Overview of Housing Reform Bill

The foreclosure-prevention measure, unveiled in March, was bolstered after Treasury Secretary Henry Paulson sought and received temporary authority, through Dec. 31, 2009, to lend money or buy the stock of Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac. The goal is to avert a collapse of the companies that buy or finance almost half of the $12 trillion of U.S. mortgages.

The treasury chief, who was the lead lobbyist for the White House, persuaded Bush to back off a threatened veto over a section of the legislation that provides $3.9 billion in grants to states to buy and repair foreclosed properties. Bush said he regarded it as a bailout of lenders.

The law also creates a tough regulator for Fannie Mae and Freddie Mac, the two government-sponsored enterprises.

Under the law, the Federal Housing Administration can now insure higher loan limits, up to $625,500 from $417,000 in high-cost areas. The law also raises the nation's debt limit to $10.6 trillion from $9.816 trillion to accommodate the Paulson plan.

A new FHA program, a unit of the U.S. Department of Housing and Urban Development, would insure up to $300 billion in refinanced 30-year fixed loans for about 400,000 borrowers struggling with their monthly payments after loan holders agree to cut their mortgage balance.

The measure would offer $15 billion in tax breaks, including provisions offering the equivalent of interest-free loans worth up to $7,500 for first-time homebuyers. States would be able to offer an additional $11 billion in mortgage revenue bonds to refinance subprime loans.

Regulatory Reform

  • A new independent agency, the Federal Housing Finance Agency (FHFA), will be established to replace the Office of Federal Housing Enterprise Oversight (OFHEO) and the Federal Housing Finance Board (FHFB). The FHFA will oversee Fannie Mae (FNMA) and Freddie Mac (FHLMC), and will regulate the Federal Home Loan Banks (FHLB).
  • As a part of FHFA’s oversight, Fannie Mae (FNMA) and Freddie Mac (FHLMC) must obtain approval on new products. However, FNMA and FHLMC will continue to modify their AUS approval engines, product terms, conditions, and underwriting criteria as necessary. FNMA and FHLMC will also have established goals to serve borrowers in need of affordable housing or financing for manufactured homes and properties in rural areas.
  • The Secretary of the Treasury was given authority to increase the existing lines of credit to FMNA, FHLMC and Federal Home Loan Banks. The Treasury has standby authority to buy FMNA and FHLMC stock to provide confidence in the GSEs and stabilize housing finance markets.

New Loan Limits

Under the Housing and Recovery Act of 2008, the maximum allowable loan limits were restructured for Conventional Conforming, FHA, and VA loans and will be effective for closings on or after January 1, 2009.

  • The maximum limits will be based on the annual housing price index using a calculation method similar to the approach used to under the Economic Stimulus Act. However, the percents used to derive the new limits will be slightly lower as noted in the table below.
  • It is expected that the high loan limits programs will have unique eligibility criteria that are yet to be determined. These eligibility criteria may or may not be the same as the criteria currently in place for the high loan limits programs allowed for by the Economic Stimulus Act expiring December 31, 2008.
  • Additionally, the pricing and delivery methods have not yet been determined for these programs.
  • As these details are finalized and announced, communication will be provided.

New Maximum Loan Limits will be established based on the method, effective January 1, 2009

Conforming

The greater of the conforming limit or 115% of the HUD median home price (not to exceed 150% of the conforming limit).

  • For example, for a 1-unit property, the maximum conforming loan limit is $417,000. However, if the 115% of the HUD median home sale price for the area is greater than $417,000, that amount can be used as long as it doesn’t exceed $625,500 (150% of $417,000)

FHA

FHA limits will be based on 115% of the HUD median home price. However, the FHA limit will not be lower than 65% or higher than 150% of the conforming limit.

  • FHA limits for an area will be 115% of the median home price with a floor of $271,050 (65% of $417,000) and a ceiling of $625,500 (150% of $417,000)

The mortgage amount cannot exceed 100 percent of the appraised value.

VA

The new VA guarantee for loans above $144,000 will be 25% of the new GSE loan limit base or 125% of the median home price (not to exceed 175% of the conforming limit).

Important Note: the Economic Stimulus Act was slightly more aggressive; using 125% of HUD median sales price or 175% of the conforming limit to derive the current Conforming Plus and FHA expanded loan limits. Any loan amounts greater than those allowable under the new legislation cannot close after December 31, 2008. As this date approaches, you will be sent detailed instruction for managing the pipeline.

 

FHA New Downpayment Requirements

Effective October 1, 2008 the following changes will take effect:

  • The minimum cash investment (or equivalent) for FHA loans will be increased to 3.5% (currently 3%)
  • The parameters under which non-profit entities can offer housing down payment assistance could impact seller funded assistance programs such as Nehemiah, AmeriDream, Genesis, etc. With the related FHA proposal still pending comment, a final ruling on this subject is not expected until October.
  • The required cash investment may be borrowed from a family member. Any lien for repayment must be subordinate and the total liens may not exceed 100% of the value of the property plus the appraisal, inspection and other fees.

System updates will be required and are under evaluation to ensure we are prepared with an automated solution.

FHA Risk-Based Premiums

A 12-month moratorium was issued for the new FHA risk-based MIP recently implemented by HUD, effective October 1, 2008 through September 30, 2009. This requires the return of FHA MIP to a flat premium structure for all LTV and credit score levels.

While the new flat premiums will be the same for all scenarios, we do anticipate they will be different than the previous flat premium structure. The new premiums have yet to be announced by HUD. Once their announcement is issued, you will be notified of the details as well as impact to pipeline (should there be any).

FHA “HOPE for Homeowners Program”

Hope for Homeowners is a new FHA program that allows at-risk borrowers to refinance their current loan to avoid foreclosure. While this program has yet to be finalized, the following provides a high level overview in the event you receive questions:

  • The new loan must be the lesser of 90% of the current value of the home or the amount the borrower can afford to pay (as determined by the current affordability requirements of FHA).
  • New loan must be a 30-year fixed rate mortgage.
  • The homeowner must provide evidence that they are unable to afford their current mortgage payments.
  • The borrowers would be required to share the equity and any appreciation equally with HUD upon sale or refinance of the home.
  • The borrower must certify that they have not intentionally defaulted on their mortgage and have not knowingly provided false information for the purpose of obtaining a mortgage.
  • As of March 1, 2008, the borrower’s debt to income must be greater than 31%.
  • The subject property must be the property’s primary residence and the only one in which they have an ownership interest.

It is important to understand that HUD must still establish the specific regulations for this program and follow the Administrative Procedure Act for implementation. This requires the proposed regulations be published with a comment period that must commence before finalization. This process will take time and is not anticipated before year’s end.