The Good News and Bad From The Housing Rescue Bill

Thanks for explaining this.  it's so hard to keep up on everything going on!

I appreciate the quick summary on this very important development in our industry.

My pleasure, Christine!!

This will be bad if we lose the Nehemiah program!  I hope something can be done before October 1st!

Tony--- The only thing that can be done is another lawsuit by the DPA programs.   However, its much more difficult than last time.   Last time, FHA banned it.    This time the United States Government banned it.    Very challenging to defeat.   I am hopeful like you are but skeptical. 

I forgot to sign in earlier, Thanks for explaining this.  it's so hard to keep up on everything going on!

My pleasure, Dick.  I am not happy about this part of the bill however.  I think its a huge mistake.  There were many other options here and they are throwing out the baby with the bath water.

My first impression of this is that if our legislators really wanted to help, they would have offered an either/or option for first-time homebuyers. Either receive downpayment assistance, or get up to a $7500 tax refund. That would create the largest pool of first-time homebuyers and provide more support where this market needs it.

Another horrible move.  In Arizona, there are a huge number of transactions that use the down payment assistance.  Over 1700 Transactions through the first half of 2008 in Maricopa County.

Just like the move to limit investors from having 10 investment loans down to 4.  If an investor, on paper, can prove they can afford 10, 15, 20 mortgages and has the reserves to handle it in a "worst case" scenario.. there should not be a limit.

John - Agreed!  I saw the same report that all congressmen saw.  Half of these foreclosures on DPA programs were on borrowers with credit scores under 620.   Why didnt they just eliminate it for these borrowers?   This is a complete overreaction that is going to potentially create more economic woes.

Tim--- There is no sensible reasoning....only fear.    When one operates from fear, they make horrible decisions.    There are a huge number of transactions in every state using DPA.  30% of all FHA loans have them today.

Good explaination and this will be one more thing to add into the miz this year ! Whew what a year!

Thanks,

Tom Davis

World Class Delaware Realtor

I think this move is wrong! I understand the statistics of higher foreclosures rates with people under this score and no money down and so on.... Yes - makes 100% sense....

My question is - is tightening the requirements to get a loan such as 3.5% down and no DPA assistance going to help stimulate the housing crisis or is it going to put it into a coma? I believe I know the answer........

Aaron,

Sounds like a bandaid at best!!! Thanks,   Fran

This will have a huge impact on our first time homebuyers.  I had heard that they were going to reduce the FHA downpayment to possibly 1.5%.  To do away with the DPA & also increase the downpayment is devastating.  In MS, we do have a Bond Program and some of our area qualifies for USDA loans, so those will be our main options. (Probably our only options)

Aaron you are always keeping me in the loop!  Thanks for the insight!  We bought our first home with a NE state NIFA bond and only had to pay closing costs.  Back then it was $1500 for our $50K home.  We owned for 8 years and the state more than recooped the costs (again $1500) in two years w/ property taxes.  Hopefully Nevada will look at that alternative but it will take them three years to recoop.

What is the default rate with the nehemiah?  I am sure it isn't in the range of Fannie and Freddie conventional where speculators took full advantage of cheap 100% loans in hopes of short term gains.  I feel very confident that is where the majority of foreclosures are coming from.  People are chopping off their arms before they bleed to death and the avalanche is falling.  Probably doesn't have much to do with first time buyers who are OCCUPYING the property.

My thoughts are that there are laws on the books for such fraud, why don't they just use them????  If they start making examples out of fraudsters we would see a) less fraudulent loan apps and b) foreclosures lessening because the decision (and YES it is a conscious decision for MOST) wouldn't be taken so lightly.

Aaron, thanks for the update written in a way that is easily understood.  What do you think is next?  Is there any light at the end of the tunnel?  Thanks

Aaron,

This is another "feel good" knee-jerk reaction by Congress that just spends money but does little else. They should have stayed on vacation.

Steve

Can anyone tell me how the new bill affects those facing foreclosure or how the banks will benefit?

Tom--- Crazy year and a half!!

Fran--- A $400 billion headline to make us all feel better....except this time, they hurt our business in the process.

Pam--- I had heard that as well and they went the opposite way by raising the down payment.  Bond programs will rise in popularity but they are usually limited in their scope.

