My Blog

One of the last ways for a homebuyer today to acquire a home with no money down may be a thing of the past very soon.  Down Payment assistance programs, once allowed by FHA, will be discontinued as of October 1, 2008.  Actually, most lenders stopped accepting loan submissions involving this program as of about the middle of September because the loans need time to close and then be insured by FHA and no lender wanted to be left holding the bag on an uninsurable loan.

The way Down Payment Assistance programs worked was this:  The seller agreed to donate 3% of the purchase price of the home to a non-profit group (such as Nehemiah, Genesis, etc...) plus a fee ranging from $300 - $500.  The non-profit group then "donated" the 3% to the buyer for their down payment.  Yes, we all knew the down payment was really provided by the seller for the buyer, but if the seller was willing to do it, and they buyer qualified for an FHA loan, then it was a great way to get buyers into homes. 

It has been especially useful recently, since virtually every other way for a borrower to get into a home with no money down has disappeared.  With the overabundance of homes on the market, and many of them bank-owned, even the banks were willing to donate the buyer's down payemnt to move the foreclosed homes off the market.  Personally, 80% of the purchases I have done in recent months involved down payment assistance from the seller.

Have the lending guidelines over the past few years been lax? Yes.  There were many mortgage loans that should not have been made--that's an extreme understatement.  Were FHA guidelines too lax?  In my opinion, no.  FHA loans have always been "make sense" loans.  If there are credit issues, explain and prove the reason for them.  If there was a hardship responsible for the credit issue, prove it.  If there were collections that should have been paid and weren't, pay them.  FHA loans were not subprime loans, they were common sense loans.

FHA borrowers are good borrowers who meet all the guidelines the government asks of them to insure their loans.  Is now really the time to restrict the pool of buyers even more by eliminating the last "no-down" program out there for non-veterans?

There is another bill, H.R. 6694, that if passed, will allow seller funded down payment assistance programs for certain borrowers.  Borrowers will have to have a minimum of a 620 fico score to qualify for down payment assistance and even at that, will have higher rates and higher mortgage insurance premiums.  Borrowers with 680 fico scores will qualify without higher rates.

H.R. 6694 seems to be the "happy medium" for banks and legislators today.  It will allow no money down programs for FHA borrowers, but put restrictions on it so that borrowers have some accountability for their actions.  Not a bad compromise in my opinion.

So how do you not feel like a loser if your home is foreclosed on?  I asked this question to my husband and he said, "You are not a loser if you bought a ticket on the Titanic, you just get to go swimming with a lot of other people."  That's why I love him.  He says stuff like that.

As it turns out, many of us who purchased homes with two or three year adjustable rates in 2005 or 2006, were buying a ticket on a sinking ship.  Unlike the titanic though, we all will survive this, and guess what, home appreciation will begin to go back up, it always does.

In the meantime, how do you deal with losing your home to foreclosure?  We put our hearts into our houses to make them homes and when our home is taken away from us, we feel a considerable emotional loss.  We're sad and we feel like we failed and we kick ourselves for buying at the wrong time, or not choosing the fixed rate, or not saving money to get us through tough times.  Stop, take a deep breath and put things in perspective.  Remember that in the end, we wouldn't call it home if our family weren't there with us.  If something happened to our spouse or one of our kids, it wouldn't matter where we were living or what we owned, because we would trade it all to have them back.  We wouldn't trade our family for our house though.

As devastating as a foreclosure is, you can recover from it, emotionally and financially.  Sure, you may have to rent for a while, but a rented house is still a home if your loved ones are there with you.  Save your money because mark my words, sooner or later a lender will come out with a loan program designed for people with a recent foreclosure on their credit.  They have to, because otherwise no one in the near future could qualify to buy a home again. It will require a down payment, and be a fixed rate, and we will have to prove we can afford it, because we're all a little wiser.

That's what bad experiences are supposed to do, make us wiser, and stronger and appreciative of the good things in our lives.

Now, is that the Carpathia I see in the distance, or is that another iceberg....

Did I mention it helps to have a sense of humor?

Well, the numbers are in and for Clark County, Nevada, the maximum FHA loan limit is now $400,000 and the conforming loan limit is unchanged at $417,000. 

Many high cost areas, such as counties in California, did get substantial increases in their conventional and FHA loan limits.  Oddly, the conventional increased loans are called "Jumbo Conforming", which is sort of an oxymoron since it used to be that loans were either jumbo or conforming.  You would think that since it's a change to conforming loan limits, that these new loan amounts would be conforming loans, but no, that's too easy.  To check your county and what the new conventional conforming loan limits are, click here.

