus Package
Please vote to defeat HR6694. Reinstating this pseudo charity is the sort of reckless lending that lead us into our current financial melt down. The way this "charity" works is that a Seller (most frequently a developer with multiple properties to sell) donates a ‘gift" of approximately 4% of the property's sale price to a designated charity. (Nehemiah and AmeriDream are two such organizations). In exchange, the charity donates the 3% downpayment required for a potential homeowner to obtain FHA financing. (Soon to be increased to 3.5%). This is a win/win/win for all parties except the American tax payer.
•· Winner: The Buyer has the Seller pay his closing costs and owns a home with no cash invested. (You can't even buy a car with no money down).
•· Winner: The Seller, pockets his profit having inflated the sales price to include the "gift" and the purchaser's closing costs, (thereby passing through the costs into the Buyer's loan thereby inflating his price).
•· Winner: The Charity collects an administrative fee.
•· Losers: The American Tax Payer covers the cost of the default in the event the homeowner falls behind his payments or walks away from a declining asset in which they have no personal financial stake.
In the housing stimulus package, passed only four months ago, HUD prudently requested the program be terminated because borrowers under the program proved to be the greatest foreclosure risk. Currently, under FHA, a borrower may still be gifted the entire downpayment (only 3-3.5%) by a family member, or close friend, and they may also qualify to purchase using the income of a non-occupant co-borrower. By all measures these are generous terms. Adding gifts from strangers who would benefit financially is an invitation for fraud and abuse. If, as a Nation, we are expected to be more fiscally prudent and circumspect, we must start here!
Please, if you still feel compelled, at the behest of Congresswoman Waters, to pass this bill, give it teeth. Require the Purchaser contribute 1% of their own funds to the transaction, require that the qualifying ratios be more stringent, and/or require higher credit scores for purchasers obtaining charitable gifts.
With regards the proposed stimulus package the speediest way to stabilizing the housing crisis would be to reduce mortgage rates substantially and immediately! In the 1970's HUD dictated FHA rate. (Points fluctuated with the market). As part of the stimulus package, HUD (the US Government is currently the de-facto lender of choice anyway) could offer mortgage rates at say: 4.5%*, with no points, for the next 6 months and extend the program quarterly, on a rate
to-be-determined basis, thereafter.
These would be the immediate benefits of a lower rate:
•1. Lenders currently negotiating with borrowers in default would have a go-to rate they could offer all comers automatically. Many borrowers in trouble might then be refinanced out of their troubles at or near current market prices, (now declining monthly). This could help remove loans of currently plummeting value from their portfolios and free up funds to lend.
•2. It would stimulate new homeowner pent-up demand. The early birds would likely negotiate the best prices.
•3. If successful, a rate reduction would stabilize home prices fairly rapidly. Stable home values would shore up our economy and consumer confidence. FHA mortgage rates are currently at 6.75%**. (Rate quoted 10/24/2008 by John Corrigan at Chase Home Finance (202) 216-8178). At 6.75% the monthly payments are $6.49 per thousand of mortgage. At 4.5% per month they would be reduced to $5.07 per thousand. This means a $200,000 mortgage @ 6.75% today would be reduced from $1298 per month to $1014.00 at 4.5%. The same borrower who could afford a $200K house at today's rate of 6.75% could afford a $256K house at 4.5%.
•4. The 30 year treasury yield curve rate effective 10/23/08 was 3.99 % If FHA were to securitize and sell these loans yielding 4.5%, investors would receive a better yield than treasuries which would reflect the nominally higher risk offset by the required FHA mortgage insurance.
Bill HR6694, would, according to AmeriDream, avail about 300,000, of the riskiest borrowers, the possibility of homeownership. Without some, (preferably all), the modifications suggested, it is far too risky and is more likely to add to the existing crisis than to aid it. Please defeat, or modify it.
We need a substantial and systemic fix to our burgeoning housing crisis. A short term mortgage rate reduction would go a long way toward solving the problem and infusing consumer confidence in our economy and in our government's willingness to act on behalf of its individual tax payers who will be footing the bill.
Amy Fisher, CRS, CBR
VP., Realty Group Inc.
October 24, 2008
*Some limitations might need to be applied for example:
1. Higher rates for those wishing to refinance without an imminent financial need or
2. Applicable to primary residences only.
**6.75% Mortgage rates are about the same as they were in July 2007 when the Fed rate was 5.25%
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