Renee--- There were a ton of different ideas they could have implemented to curb this.   Actually the data shows, strangely enough, that FHA default rates have been similar each year in spite of whats going on around them.   The default rate is around 2.5% on a DPA and around .80 when a borrower doesnt use DPA.    However, more than 50% of those DPA defaults occur when the borrower's credit score is below 620.   Why didnt they just eliminate those?   Mindless, like most of what they do.

This is interesting and who knows how it will end.  I guess I'm old fashioned enough to think that if a person can't save up enough money for a tiny amount of closing costs they probably should rent for awhile longer.  And I never thought the down payment assistance was a good idea.

Denise--- what I think will happen next is as follows.  

My email and phone has been blowing up today with angry agents.   This woke them up.   I am sure NAR is getting an earful today.   I expect there to be a compromise proposed but I doubt Congress will do anything about it.  

FHA fought too hard to get this.   It wasnt well thought-out.    DPA total losses cost them a couple billion or the same amount as a few days of war.

So, this bill will go into effect at the end of September.  The real estate market will crash further, the economy, which is tied directly to the housing market will suffer more, the 400,000 homeowners they say will be helped will be more like 40,000, and so there will be even more bills next year. 

And the first thing they will do is try to get the first-time homebuyer BACK in the game.

Katie--- the banks dont benefit...they lose.   The borrower gets to get some of their lost equity forgiven if they can convince to get the bank to let them off the hook so they can refinance at today's value.    Thats why, just like FHA Secure, this has no chance of being as successful as they think.

Oh, if you are able to refinance at the lower amount and you sell your home within a year, you will give 100% of your profit to the forgiving bank.   It scales down to 50% and lower in the years after that.    Interested??

Barbara--  I disagree.  VA has done this since day one successfully.   98 out of every 100 FHA down payment assistance users as well.    35% of all FHA loans use DPA.  50% of all loans today are FHA.   First time homebuyers make up 30% of the marketplace.  DPA is what they use to buy homes.   They do not have 3.5% saved.  

This means that come October 1, your market and mine will lose nearly 20% of its potential business in one day.   

If you are working with buyers today and they ask you "is today a good time to buy a house or wait?"  now the answer is "wait until 2009"....we can all expect dramatic depreciation caused by this elimination of demand.

Once again let's look at the track record ---

example -  FHA Secure --    in my opinion this is a money maker for ex subprime originators looking to whack clients with big fees. I could be wrong, but I can never find anyone that fits an FHA Secure loan. Anyone else??

what an EXCELLENT point!!

If you are working with buyers today and they ask you "is today a good time to buy a house or wait?"  now the answer is "wait until 2009"....we can all expect dramatic depreciation caused by this elimination of demand.

In my area, with so many foreclosures I see this as a positive. Those who are facing foreclosures can go to a loan modification program. The inventory of houses will decrease. New housing will be built. The economy will get stronger.

Those Realtors and mortgage folks who are die-hards will stay in the business, thus more experienced people assisting the customers in the purchase of the right house, for the right price with the right mortgage.

It may not happen over night, but I have hope.

2.5%?  How is that compared to Alt-A 80/20 or 100%?

I agree about scores!

Nancy - 

just go get a loan modification??? Have you heard anyone who just went and got a loan modification? Yeah - it's available and banks do it.... but it takes a long, long time and most modifications get turned down. If everyone was approved, yes, that makes sense but in my opinion they are harder to accomplish than an FHA Secure loan...

Thank you for laying this out for us, Aaron.  I do appreciate it.

Aaron - This is fast becoming a true test for all of us.  I haven't been doing this gig as long as some (7 years) but resolve should prove key.  We have one heck of a financial fight staring us right in the eyes.

Thanks for the update, it definately is a heated topic isn't it.  Home sales will take another blow.

Any idea as to how this bill will help those who already own a home needing to refinance or avoid foreclosure?

Thanks from me too. Your explanation came at the right time.

Lewis, actually, I know 5 people who got them. One of which I worked very hard with them to get it. Six months of working with bank is far better than losing a house.

Thanks for the easy to understand version of what's been going on!

Michael Carter, Realtor Greenville, SC www.beachboyrealestate.com

I have one idea...lets make sure that buyers should really be able to afford their homes.

Lots of good comments and I cant touch on them all but let me make a few points...

Renee--- Alt A 80/20 foreclosures will certainly be much higher than 2.5%.   In 2006, 81% of the ALT A loan market was stated income loans.  