You can find the new FHA loan limits here for your county.  Just key in the county name and hit send.

The increase to the FHA loan limits are going to be the most helpful to most people, I think.  The conforming increases come with some strings attached, namely these:

• They are for purchase or rate and term, (no cash out) refinances only
• The loan to value and combined loan to value is limited to 90% for a fixed rate purchase or 80% for a 5 year ARM purchase ( A five year ARM is the only ARM available at these new loan amounts)
• The loan to value for a rate and term refinance is 75%, the combined loan to value is 95% for either a fixed rate or a 5 year ARM
• The minimum fico requirement for a refinance is 660 and for a purchase less then 80% loan to value is 660, greater then 80% is 700.
• They require 2 months new house payment in reserves for a primary home and 6 months for a second home or investment property and no more then 45% debt to income ratio
• The rate will be a little higher then then regular conforming rates, but not as high as jumbo rates used to be
• If your home is in an area that has been declared a declining market by fannie mae, then the maximum loan to values mentioned above go down by 5%

For all the details on the guidelines, click here for a fannie mae matrix.

The FHA increases so far don't have additional restrictions, although many FHA lenders are putting fico score restrictions in place for FHA loans, and higher rates for loan amounts above a certain amount.

These changes will remain in effect until 12/31/2008 (the note must be dated by then) for now.

What does this mean for consumers?  Well, compared to the old jumbo guidelines, it amounts to a consumer being able to refinance to a 5% higher cltv (combined loan to value) at a lower rate then he would have been able to do before.  Helpful, but not monumental.  With the ltv limit being at 75% for a refinance, this does not help many homeowners in high cost areas.  If it were truly an increase to conforming loan limits, and not a new category called "Jumbo Conforming" then a person with a $500,000 loan whose rate adjusted, would be able to refinance up to 90% ltv (assuming he's in a declining market).  But instead, he has to do a 417,000 first loan, then a second loan to 90% and good luck finding a second lender who will do it.  It might be a help to those who have a first mortgage and a second mortgage and their second mortgage holder is willing to subordinate (go behind) a new first mortgage.

The FHA loan limit increases hopefully will help those folks in the high cost areas that need it.  There are so far, less restrictions to these, although that could change. 

Once again, time will tell.

Could the proposed increase in conforming and FHA loan limits help you?  The short answer is maybe.

The economic stimulus package was passed by the Senate and Congress and now waits for President Bush's signature.  It contains a proposal to increase the conforming loan limit for Fannie and Freddie loans in high cost areas of the country, such as New York, New Jersey, Illinois, California, Hawaii, Massachusetts, and others.  The limit could be as high as $729,000.  It also proposes to raise FHA limits to as much as $729,000.  The Fannie and Freddie increase would be temporary, through December 2008, and the FHA limit would be permanent.

What the exact limits will be and what exact areas would benefit from this remain to be seen.  The Secretary of Housing and Urban Development (HUD) would have to determine the median home price for various housing markets before the exact loan limits are set.  They are saying this will happen no later than 30 days after passage of the bill.

For those in high cost areas, like California, this could provide much relief for folks whose payments adjusted and need to refinance.  This is especially true if they are in a declining market where the maximum loan to value was cut by 5%.  Jumbo ltvs (loan to value) are less then conforming, jumbo rates are higher, and debt ratio restrictions for jumbos are tighter.  So all those people that once were limited by a jumbo loan would now be considered conforming and have a better chance to qualify to refinance. 

The doom and gloomers will point out that for the homeowners that are upside down in their loans due to their property value decreasing, this measure will not help.  This is true.  Also, lenders could very well still make rates higher for loans over 417,000 or put some other restrictions on those loans making it not as easy as it seems to refinance. 

What about our local area of Las Vegas?  The increase in FHA loan limits should help some homeowners.  Since we are not considered a high cost area, it's not clear yet if the conforming changes will affect us or not.  Until HUD determines the new median home prices, how many people this may help remains to be seen.

For areas that it does affect, homebuyers will benefit too as they will be able to get better interest rates, with less money down for the home they really want.  Since the measure so far is temporary, it should spur homebuyers into making the decision to buy this year.  With rates still low it's an excellent incentive.  More buyers means more demand for homes, which eventually leads to home values increasing again over time. 

