The housing bill, referred to by many as the "Bailout," has finally passed and has been signed by the President - and now the complaints begin. Before you start, remember two important items: 1) we are all connected as a society and 2) very few people will be helped by this bill. Explanation to follow. The bill had a long name and even longer verbiage, about 624 pages, with a few surprises that actually should be of great help. Fannie Mae and Freddie Mac are now able to treat an additional part of the country as they treat the four biggies: Alaska, Hawaii, Virgin Islands and Guam. Conforming loans, those that conform to the rules of Fannie and Freddie, will have a new maximum limit up to $625,500 for single family houses and higher for projects of two to four units. This is the proverbial too little, too late with a twist. It isn't too little but they are trying to make it really too late. Again, explanation to follow. Most people will grasp the importance of what could have happened here and realize that this might have been a step toward normalizing a huge industry that is extremely important to America's future.
Let me get right into the "bail out." First of all, only a select few might be helped by this bill and they will have to qualify under the standard rules for a full documentation loan. Not only must their finances be pristine, but they also cannot ever have defaulted on a government obligation, own any other real estate, or get a subordinate lien on this property for five years. The new loan must be 90% of the current appraised value or less, and cannot exceed $550,000. The borrower must pay 1.5% in FHA mortgage insurance on the loan each year and must share the equity with the government after 5 years. It will take that long for the borrower to earn his 50%.
Second, the banks, or other types of lenders who hold the notes, must participate as well by reducing the note to the above mentioned value. Therefore for the government to come into the picture and guarantee the loan, the bank has to lose money and the borrower has to qualify in today's environment, pay a large amount of mortgage insurance, give up sole ownership of the equity and not be able to get any money out of the house through a junior lien for 5 years. The target is about 400,000 homeowners, where the number of those who will take advantage and make it through until the end of the project is truly unknown. The operative phrase is, "At least the government will be fine!"
Roger Schlesinger's Mortgage Minute is heard on hundreds of radio stations and daily on the Hugh Hewitt radio show and Michael Medved shows. Roger interacts with his hosts and explores the complicated financial markets in order to enlighten his listeners and direct them along their own unique road to financial freedom.