Richard's Real Estate Thoughts

The most sweeping mortgage bill in decades has just been signed in a brief ceremony, "without fanfare". This was reported this morning by NPR.

An measure of how good this bill is can be made by the almost secretive signing ceremony. It was done early in the morning Eastern time.

It sounds good in a news clip.

"stabilizes volatile markets"

"relief for struggling homeowners"

"lifeline to troubled mortgage companies Fannie Mae and Freddie Mac'

I really think if it did all this well there would have been much more emphasis to the bill signing. I think our boys and girls in Washington did something to do something.

I hope we do not pay too much for their rushed actions. We will see how the implementation of these changes effects the industry and the nation.

Richard Smith
Home financing in Tennessee, Georgia, and Alabama.
Experience matters when it is your home loan.

The $7500 tax credit for first time home buyers is a significant incentive to purchase. It is a major positive provision in the Housing Bill that passed Congress over this past weekend. This is a credit not a deduction, which means it directly reduces the taxes owed - dollar for dollar.

This gives the new home owner directly as much as $7500 cash in the pocket at tax refund time.

The credit incentive is retroactive back to April 9, 2008 and continues through June 30, 2009. The incentive is 10% of the purchase price up to a maximum of $7500.

The actual legislation that implements this tax incentive is called the Housing Assistance Tax Act of 2008 HR 5720. It is included as part of the massive Housing Bill HR 3221, that is waiting to be signed into law.

The incentive is available to individuals who make less than $75,000 and to couples who make less than $150,000. Above these income levels the incentive is reduced and is completely phased out at $95,000 for an individual and $170,000 for a couple.

The tax credit must be repaid over the next 15 years, and more quickly if the home is sold or is no longer the primary residence. Repayment is made by increasing the tax owed in the year the home status is changed (sold or no longer the primary residence). For more details on the tax credit and repayment provisions, please see a tax accountant.

A first time home buyer is defined as not having an ownership interest in a principal residence in the previous 3 years.

This credit can be good news for many first time buyers. Some reports indicate that over 2 million first time home buyers last year, and a large percentage of them would have qualified for such an incentive it had been offered last year.

It may offset some of the less good news for home buyers in the Housing Bill with the loss of seller funded down payment assistance

Richard Smith
Home financing in Tennessee, Georgia, and Alabama.
Experience matters when it is your home loan.

HUD Secretary Steve Preston in a press release hints that the Housing Bill will force FHA to "increase prices on all customers or eliminate its refinancing program for subprime borrowers at a time when they need it the most. "

The press release regarding FHA provisions in the Housing Bill is available on HUD's website. The release is dated July 23, but I have not found any updated releases on the website. It seems to me that HUD received most of their requests with the Housing Bill.

Certainly they were able to ban Down Payment Assistance. They increased the minimum investment requirement from 3% to 3.5%. It was not too long ago that HUD was ready to implement a reduced down payment, but I guess recent developments forestalled that initiative.

High delinquencies combined with increased market share for FHA as a result of the loss of other high loan to value (LTV) financing options. Likely also that the expected volume increase from refinancing the subprime loans is another consideration to increase the minimum investment requirements. 

I have not heard how the roll back of tiered MI pricing will be implemented, but judging from the secretary's statement, we may be looking at an across the board increase, as well as a departmental reluctance to refinance the borrowers who are targeted for foreclosure relief in the Housing Bill.

There are a lot of questions still unanswered in this bill. I hope that in an effort to address pressing matters, the bill was not rushed so quickly that provisions were left in place that were not fully considered and would not have otherwise been approved.

Richard Smith
Home financing in Tennessee, Georgia, and Alabama.
Experience matters when it is your home loan.

Another feature of the Housing Bill is establishing a national registration for mortgage loan originators. Tennessee has required licensing for originators for the last couple years, and is now in the process of implementing continuing education requirements.

According to the housing bill summary, this legislations "establishes a nationwide loan originator licensing and registration system that will set minimum standards for loan originator licensing substantially improving the oversight of mortgage brokers and bank loan officers."

It will be interesting to see how this registration system works and how much the national licensing will cost. Also, it will be interesting to see what the minimum standards for loan originators will include.

According to RISMEDIA, the minimum standards will include a background check, a qualification test, and annual continuing education requirements for bankers and brokers.

This may very well make for positive and lasting changes in the industry. I was glad when Tennessee adopted its continuing education requirement. It seems to be very much needed.

This provision and the changes to FHA lendingare two of the lesser publicized parts of this bill that have significant long term implications.

Richard Smith
Home financing in Tennessee, Georgia, and Alabama.
Experience matters when it is your home loan.

