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New Housing & Economic Recovery Act Provides New Market Stability

July 31, 2008 by  
Filed under Finance, National

The President signed into law the long-awaited Housing and Economic Recovery Act of 2008.  The housing bill is very broad and affects the GSEs (Fannie Mae and Freddie Mac) and FHA.  It makes permanent many of the changes put in place as part of the Economic Stimulus Act passed earlier this year, most importantly a permanent increase in conforming conventional and FHA loan limits.  It also provides tax incentives for first-time homebuyers, provides financial support for modernization of FHA, and has several provisions to strengthen and reform Fannie and Freddie.

Outlined below the key changes that will affect borrowers. Some of the provisions go into effect immediately, and others on October 1, 2008 or January 1, 2009.

Higher Loan Limits – Raises Fannie Mae and Freddie Mac and FHA single family loan limits on a permanent basis.  The bill sets the GSE loan limit for single family one-unit properties at the greater of $417,000 (with increased limits for other single family properties up to four units) of 115 percent of the local area median home price, as determined by HUD, up to a cap of 150 percent of the GSE limit of $417,000 for a one-unit property or $625,500 in high cost areas.   The new loan limits will go into effect on January 1, 2009 after the limits in the Economic Stimulus Act expire on December 31, 2008.  They will be lower than those set by the Economic Stimulus Act which used 125 percent of median, but they will still be significantly higher than the old limits in most areas, and they will be permanent.  For example, in King, Pierce, and Snohomish counties the new limits will be $522,100 under the new bill.  We will distribute the new maximum loan limits as soon as they are published.

Tax Incentives – Establishes a first-time homebuyer tax credit of up to $7,500.  The credit will be for home purchases from April 9, 2008 through June 30, 2009.  There are income limits of $75,000 for an individual qualifying as a first-time homebuyer (i.e., has not owned a home in the last three years) and $150,000 for a family.  The tax credit has to be repaid over 15 years, making it a tax-free loan.  We will provide more details on this in the near future.

FHA Changes – The bill includes several significant provisions related to FHA, beyond the higher loan limits mentioned above.

Cash Investment Requirement – The cash investment requirement for FHA transactions will be set at 3.5 percent.  While the exact timing is yet to be announced, it is expected that this will be effective very soon.

Seller-funded Down Payment Assistance – Down payment assistant programs involving sellers or third parties (e.g. Nehemiah) will no longer be accepted on FHA loans as of October 1, 2008.  (Borrowers must be approved on or before September 30).

Risk-based Pricing Moratorium – A moratorium on risk-based pricing based on FICO scores will be imposed for one year beginning on October 1, 2008.

FHA Modernization – Provides financial resources for modernizing and streamlining the FHA loan process.  Most notably, the bill gives FHA authority to streamline condominium approval.  This should make it much easier to provide FHA loans to purchasers of condo units.  Details on this will follow, so we don’t know anything yet.

FHA Rescue Plan (foreclosure relief) – Authorizes a new FHA “Home for Homeowners Program” to refinance existing borrowers into fixed rate FHA mortgage products.

VA Loan Limit will increase

GSE Regulatory Reform – The bill strengthens regulation of Fannie Mae and Freddie Mac through creation of a strong new regulator.

GSE Stabilization – Establishes several new powers and grants authority to stabilize the GSEs in the event of a financial crisis.

This is a very important piece of legislation for the housing market.  It will help stabilize and restore confidence in Fannie Mae and Freddie Mac.  It will also expand borrower access to mortgage credit at the most favorable price and terms through conforming conventional and FHA loans on a permanent basis.  And when FHA completes changes to its condominium eligibility requirements it should open up many more condo projects to FHA financing.

These provisions should help sell houses/condos again, and give us stable loan programs for borrowers.  FHA is gaining market share, and will provide more information as it rolls out.