Team DiMuria---  I agree with you but more than 97 out of 100 FHA buyers using DPA can obviously afford their home.   I am sure your comment was made with sarcasm and I am not sure what the avg sales price is in Katy, Texas but I am assuming its somewhere around $150,000.   A mandatory 3% in Katy is not the same as in Southern California.   Its much easier to make that statement in your area than some others. 

I'm with Barbara - save enough for your down payment but even more than that - If you can't pay your bills and can't afford your house - I SHOULD NOT HAVE TO PAY FOR IT!

FREE MARKET SHOULD RULE!

We all heard it was coming and now it's here. It will be interesting to see how this plays out in the market.  The legislation was actually a much needed measure to certail what has happened in the mortgage industry.

Susan--- I just read where 94% of everyone who used a DPA has never even had a deficient account or foreclosure.   These people being punished pay their bills.   That falls right in line with every other kind of loan pre-subprime crash.

By the way, the foreclosure rate on these loans in the first quarter of 2008 is lower than last year in the same quarter.    Can any other loan program say that?

Tracy--- I can tell you how this will play out.   The nation's homebuilders that currently cling to survival are in big trouble.  The only good news if for buyers as home prices will soon likely fall again.

From the Wall Street Journal today "Miami-based home builder Lennar Corp. said recently that 33% of the mortgages it originated used down payment assistance, according to a research note by J.P. Morgan analyst Michael Rehaut.

"We believe the legislation's elimination of seller-funded down payment assistance program.....represents a material negative for the housing market and hence the overall bill could result in more harm than good near term,'' Mr. Rehaut says.

WOW! It seems you really stired the pot here with all of the diferent viewpoints expressed in the reponses.

Excellent blog Aaron! You really gave an excellent explanation of how our government continues to help the middle class and focus on guiding our nation out of this " mortgage meltdown" that they helped create!

I work with many Realtors and First Time Home Buyers that are hard working, good citizens that I have used the DPA programs along with FHA to help them acheive the " American Dream". Not one of my clients has defaulted nor are they likely to.

I also agree with Lewis regarding FHA Secure.....It is almost a joke.

Those of us who are sincere, focused professionals and are able to put our heads down at the end of a honest,hard days work......will survive in this industry. There are still opportunities for business, but the dust has far from settled and we will still be in flux for awhile.

There is a welcome purging taking place in our industry for Realtors and Mortgage Professionals where the people( I'll restrain from naming other industries) that jumped in when prices where appreciating faster than ever in history and we were in a refinance boom, etc., are leaving looking for the next "quick buck" or having to find a real job because they can't handle having to really work at Real Estate. To be successful in this market, takes a full time effort to say the least.

I for one look forward to the anticipated national licensing requirements for loan officers that is long overdue.

Forgive me if I got long winded. .....Great Post Aaron!

I hate that they are doing away with DPA altogether.  I think a better idea would have been to put restrictions on it, like minimum FICO score or a small reserve requirement.  Just to do away with someone ALWAYS takes it away from someone that is well qualified and worthy of it.

Olan Carder
www.charlottemortgageonline.com

AAron.....great job explaining the nuances to us about this.  thanks again.

Aaron- These bills are always such a joke. They get so entangled with egotistical if I give you this then you get this. Blackmailing in congress. I am with Glenn Beck, grab the pitch forks. Congress needs to all get fired and remember who they are working for,not themselves. I was hoping that the President would veto this bill but he succombed under pressure.  I am sick of bailing people out of their own messes.

The down payment assistance programs are huge in our county, especially for school teachers and police officers. It is amazing how we all get screwed, yes, this will affect the first time homebuyers. What are they thinking???? Hmmm, I mean, well, gee, I was giving them too much credit to even think they think!

Extraodinarily Insightful observations, Indeed.  How do you think this will playout over the next 12 months? What do think about the consequences of the electiion. Republican vs. Democrat?

Thanks again for yor words of wisdom . . .

Best Regards

Jim

Thanks, Jerry--- I dont see this being much more effective than FHA Secure.

Olan--- I agree.  More than 50% of the defaults on DPA come from those with credit scores under 620.    I cannot believe that wasnt the answer.

Thanks, Pam.

