NEW FORECLOSURE RESCUE LAW - REAL HELP OR FANTASY?
So, the boys on capital hill have put together one heck of a package, called the Housing and Economic Recovery Act, which was designed to slow down the pace of home foreclosures and increase sales of existing homes. This all sounds great on paper, but will it really do anything? Democratic Representative Barney Frank of Massachusetts thinks so. The programs are in effect from Oct. 1, 2008 until Sept. 30, 2011
This law is the governments attempt to reach millions this year and next of people who are defaulting on the home loans. Many of these people have weak credit, bought homes using zero down payment or sub-prime loans, or simply over extended themselves with multiple cash-out refinances and exotic Option ARM, Interest Only, or No Documentation loans. The failure of these foreclosed homes have driven values down, flooded the market with unsold homes, and created the biggest credit crunch in history.
WHAT THE LAW DOES AND DOESN'T DO
The law has provision designed to rescue people from foreclosure by allowing them to refinance into FHA loans, as alternatives to going to sub-prime lenders. The first problem with this is simple. False sounding hope. There are no longer any sub-prime loan options to be found. Sub-prime loans very quickly went away in the first round of the credit crunch.
Refinancing into an FHA loan sounds great, but wait: It may require the current lender's approval. Huh? If the homes value is LESS than what is currently owed, which is likely if you bought a home in the past 4 to 5 years, the current lender must agree to accept 90% of TODAY'S appraised value as payment in full. If they do, you can now try to get approved for a government-backed FHA loan.
Under the new rules, assuming the current lender agrees to accept less as payment in full, you still need to get approved for the FHA loan. You still need to meet qualification guidelines (income, assets, credit, etc.). Anyone who obtained a mortgage after January 1, 2008, or whose payment is less than 31 percent of their gross income doesn't qualify.
Then in this provision, the real kick in the butt, you have to agree to SHARE HALF of any future appreciation of the property with FHA!
The gigantic problem with this effort is two-fold. Talking your lender into breaking your contract, and accepting a significant less amount of money usually only happens after you have gotten significantly behind in payments, or are actually in foreclosure. If you are making timely payment, why would they accept this in anything other than the most extreme cases?
Also, by the time the lender would reasonably look at such an option, your credit is typically destroyed, making it nearly impossible to get any new loan. A similar program launched last year, called "FHAsecure" was designed to help people who had non FHA adjustable mortgages, and it has fallen embarrassingly under Congressional projections of helping people.
FIRST TIME BUYER CREDIT. The law allows for a first-time buyer credit of $7,500. While this sounds good on paper, it really isn't a credit. It is actually a 15-year interest free loan. The new homeowner would repay 1/15th of the amount BACK to the government each year. This would equal $500 per year for 15-years assuming one qualified for the full $7,500. Some of the requirements include single borrowers must earn less that $95,000 per year, married couples, less that $170,000.
ELIMINATE POPULAR DOWN PAYMENT ASSISTANCE
Popular, yet disastrous "seller funded" down payment assistance programs are now banned. Nehemiah, Genesis, and other seller funded down payment programs were a creative way of by-passing down payment rules on programs like FHA, which allow a "gift" of down payment from a relative, government, or non-profit entity. The money to "gift" the buyer of a home actually came from the seller of he home, who agreed to "give" the program the same amount the program was "gifting" the buyer. In reality, the buyer was usually paying significantly more for the home, based on increased, and often unrealistic appraisals. Defaults on loans using this type of down payment assistance is dramatically higher than those who pay their own down payment, get a gift from parents, or get a true grant.
Government, state, county, and true non-profit assistance is still available. To qualify, the assistance MUST become a mortgage against the home. Under these programs, the "assistance" mortgage usually has no payments, and is either forgiven after about 10-years, or payable when you sell, refinance, or no longer occupy the home.
FHA DOWN PAYMENT GOING UP
Currently, the minimum amount required to purchase a home out-of-pocket using FHA financing is 3.0%. This is going UP to 3.50%. While this may initially seem counter-productive in helping move the huge amount of homes for sale - statistics have pretty much proven the Zero Down Payment experiment a big failure.
Prior to about 2000, there were essentially no options for zero down (other than a VA loan), and everyone either saved up their own money, or got a gift from their parents. This is again where the market has gone. ZERO DOWN PAYMENT IS GONE. It will not be back anytime soon, so GET USED TO IT.
THE BOTTOM LINE
Will this work? NO! While it will help a few people get cheaper loans, possibly saving their home, and while plenty of people will take the first-time buyer credit, the overall aspect of these actions will help few, and change little. But it sure does make it look like those on Capital Hill are earning their pay and doing something - unfortunately, it is pretty much just smoke and mirrors
Buyers, sellers, lenders, banks, wall street, realtors, builder, and everyone else got stupid drunk on equity, or the possibility of equity. Drunk people do dumb things. Today, we are all suffering the handover. It will take a lot more than these actions to fix the problems and make the hangover go away.
(C) 2008 - Joe Metzler - www.JoeMetzler.com