Representative Maxine Waters, D-Ca, was interviewed by Fox TV Friday concerning the Housing Bill. In that interview she repeatedly referred to lenders as villains, who lured unsuspecting people into traps. I guess the villainous plot was to foreclose and kick the unwitting victims out of their homes.

The immediate focus of these remarks was Countrywide, for the moment the kick 'em while they are down target. I am not a fan of Countrywide, but they are not villains because they offered neg am loans or subprime stated loans or even hybrid ARMS with prepayment penalties. There may be villains affiliated with Countrywide, but the villainous behavior was not  targeting victims whom they could lure into a foreclose trap.

It does not seem to me to be productive to use such language, mostly because it does not seem true to me. Are the people who took advantage of stated loan programs generally unwitting victims that were tricked by evil tricks of banker villains? If so, it was not the lenders who were the villains but the loan originators who directly contacted the borrowers, but that just does not describe the borrowers that I know. For the most part, self employed, competent, educated, good well, established credit histories. Even the subprime borrowers know well the terms of their loan. When I speak to them today, and explain that I cannot help them, they are not speaking to me as victims of anything but a changed market and a loss of access to credit.

They are not victims of an evil banking plot to deprive them of their home.  And I think that such a portrayal is counterproductive. Probably misdirecting efforts from finding true solutions to a real credit crisis.

And if Fannie Mae and Freddie Mac are suffering significant losses, it is not because they lured unwitting victims into negative amortization, high margin, stated loan programs with criminally high prepayment penalties.

Jim Crawford indicated, in a comment on his post asking if we need this bailout , that many conventional foreclosures in his area were a result of perhaps questionable transactions. In that case, the villains are the buyers and the victims are the lenders. I have asked a couple times for a reason for excessive conventional losses. Jim's comments were as close to an answer as I have seen. 

I still wonder if the credit crisis is not caused by greater underlying economic problems.

The Housing Bill is not a solution to these problems. At best, it seems to me to be a kind of signal to market investors that the federal government will not let the credit markets fail. Helping 400,000 people with foreclosure bailouts is not a solution to the nations foreclosure, high inventory, dropping sales, dropping value problem.

This is problem is not going to be fixed with references to villainous lenders or by making this housing bill to be more than it is - just a bill that happened to be present when Congress needed to pass a bill.

The housing bill has many provisions, including some significant changes with FHA financing, but I think very little addresses villainous lenders or how to repair the credit market. Congress needed to do something, so they passed the bill that was there.

Richard Smith
Home financing in Tennessee, Georgia, and Alabama.
Experience matters when it is your home loan.

The local and national impacts of the new Housing Bill are significant and long term. The provisions of the bill will take some time to sort through. The bill was approved by the House earlier last week and by the Senate yesterday, after the President indicated on Thursday that he would sign the bill.

The circumstances of recent mortgage and financial market crisis events forced quick passage of some response, and this bill was already in place.

The Housing Bill brings many changes to the national and local real estate markets. The headline changes focus on foreclosure relief, Fannie Mae and Freddie Mac support and regulatory changes for both agencies.

This bill has several lesser publicized features. Many of which I probably have not been able to find amid all the news reports.

Some of the lesser known provisions include these changes to FHA lending:

Banning seller funded downpayment assistance (DPA). These are transactions in which the buyer uses grant funds from an IRS approved charitable foundation. The seller then reimburses the charitable foundation and pays the foundation a processing fee.

Problems with this program are mainly from higher loan delinquency with loans that include such downpayment plans. Additionally, it is perceived that the programs generally inflated the price of the homes and amounted to money laudering, according to many critics. I actually like the programs, myself.

Loans using DPA made up around 30% of FHA's total loan volume. These loans had 10% delinquency compared to 6% delinquency for non DPA loans.

This will have a significant impact on qualified buyers.

Increasing FHA minimum downpayment to 3.5%. I am not sure of the reason for increasing the minimum investment by.5% ? Now without the availability of DPA, home buyers will need to save another $500 for every $100,000 purchase amount.

This is still a relatively low down payment, but many people will struggle with this. I expect it to be a major impediment to home ownership.

This may be viewed as ensuring home buyers are more qualified. My opinion is that it will mean fewer home buyers at a time when home sales are already dropping.

FHA risked based premiums are held off for 1 year. These new premiums went into effect on July 14. I guess the risked based premiums will be in effect until October 1, when the newly enacted provisions of the Housing Bill are scheduled to go into effect.

There are many other provisions of the Housing Bill that will have significant and long term impact. As is stands now, there are probably more questions than answers as to what the impact will be. It will be iinteresting to see how the downpayment assistance companies respond.

