****This article gives an overview of the situation****

Housing and Economic Recovery Act 2008

The Housing and Economic Recovery Act of 2008 was signed into law by the President on July 30, 2008.  This law has been hailed as the most important piece of housing related legislation in more than a generation.  The final draft became a hodge-podge of changes that covered so much.  Although the law contained much more information that I have provided you here, I wanted to give you some information on key components of the law that will affect you and your clients most.

As implementation is an issue with any new legislation, the industry is awaiting additional guidance from the appropriate agencies to clarify specific language and intention of some of the provisions.  The following are key components of the law.

Reform of the Government Sponsored Enterprises (GSEs aka Fannie Mae, Freddie Mac and Ginnie Mae): This provision created a new regulator similar to other bank regulators, it also established an affordable housing and capital magnet fund created through increased fees on all new loans.  It also raised the conforming loan limit to the higher of $417,000 or 115% of the local median home price, not to exceed $625,500 (effective January 1, 2009).

FHA Modernization: The bill provided a $25 million appropriation to improve technology, processes, program performance, eliminate fraud and provide appropriate staffing for FHA. On January 1, 2009, the FHA loan limit will change to the lesser of 115% of the local median home price or $625,500 with a minimum $271,050 floor.   FHA's proposal for risk-based premiums was tabled for 12 months which created a need for increased mortgage insurance premiums across the board.  We are still awaiting what the new increased amount will be.  The Energy Efficient Mortgage cap of $8,000 for improvements was replaced with a cap of 5% of the home value.  The also law increased the down payment requirement of FHA from 3.0% to 3.5% and prohibited the use of seller-funded down payment assistance after October 1, 2008.  (On July 30^th the House introduced a bill to amend the elimination of seller-funded down payment assistance programs through HR 6694.  No further information is available)

Establishment of a National Mortgage Licensing and Registration System: In order to increase uniformity, reduce regulatory burden, enhance consumer protection, and reduce fraud, the law, through the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators, encouraged states to establish a Nationwide Mortgage Licensing System and Registry for the residential mortgage industry.  It will also set up a national registry for personnel employed through federally chartered banks and financial institutions.

Temporary Authority of Treasury to offer credit to GSEs: The legislation authorized the Treasury Secretary to temporarily increase the GSEs' line of credit and if necessary buy equity in the GSEs in order to provide confidence to credit markets. 

Tax Incentives to First time Homebuyer:  The law allowed up to a $7500 refundable tax credit, based upon income, for first-time home buyers.  The term first-time homebuyer is defined as any individual having had no present ownership interest in a principal residence during the 3-year period ending on the date of the purchase of the principal residence.  To be eligible the buyer must purchase their home between April 9, 2008 and July 1, 2009 and the credit must be repaid to the government over 15 years or when the house is sold. Make sure you are advising your clients to speak with their tax advisor about these new guidelines.

Hope for Homeowners Program: The purpose of the HOPE for Homeowners Program was established...

*          To  create  an FHA program to insure refinanced loans for distressed borrowers

*          To allow homeowners the opportunity to avoid foreclosure by reducing the principle balance outstanding, and interest rate charged, on their mortgages

*          To provide servicers of delinquent mortgages with additional methods and approaches to avoid foreclosure.

To be eligible a borrower must demonstrate a lack of capacity to repay the existing mortgage by

1.  Certifying that they have not intentionally defaulted on the mortgage or any other debt, nor furnished material information known to be false for the purpose of obtaining any eligible mortgage.

2.  The borrower, as of March 31, 2008, must have had a current monthly income to housing debt ratio of at least 31% on the existing mortgage. 

3.  It is not a requirement that the borrower is currently in default.

To qualify for the new mortgage it must be determined...

1.  The amount that the borrower is reasonably able to pay in a monthly mortgage amount.

2.  That the new loan amount is not more than 90% of the current appraised value.

3.  One of the most important criteria is that the property must be the borrower's primary residence and the only real property of which they have any ownership interest.

To comply with the guidelines for the new loan...

1.  The current lenders (first and subordinate) must be willing to accept the new loan guaranteed by FHA as payment in full and must waive all prepayment penalties and fees. 

2.  The second lien holders must be willing to extinguish their debt and the maximum amount of new loan cannot exceed $550,440 on a 30 year fixed rate note.

To participate...

1.  The previous lender will be charged a 3% premium at time of insurance for the program which will be reduced from the amount refinanced and paid through the write-down of the previous loan. 

2.  The borrower will also pay a 1.5% annual insurance premium and subject to market rate and terms. 

3.  The borrower will also be subject to a 5 year phase-in for shared appreciation with HUD.  The appreciation that will be shared with HUD will run between 50-100% of appreciation of the home at time of sale or disposition of the property prorated over the first 5 years and remaining constant thereafter.

Implementation of Hope for Homeowners

The law will take effect October 1, 2008.  There has been no additional guidance given from HUD as to the logistical implementation of the program.  Additionally, there has been no discussion on the effect of the program on someone's credit profile and how it will be viewed in the future.  As I receive more information as to the specific protocol for participation I will update you with that instruction.

The overall law does contain provisions designed to stabilize an incredibly volatile and chaotic market from a global long-term perspective and although many consumers, industry participants, and others have openly questioned the negative ramifications of the legislation, we can only wait and see if the full affect of this law will truly help or hurt our real estate and mortgage market.