Nestor and Katerina--- I truly believe that Congress does their best to do the right thing but the problem is they jump into areas they dont understand and no one can properly explain to them.   This bill is yet another attempt to try and avoid writing a check to make it all go away like they did on the S&L crisis.   In my opinion, when this doesnt work either, we will see even more bills.   And someday, in the not so distance future, a giant check will be written and you and I will pay for it for the next decade.

Thanks, Jim--- let me summarize the next 12 months thru my crystal ball.   Please save for me.  :)

This bill, like the ones before it, will not work.   Banks arent going to take the losses that would make this work.  They will take back the homes first.

The Black Congressional Caucus and the Hispanic Congressional Caucus came out today and said they will fight the DPA ban but will likely wait until Bush is out.

The loss of DPA programs will force some large homebuilders out of business and drive prices down further in many high-cost areas.  This will panic Wall Street, force rates higher, and result in many more foreclosures as people walk from their homes.

We will have an election and the new administration will start in January.    Both candidates in the debates will have promised an even "newer, better" housing plan. 

If its Obama, the Black and Hispanic Caucus' will celebrate as DPA will be back or at least some minimal down payment on FHA will be in place early in '09.  

If its McCain, it will take a bit longer but it will be revisited and revised as well and back in some form.

In the first quarter of the year, we will get the Housing Revitalization Act of 2009, sometime in the summer we will get the Foreclosure Avoidance Act of 2009, and by year's end we will get the $500 billion Make It All Go Away Act of 2009, which will have a tax increase on the middle class nestled within.

Then, and only then, can we all go back to work and not worry about this junk.

Aaron-

Thank you so much for the clarification, but, why is NAR backing this bill if it's obvious that this will not be beneficial to home buyers and us as well?

This bill has sparked the cynic in this real estate broker. 

"The rich get richer and the poor get poorer" was never more vividly exhibited.

If you're a rich U.S. Senator, you can be a VIP borrower.

If you're a poor home buyer, you can just rent and support your local landlord. 

Lenn -  Wait until a few of the rich U S Senators need to refinance and realize there is no such thing as stated income loans anymore and they are denied. What happens then?

Aaron,

Thanks for the explanation of the bill. It appears that it will take time and patience for the real estate market to stabilize.

Lenn is all too right.  Unfortunately.

Clarification:  Down Payment Assistance has not been ended.  SELLER-FUNDED down Payment Assistance has been ended.  INTERESTED-PARTY down-payment assistance has been ended.

Lender's point of view:  it is a BIG measure of how much risk a loan represents, HOW MUCH the buyer puts into a deal out of their own pocket.  BIGGER than credit score.

Anyone old enough to remember that prior to VA lending after WWII GI Bill, no one could buy a house without 20% down?

Then mortgage insurance was invented.

NOW because of low DP excesses, MOST of the private MI companies are gone altogether, or have rolled up their sidewalks so far that only really stirling borrowers can get a high LTV loan with PMI.

Which leaves FHA to be adversely selected, as they say, when you cannot get PMI - if you can get an FHA approval, they don't have any choice but WILL give you a loan with MIP.

Now HUD got the Congress to protect the FHA program with a little bit larger DP requirement, and took away the dangerous interested party DP assistance program.

I am a lender who wants FHA to be here more than a few more months - so I am glad when they make moves to protect the FHA insurance system, and moves that make FHA loans less risky for the lenders.

I don't want to do more loans - I want to do more loans that don't go into default.

There is more to this law - but the increased DP requirement and the elimination of seller funded DPA are two of its good features.

DAP buyers default at a higher rate than those who are able to actually put money down. I'm sorry that it makes realtors' jobs harder, but DAP is bad for the economy. People need to learn how to save up for things again.

What many agents do not understand (or are unwilling to admit), is that when you make it possible for a person to buy before they are economically viable, you hurt the economy. Just look at this slump in housing. It was all caused by prices being bid up with easy credit.

I shake my head whenever I hear an agent tell me that exotic mortgage products were a response to rising prices. Wrong, wrong, wrong. Without access to this much credit, none of these people who overpaid would have been able to bid up prices so high. The vast majority of homes are purchased with credit. Therefore, access to credit drives prices. That is the 'demand' of the supply and demand equation. As credit is justifiably tightened to SUSTAINABLE LEVELS, houses will find their true market value.

You should be glad that DAP is going away. DAP is just another hurry-up method for getting people into a huge financial decision before they have demonstrated the ability to manage money.