On Friday President Bush announced that HUD's Federal Housing Administration (FHA) will help an estimated 240,000 families avoid foreclosure by enhancing its refinancing program effective immediately.  The program is called the FHAsecure plan.  Whether or not it will truly help the people who need it remains to be seen, but here are a few highlights:

• The mortgage being refinanced must be a non-FHA ARM that has adjusted and the borrower must be in default.
• The borrower must have been making on time payments on the mortgage prior to the time it adjusted.
• The lender must be able to determine that the reason for the late or missed payments is that the borrower's mortgage payment increased.  They must also determine that there is sufficient income to make the payments with the new FHA insured lender.

What about those folks whose value dropped and now owe more on their mortgage then their home is worth?  FHA will will insure the first mortgage even if the existing lender has to write off a portion that cannot be refinanced into the FHA mortgage.  The new lender may even take back a second lien to include closing costs, arrearages or the previous secondary financing.

What if the total loan size exceeds FHA loan limits?  As long as the new FHA insured first mortgage meets the loan to value and loan size guidelines for FHA, the combined amount with the second can exceed it.  The borrower must qualify with both the first and second payment.

This is definately a step in the right direction.  It's not all-encompassing, of course, and won't solve everybody's problems, but it should give some relief to some strapped families.  It's not a hand out either.  It won't help irresponsible people who knew that at one point their payment would adjust and should have been paying their mortgage on time but didn't because they either just didn't care, or couldn't budget.  And it won't help those who couldn't seem to figure out that if their mortgage payment is $2500 a month and their household only brings in $2000 a month that maybe the house is too expensive for them.

It should, however, help folks who took an adjustable rate for reasons that made sense at the time, and based their decision on past performance of the local real estate market.  Many things occurred that caused housing values to go down--that's a topic for another blog--but most didn't expect it to drop as much as it did.  It was out of their control.  Some would argue, that hey, if that borrower made the decision to get an adjustable rate then he should live with it and suffer the consequences of having it.  Well, Bank Of America came in and saved Countrywide from going under even though Countrywide made the decision to offer stated income loans to borrowers with no savings, no down payment, no past rental payment history, and who never owned a home.  They didn't have to crumble as a result of their decision.  Why should a responsible--and I stress responsible--homeowner?

More information will be coming out after the holiday weekend on this initiative.  Right now it is only being extended to homeowners that are in default.  That means they have already missed 2 or 3 mortgage payments.  It won't help those that are struggling, but making it each month.  Maybe that's bad, maybe that's good, as it's meant to help those that truly are in dire straits.

Here's a question: How many lenders will really be on board with this?  Is it something they have to offer if they are an FHA insured lender?  Or is it subject to their own lender specific guidelines, sort of like how some lenders do not allow an FHA loan to be manually underwritten and others do.  Or how some do not lend on manufactured homes, even though FHA insures loans on manufactured.  Or some won't let a borrower use a grant as their down payment, even if it's allowed by FHA--and I'm not just talking about recently.  

The biggest problem lenders will have with this initiative is that, in some cases, they will be asked to lend more then what the property is worth.  Either that or the prior lender will have to take a loss on the portion that can't be refinanced into the new FHA loan.  Maybe an investor will come out that will offer seconds with payments deferred for 36 months. When the market picks up in a few years and everyone is scrambling to refinance out of those seconds, because of the high rates, that investor will make a ton of money.  Hmmmm.... 

It will be interesting to see how this initiative will morph over the coming weeks and months and how many families will benefit from it.  I hope it will do what it was intended to. 

It has been said that a pessimist complains about the wind, an optimist hopes the wind will change, and a realist adjusts the sails.  In this market, a good mortgage professional is a little of all three.  Well, you can't help but be the first, just a little bit.  But to be truly successful despite the soft market, we have to be optimistic and look for positives and we may have to adjust our business.  It's time to get back to the basics and remind our clients to buy a home for their home, and not just an investment.  There was a great article in the Las Vegas Review Journal today about just that.  Read it now, it's poignant.

When you buy a home, you are in it for the long haul.  Nowadays, "long" being at least 5 years.  Sure, it's not the days of our grandparents when folks bought homes, stayed in them, and paid them off, but the "flipping" days are over.  There's a balance somewhere in the middle.  In that balance are folks who put down roots, make neighborhoods of homeowners, not renters, and who just maybe are content with what they have.  Not that homeowners can't move up to a bigger and better home, but they need to be realistic and know what they can afford. 

The market will turn around, and the cycle of appreciation will start climbing again, as it always does.  In the meantime, let's be optimisitic, recognize the buyer's market and help folks be homeowners!