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!"
The reason I state that we are all part of one big society that is dependent upon each other is in answer to those who would like to see everyone live under "their" means and basically take care of "themselves." On paper this can look appealing but in reality it is a recipe to sink our nation. It would be nice if we all built our home, made our own clothes, grew our own food and had an oil well in the backyard for good measure. That just isn't going to happen for the majority of Americans and therefore we are dependent on each other to do their job so we can keep our job. This is a long way of stating that if real estate was to disappear as we know it, we might find ourselves in a world of hurt because of all the collateral benefits that come from the real estate industry.
In a column entitled "Experts Make the Story Worse" that I wrote on August 24, 2007, I called for raising the limits on Fannie and Freddie loans to the same limit that we have on the "high cost" areas (Alaska, Hawaii, Guam) - $625,500 for a single family home. It has finally been announced, but almost one year late. During that time we have suffered in the mortgage industry from a lack of jumbo loans which was partially supplemented in about 150 markets with the stimulus conforming/jumbos. That alleviated some of the problems from lack of a vibrant jumbo market but it has its limitations. One limitation was the lack of maximum loan limits in most states, higher costs and more stringent underwriting. This prevented qualified borrowers from refinancing as well as purchasing new homes. When you are trying to avoid a credit crunch and a real estate slowdown, you don't want to restrict buyers from buying, or borrowers from refinancing or people who need money from a cash out transaction. But that is exactly what happened. And now for the real joke: the new conforming limits will not take affect until January 1, 2009. As the younger generations might say, "Are you kidding me?"
Let me outline the benefits that come with a conforming loan. First is a lower rate as conforming loans receive the lowest rates in the industry (about 1/2% lower than jumbos). Second, you have more programs to choose from, generally higher loan to values and much easier underwriting. All Fannie and Freddie loans are run through the automated underwriting system and must pass either of the systems to be approved. The automated systems will allow higher ratios which cannot be done for the most part by manual underwriting. Last, but not least, when submitting a loan for the conforming jumbo, under the stimulus plan, even if the automated underwriting system approves the loan, if the ratio of total debt to income exceeds 45% as it usually does, the loan will be declined. We can usually get a 60% debt to income ratio approved under the automated system as long as it is a conforming loan.
The FHA loans are also going to raise their limit to attempt to mirror Fannie and Freddie but not as aggressively across the board. They reportedly will go to 115% of the median income of an area or $625,500, which ever is lower. This is not as good as what I have been talking about but definitely better than leaving them at the lower limit or using the conforming jumbo loan. The main plus for FHA is they are the only lender we have that doesn't require your file to fit within a very small box. Sometimes I feel like we are in the shoe business with all types of sizes and styles - but if you have a hammer toe, high instep or exceptionally wide feet, don't apply at our store. FHA changes the equation.
The mortgage world has been turned upside down and we have been forced to stand on our heads to try to make it work. It appears to be changing, but ever so slowly. You can have what you want, you can make your financial life better and, best of all, the future is beginning to look a bit brighter. It all is just a matter of time.
I will devote more time to this subject and the breakdown of the new law in subsequent columns.