AP: Fed to Unveil Home Mortgage Plan
By The 800lb Gorilla | December 18, 2007
Fed to unveil home mortgage plan
By JEANNINE AVERSA, AP Economics Writer
A Federal Reserve plan being unveiled Tuesday would give people taking out home mortgages new protections against shady lending practices.
The rules to be proposed are especially geared to providing some future safeguards to the riskiest “subprime” borrowers, already painfully stung by the housing and credit debacles. The proposal is expected to apply to new, or future, loans made by all types of lenders, including banks and brokers. The plan could be finalized next year.
The Fed, which has regulatory powers over the nation’s banking system, is considering:
_barring or restricting lenders from penalizing subprime borrowers — those with tarnished credit or low incomes — who pay their loans off early.
_forcing lenders to make sure that borrowers, especially subprime ones, set aside money to pay for taxes and insurance.
_barring or limiting loans that do not require proof of a borrower’s income.
_setting new standards for how lenders determine a borrower’s ability to repay a home loan.
Fed policymakers also will look into improving financial disclosures so people better understand the terms and conditions of their mortgages. It will consider ways to crack down on misleading mortgage advertising.
The Fed’s response has taken on heightened importance given the meltdown in the housing and credit markets that has led to record numbers of home foreclosures. The crisis has raised the odds that the economy might fall into a recession, roiled Wall Street and given Democrats and Republicans much fodder to blame each other.
The plan, if ultimately adopted, offers Federal Reserve Chairman Ben Bernanke, who took over the helm in February 2006, an important opportunity to put his imprint on the Fed’s regulatory powers. Some critics have complained that Bernanke’s predecessor — Alan Greenspan, who ran the Fed for 18 1/2 years — failed to act as a forceful regulator especially during the 2001-2005 housing boom, where easy credit spurred lots of subprime home loans and many exotic types of mortgages.
When the housing market went bust, the carnage was the worst in subprime loans.
Of the nearly 3 million subprime adjustable-rate loans surveyed by the Mortgage Bankers Association from July through September, a record 4.72 percent entered the foreclosure process during those months. At the same time, a record 18.81 percent of the subprime adjustable-rate loans were past due.
When home values weakened, borrowers were left with loans balances that eclipsed the value of their homes. They also were clobbered when their loans reset with much higher interest rates.
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CNNMoney.com: Next Steps for FHA Bills
By The 800lb Gorilla | December 18, 2007
Provisions of the Senate bill are less aggressive than the House version. Differences will be reconciled in conference.
By Les Christie, CNNMoney.com staff writer, December 17 2007
A Senate bill that would expand the functions of the Federal Housing Administration (FHA) could help upwards of 200,000 homeowners - though a similar House bill that passed last month is more aggressive.
Christopher Dodd (D - Conn.), the sponsor of the Senate bill, which passed last week, hopes to make low-cost, fixed-rate mortgages available to more homebuyers and to homeowners seeking to refinance out of expensive adjustable rate mortgages (ARMs).
“This measure can shield homeowners from harm by helping families find safe, fair and affordable mortgages,” said Dodd in a statement. It can help provide credit, both for new homeowners and those seeking a way out of abusive loans in which they are currently trapped.”
FHA-insured loans have become an important element in the proposed solutions to the subprime mortgage crisis. There is bipartisan Congressional support for the measures and from the Bush administration.
FHA mortgages are consumer friendly loans made by private banks that are insured by the government. That makes them especially attractive to lenders because the government guarantee enables the lenders to easily sell off the loans.
Borrowers pay up-front premiums of 1.5 percent of the loan value, and 0.5 percent of the monthly payment each month. In return for that premium, the borrower gets a loan at a reasonable rate. The premium ends when the loan balance dips to less than 78 percent of the value of the home.
The Senate FHA-modernization bill differs in some significant ways from the House bill and is in addition to the FHASecure program that launched last summer, and was geared toward helping delinquent subprime borrowers refinance into affordable, fixed-rate loans.
Both the House and the Senate versions raise cap limits, the maximum dollar amount of mortgages that are eligible for FHA insurance, but the House bill is much more aggressive in nearly every one of its provisions.
The House would set the cap at $729,750, which is more than twice its current amount. That will give many more home buyers, especially those in high-priced areas like California, access to FHA-insured loans.
The cap under the Senate bill would max out at $417,000, the same amount as loans conforming to Freddie Mac and Fannie Mae limits.
If the House cap limit is adopted, the rough estimate of 200,000 eligible for help will expand, according to Bill Glavin, special assistant to the FHA commissioner.