What many agents don't understand is that loosening credit might get you more buyers TODAY, but it is much like tailgating the car in front of you. You FEEL like you are getting to your destination quicker, but you are not. And you are more likely to cause an accident.

DAP is nothing more than economic tailgating. Agents must be patient and let this market sort itself out, instead of clamoring for more of the same medecine that cause this mishap in the first place.

Yona--- I am sure NAR is backing it because of the tax credit and redevelopment component as well as the possibility of keeping 400,000 people in their homes.     The Seller assisted DPA part, I would be shocked if they are in support of.

Lenn--- Sad but soooo true.

Lewis-- As well as the nation's top businessmen. 

Lucy--- Recovery will come when lending stabilizes.

Paul--- Ditto.

Aaron, thanks for the summary on this.  We have a bit of a mess on our hands right now. It will be intersting to see how this plays out over the next year.

Bob --- You are correct.  You can still get the DP from a family member, employer or family friend.  

I'm sorry--- I agree with your credit comments.

To both of you --- I am not advocating the return of exotic loan programs.   This is a 70 year instutution we are talking about that was formed to ASSIST first time home buyers, those with low income, and minorities. 

I believe they went too far.  3.5% is too much.   This is no longer a program for first time homebuyers and those with low income.  Its too expensive.  They now have to turn to their state bond programs.

I would be OK with the elimination of seller gifted DPA if they did what they were originally going to do and lower the down payment requirement to 1.5%.

I complete disagree about the solvency of FHA.   

FHA announced they will lose $5 billion this year.  They also announced $3 billion of this is due to seller paid DPA.  These numbers are not out of line when you consider the losses posted by every large mortgage company.

$3 billion is nothing to this government.   Thats about a DAY or so of war.   Small trade-off to make sure we protect our real estate markets, economy, as well as low income borrowers and first time homebuyers.

Once again, first time homebuyers are 30% of the market place.  FHA loans are 50% of the my market today.  One third of these FHA loans use seller paid DPA.   You do the math.  

Morgan Stanley is predicting another 25% depreciation in real estate values nationwide.   I guess you can argue that's great for buyers.    If we get all home prices across the country under $200,000, then a 3.5% required down payment becomes less of a big deal.

I also disagree with you about the need to cut off all "loose credit" which I assume means 100% financing and its ilk.  There are effective ways to offer lower down payments for a certain kind of borrower.   VA has done it successfully since day one. 

Thank you for the clarification!  My $200,000 are so happy!

Thanks for the post!!!

Perhaps I don't understand this completely, but it seems that part of the problem has been people who never should have been given loans granted them. In some cases, buyers could get into homes with none of their money invested. Could the end of DPA help weed out the people who should be waiting a bit to purchase homes in the first place? Please explain further if I'm missing a piece of the puzzle on this. Not trying to cause an uproar; just playing Devil's advocate!

Liz-

Bingo. If you can't scrape up 3% (ON YOUR OWN) , you have no business buying a house.

Everyone is in sucha blessed hurry to get, get, get. Realtors hate the 3.5% and elimination of DAP, because it means in the near term, houses will sell more slowly.

Too darn bad, I say. Easy credit ALWAYS leads (eventually) leads to market dislocations like we are having now.

Again, it is like tailgating. We must learn to delay gratification (including sales commissions) and not try to put people into houses before they are truly in a position of financial strength.

Personally, I get awfully tired of the whining from many in this industry. They need to take their lumps like adults.

That said, no amount of government intervention is going to bring back the agents' most valuble sales tool of all - rapid price appreciation of houses. I don't even need to debate that point. Realtors are going to have to WORK to sell houses and not be able to point to price-appreciation stats for an easy sales tool.

It's over for meaningful appreciation for the near to medium term. When thi market finally turns, we will likely have normal appreciation of 2-4%. That kind of appreciation will not have buyers tripping over themselves to get into bidding wars.

They may not be making any more land, but they don't need to. Dumb buyers who made dumb decisions are being 'encouraged to make other housing arrangements'. Supply will be plentiful for some time to come.

Wow, that is major news. I do agree that from a tax payer viewpoint that Nehemiah and such are not good for the industry.  They help people who should never own a home suddenly own a home and thus eventually have a great chance of falling into foreclosure.  From a Realtor, mortgage broker, a seller, and a first-time buyer viewpoint though, this news is pretty rotten.