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July 31, 2008

President Bush Signs the Mortgage Relief Bill

The president has signed the mortgage relief bill that was presented to him by congress.

One of the lenders I refer clients to, Debra Delgado of Countrywide Home Loans, sent me the following description of what the bill will accomplish.

President Bush signed into law the "Housing Rescue Bill" that aims to boost the struggling housing market and bolster Fannie Mae and Freddie Mac this morning. The legislation has two principal objectives: to offer affordable government-backed mortgages to homeowners at risk of foreclosure, and to bolster Fannie and Freddie with a temporary rescue plan and a new, more stringent regulator. Here are the key points:

A ban on down-payment assistance from sellers. The new law eliminates a program, Nehemiah that has allowed sellers to provide down payment assistance for FHA loans. If you are currently in the process of buying a home and had planned to utilize Nehemiah please call us to discuss how to move forward.

Increased down payment requirements. The law would also increase to 3.5% from 3% the down payment requirement for borrowers getting FHA loans.

A larger role for the Federal Housing Administration. The FHA will be allowed to insure up to $300 billion in new 30-year fixed-rate mortgages for at-risk borrowers in owner-occupied homes if their lenders agree to write down loan balances to 90% of the homes' current appraised value. The cost of the new FHA program - which would begin on Oct. 1 and be in place for just a few years - will be funded by fees from Fannie and Freddie, along with fees paid by both lenders and borrowers.

A stronger regulator for the GSEs. The new regulator will have a greater say over how well funded the two government sponsored enterprises (GSEs) are - a major concern in the markets that has sent stocks in both companies plunging in the past two months.

A permanent increase in "conforming loan" limits. The law will permanently increase the cap on the size of mortgages guaranteed by Fannie and Freddie to a maximum of $625,500 from $417,000. The FHA maximum loan limits for high-cost areas would also increase to a maximum of $625,500. Higher loan limits will make it easier for borrowers to get mortgages, because those mortgages are more likely to be traded if they are considered conforming.

A new home-buyer credit. The new law 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. The refund, however, serves more as an interest-free loan, since it would have to be paid back over 15 years in equal installments.

A new affordable housing trust fund. The law establishes a permanent fund to promote affordable housing. The fund will be paid for by fees from Fannie and Freddie.
Grants to states to buy foreclosed properties. The law grants $4 billion to states to buy up and rehabilitate foreclosed properties. The White House has opposed such funding, contending that it will benefit lenders and not homeowners.

If you are already a home owner here is what you need to know

Who's eligible?

Qualified borrowers must live in their homes and have loans that were issued between January 2005 and June 2007. Additionally, they must be spending at least 31% of their gross monthly income on mortgage debt to be eligible for the program. They can be up to date on their existing mortgage or in default, but either way borrowers must prove that they will not be able to keep paying their existing mortgage - and attest that they are not deliberately defaulting just to obtain lower payments. Before homeowners can get FHA-backed mortgages, they must first retire any other debt on the home, such as a home equity loan or line of credit. Borrowers are not permitted to take out another home equity loan for at least five years, unless it's to pay for necessary upkeep on the home. To get a new home equity loan, borrowers will need approval from the FHA, and total debt cannot exceed 95% of the home's appraised value at the time.

How does the refinancing process work?

This is a voluntary program, so lenders holding the original mortgage have to agree to rework a given loan before things can get started. The bill requires lenders to make major concessions, writing down the value of the loan to 90% of the home's current value. In areas where prices have plummeted by as much as 20%, that will mean a substantial loss for the lender. Lenders will not sign off on a workout unless they think that they'll lose less money on that than they would by allowing a home to go through the costly foreclosure process. Each loan will have to be underwritten on a case-by-case basis. That means the a new appraisal will need to be completed to determine the home's current value, as well as examine and verify income statements, bank accounts, job histories and credit scores. Based on that new appraised home value, the lender must determine how much the original lender has to reduce the original mortgage, so that it will reflect 90% of the home's market value. If the original lender agrees to the writedown, the new lender buys the old loan and takes over the reworked mortgage. As part of the deal, the old lender writes off any fees and penalties on the original mortgage, including prepayment penalties, and accepts the proceeds from the new loan on a paid-in-full basis. Additionally, it pays the FHA an up-front premium equal to 3% of the mortgage principal. Borrowers agree to share any profits from future home-price appreciation with the FHA. To do that, they'll pay a "3% exit fee" of the mortgage principal to the FHA when they resell or refinance. Plus, they'll agree to pay the FHA 100% of any profits they realize from higher home prices if they sell or refinance within a year. So if the original loan principal is $200,000 and the home sells for $250,000, the borrower will owe the FHA $50,000, minus costs. After a year, borrowers will share 90% of the profits with the FHA. The percentage keeps dropping in 10% increments to 50% after the fifth year, where it stays.

Whether this plan will help the market is unknown. I tend to be on the free market side of the argument and believe that the goverment's intervention will have a negative long term impact on a recovery. The government's involvement in the housing market is already so intrenched and complicated it is difficult to determine whether this will add to the problems or offset them.

The end of private down payment assistance programs is scheduled for October 1st, so if you are interested in using one of these programs you wil need to be in contract very soon. That assumes that the institutions who coordinate these programs like Nehemiah will continue to operate with the knowledge that they are being shut down in October.

If you are interested in using one of these programs to purchase a home before October 1st, or in getting another more conventional loan, please contact Debra at 916-774-7651 or by e-mail at debra_delgado@countrywide.com.

If you need information on how to participate in the "Hope for Homeowners" program, please visit www.hud.gov/hopeforhomeowners/index.cfm or www.fha.gov. You can also call 1-800-CALL-FHA.

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