The cap for low-priced areas in both bills would be raised to $271,050, again allowing more homebuyers into the program. The previous maximum was $200,160, less than the cost of building in many areas. “[With that cap] we’ve been priced out of new construction,” said Glavin.
The House will also allow more people in by accepting no-money-down deals, unlike the current policy, which mandates a 3 percent down payment. The Senate bill still requires a down payment but halves it to 1.5 percent.
In addition, the House bill would extend the maximum term of the mortgage to 40 years from 35, again making the loans affordable for more homebuyers. The Senate bill does not change the term limit.
Another difference is that the House bill would introduce risk-based pricing into the FHA program for buyers putting down less than 3 percent. That would mean higher premiums for borrowers to pay for their greater risk of default. The Senate bill calls for a 12-month moratorium on the implementation of risk-based pricing.
Both bills relax the strict provisions that have kept FHA insured mortgages of limited use in buying condos and manufactured homes.
‘Hitting the number’
Both bills take aim at some of the shiftier lending practices of the past few years, especially those involving appraisal scams. The Senate bill would penalize any fraud having to do with an FHA mortgage. The House would impose civil penalties on anyone who exercises undue influence on appraisers in connection with an FHA-insured mortgage.
Appraisers have been subjected to intense pressure in the past to overvalue homes - it’s called “hitting the number” - in order to make sales work. If home valuations come in at less than selling prices, deals fall through because borrowers can’t obtain mortgages for the amounts they need.
Appraisers say they are often told, in so many words, to hit the number consistently by real estate agents and mortgage originators. If appraisers don’t co-operate and overvalue the properties, they may be frozen out of future work.
The next step for the FHA modernization bill is for members of the House and Senate to work out the differences in the two versions. That may happen as early as this week.
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MortgageNewsDaily: FHA Loan Limits Raised By Senate
By The 800lb Gorilla | December 18, 2007
FHA Loan Limits Raised By Senate
So-called FHA reform reached an important milestone on Friday when the U.S. Senate overwhelmingly approved its version of the legislation.
The bill, which passed by a vote of 93-1, seeks to make the Federal Housing Administration more relevant in the current housing and mortgage lending environment by expanding the agency, loosening some underwriting standards, and raising its current restrictive loan limit.
The FHA was established in 1934 to help borrowers, particularly those with low incomes, purchase homes by guaranteeing banks that those loans would be repaid should the borrower default. But the agency’s loan limits have generally lagged behind those of Freddie Mac and Fannie Mae and as home prices climbed dramatically and lenders with looser underwriting standards proliferated the agency became less and less of a player in the mortgage market.
Over a ten year period ending last December the FHA’s share of new mortgages fell from 9.1 percent to 1.8 percent according to Inside Mortgage Finance. A major reason for the slide is the FHA loan cap which, in many parts of the country such as both coasts, falls short of covering the purchase price of even a low end house.
FHA insured loans have been mentioned as a possible escape hatch for borrowers who may be unable to make payments on their current adjustable rate mortgages when their interest rates reset over the next year. The restrictive loan limits, however, make that impossible for many of those borrowers. There is also a theory that a more widely available federal guarantee would encourage lenders to make more loans in the current tight credit environment.
The Senate version of FHA reform would raise the limit on FHA loans from $362,000 to at least $417,000 which is the current limit on Freddie Mac, Fannie Mae, and Veterans Administration loans.
The FHA estimates that it may be able to help some 200,000 borrowers who are facing foreclosure with the new limits coupled with loosened underwriting standards which were announced by the president several months ago.
In October the House of Representatives passed legislation similar to that passed in the Senate but some differences between the two bills will have to be hammered out before a final version is sent to the president for his signature.
The House bill would raise the loan limit as high as $829,750 in certain areas of the country but the biggest stumbling block to a compromise is a feature of the House bill which establishes a new housing trust fund for troubled borrowers and would require FHA to contribute to it.
Also on Friday the Senate passed a separate borrower relief bill which would end, for three years, a provision in the tax code which has bitten many a homeowner after foreclosure or a loan workout. Under current rules the Internal Revenue Service requires lenders to send borrowers and the IRS a form detailing any loan amounts written off by the lender after a foreclosure, short sale, or loan restructure. The IRS treats that forgiven debt as ordinary income and taxes the borrower accordingly.
The House had earlier passed similar legislation but without the three year sunset provision.
In other mortgage news, Reuters reported on Friday that the hotline established by the HOPE NOW alliance had received 45,000 calls in the three days after its establishment was announced by President Bush. The hot-line provides foreclosure prevention counseling to borrowers who qualify for an interest rate freeze worked out between the Treasury Department and major lenders. The telephone number for the program is 1-888-995-HOPE.
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