FHA Reverse Mortgage (HECM) loan limits to be increased to the conventional loan limit for a single family residence.

More to come.

If any of these points are incorrect, please post a comment. This is how I understand these FHA changes, as described in several sources.

Some more specific provisions of the bill are outlined here from Reuters News.

Richard Smith
American Acceptance Mortgage, Inc
Toll Free 888-474-9920 Cell 423-280-0345
Home financing in Tennessee, Georgia, and Alabama.
Experience matters when it is your home loan.

FHA, VA, Rural Development, Reverse Mortgages, Construction Permanent, Renovation,
FHA Renovation, Mortgage Modification and Loss Mitigation

Mortgage lending offices located in Chattanooga, TN
rsmith@aamonline.com

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For the last several years First Things First has sponsored a family friendly open movie show in Coolidge Park. The intent is to provide free, good quality entertainment for families. Shows start at dusk and have been very successful.

It is a terrific combination with grounds at Coolidge Park and the extra fun of a family film.

First Things First is a non profit organization whose goal is to strengthen families. They provide education, programming, and counseling. The programming is well respected and received in Chattanooga. The organization is just one fine example of local community initiative that help make Chattanooga such a great city.

Most of the classes and resources are provided free to participants.

photo by Ron Logan, from Spotted, Times Free Press

Richard Smith
Home financing in Tennessee, Georgia, and Alabama.
Experience matters when it is your home loan.

One of the books I am going though is Scott Thorpe's "How to think like Einstein." Candis Hidalgo had a similar post recently about Thomas Edison.  The general idea is to appreciate and search out ideas that are out of the box.

The wilder the idea the better. Unrelated. Funny, Impossible.

One of the chapter quotes is actually from Robert Oppenheimer, but effectively conveys this aspect of the thesis.

" We need to hear some new, wilder ideas about this problem."

At issue is how to solve the unsolvable. A first step is to rework the question, removing prejudices that are inherent in logical, established approaches to the failed set of solutions.

Problems that can be solved with traditional approaches do not require thinking like Einstein.

One of the best recommendations, that I hope to make a habit is to have an idea notebook. Every idea that is encountered - absurd, illogical, random, fanciful - should be written down.

It may very well become the seed to a new solution. The book and the techniques it teaches seems a little uneven, but there are several jewels in it to spark the imagination.

Richard Smith
Home financing in Tennessee, Georgia, and Alabama.
Experience matters when it is your home loan.

Reuters just reported that two more banks were closed today. Neither close to the size of IndyMac Bank. This is 7 bank failures this year. The two banks that were closed were immediately sold to Mutual of Omaha bank.

The reported number of troubled banks, as of March 08, is 90. The Rueters article indicates that regulators are expecting additional insolvencies this year. The troubled bank list is expected to be updated next month.

If I am reading the report correctly, this is the most bank failures since 2002, and equals the total number of failures in the 4 years from 2004 to 2007 combined. Of course the failures are not even close to the totals in the early 90's when nearly a thousand banks failed in a 4 year period.

The two banks First National Bank of Nevada and First Heritage Bank NA of California were described as undercapitilized. Heritage was severely undercapitized. Both were in states hard hit by the mortgage lending crisis, although the Reuters article and various other news reports did not indicate that the insolvencies were specifically mortgage related.

Most certainly, the closings were planned well in advance for this immediate sale to Mutual of Omaha Bank to have already been negotiated and so quickly finalized.

I just wonder how many more troubled banks will be taken over. Are these problems caused by the mortgage crisis, or are these bank failures and the mortgage crisis the result of deeper economic problems?

Are these issues primarily regional?

Richard Smith
Home financing in Tennessee, Georgia, and Alabama.
Experience matters when it is your home loan.

Nightfall in Chattanooga is a summer series featuring a variety of musical acts. The series is sponsored by The Chattanooga Downtown Partnership. This is the 20th year of the series. The concerts are free, open to the public, and take place right in the middle of downtown Chattanooga at the BlueCross Stage at Miller Plaza.

http://downtownchattanooga.org/nightfall

This year so far I have only been able to attend last night, but the series continues through September. Even with the threat of rain last night the crowd was fairly large.

Events like Nightfall have made the downtown area in Chattanooga vibrant - a great place to work and to play.

Photo on the left, the crowd at Miller Plaza. Photo on the right, people enjoying Miller Park, just across from the concert festivities. 

Nightfall is one of the events that I mentioned in the Top 5 Places or Events in Chattanooge post.

Claire Lynch was the headliner last night. The Chattanooga.com has a good write up on the band.

Here is a playlist from Last.FM on the Claire Lynch band.