Questions About the New Housing Bill (with Notes)

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The main interest of this blog is the Reverse Mortgage. The new Housing Bill covers many housing factors from finance to foreclosure; it also made significant changes to the Reverse Mortgage program. Below, within this timely article from The Arizona Republic, I have written some notes...Ok...extensive notes regarding the Reverse Mortgage. I hope you will find the whole article interesting and educating... both the original article and my notes. If you have questions or comments, please don't hesitate to make comments or email me at gloria.boone@gmail.com

Thanks....
Enjoy your weekend.
Gloria

August 29, 2008

5 questions about the new housing bill
By J. CRAIG ANDERSON The Arizona Republic

PHOENIX, Ariz. - The Housing and Economic Recovery Act of 2008, signed into law by President Bush on July 30, has sparked numerous debates over its mechanisms to assist struggling homeowners, future homebuyers and lending institutions.

However, some of the complex law’s nuances are poorly understood, and certain provisions have received only a passing mention in news reports.

In an effort to better explain the law, here are five key questions and answers:

Question: Why does the housing act offer unlimited credit to Fannie Mae and Freddie Mac?

Answer:

The law’s most far-reaching provision gives financial assistance to the government-sponsored Federal National Mortgage Association and Federal Home Loan Mortgage Association, which own or insure nearly half of the roughly $12 trillion in U.S. mortgage debt.

Fannie Mae and its younger brother Freddie Mac have suffered losses totaling about $11 billion in recent months, due in large part to their investments in financially risky sub-prime loans.

Both associations purchase loans from lenders and sell them as mortgage-backed securities to the global investment market.

The housing act allows the U.S. Treasury to offer Fannie Mae and Freddie Mac an unlimited line of credit until the end of 2009, and it can also buy their stock. The hope is that a federal guarantee will bring gun-shy investors back to the secondary market, which provides the funding for lenders to make future loans.

Q: Which homeowners are eligible for Federal Housing Administration refinancing of their existing mortgage loans?

Answer:

To qualify, a borrower must live in the home, cannot own any other property and must have a high mortgage debt-to-income ratio - most likely 31 percent or more, though there may be exceptions.

Applicants also must agree to forfeit no less than 50 percent of the home’s future appreciation. They lose even more - up to 100 percent - if they sell within one to five years.

FHA must consider the applicant’s debt-to-equity ratio, which means borrowers who are significantly upside-down would not likely qualify.

The borrower must provide tax returns for the past two years to prove adequate income and must not have any fraud convictions in the past 10 years.

Possibly the most significant hurdle is that lenders are not obligated to accept the refinancing plan. Also, there is a $300 billion limit on the cost of insuring all refinanced loans.

Q: What are the terms and conditions of the new $7,500 homebuyer tax credit created under the law?

Answer:

Most importantly, the tax credit is in the form of an interest-free loan and is not a gift or grant. The borrower must repay it within 15 years of purchasing the home. Only first-time homebuyers are eligible, and the tax break only applies to homes purchased between April 9, 2008, and July 1, 2009.

The tax credit’s full amount is only available to individual borrowers whose annual income is below $75,000 and couples with a combined income below $150,000.

Q: How does the new law affect reverse mortgages?

Answer:

The housing act will have a significant effect on the issuance of home equity conversion mortgages, also known as reverse mortgages.

Proponents of reverse mortgages, which allow homeowners age 62 or older to liquidate their home’s equity over time by deeding the home to a bank upon their death, say the law makes them safer and more accessible than in the past.

(Note: Homeowners, at no time, deed the house to the bank, unless at the end of the mortgage, the amount owed is greater than the value of the home. At that time, the bank takes ownership in one of several ways, and FHA pays the lender the loss-difference between their loan and what the house is sold for.

The bank does not lose money on the FHA insured loans, and since the Reverse Mortgage is a non-recourse loan, and neither the lender, nor FHA, has any access to the borrowers other assets. Neither the borrower or the heirs must pay the mortgage loss back to FHA or the bank. This is one of the major safeguards of the FHA insured home equity conversion loan (HECM), and one that gives so much safety and security to the borrower.

And, for some reason, it's very hard for people to believe that the title is not turned over to the bank at the time of the loan. It is not! The homeowner/borrower always keeps title to the home.

I believe the confusion is because many people, including writers, bloggers and reporters do not know the difference between a Deed, and a Deed of Trust. A Deed transfers ownership. There are many types of Deeds, such as grant deeds, gift deeds and quit-claim deeds.

A Deed of Trust transfers legal, not physical, ownership or warranties or the body of property rights, to a trustee, so the trustee can enforce repayment of the Loan Note through foreclosure.

When a foreclosure takes place, it is conducted by the trustee named in the Deed of Trust, not by the lender. The reverse mortgage borrower signs, essentially, the same deed of trust and note any homeowner signs when they borrow to purchase property. But this is not a deed transferring ownership to the bank.

The law requires reverse-mortgage borrowers to receive “adequate counseling” from a third party not associated with the lender, and it allows the government to create a new counseling program funded by mortgage insurance premiums.

(Note: The new counseling program is, essentially, a program to improve the quality of the counseling that has been mandatory since the inception of the government reverse-mortgage program, through more thorough training and testing of counselors. How this is to be done is under discussion now by regulators striving to put the requirements of the Housing Bill into effect.)

It also reduces possible conflicts of interest by forbidding reverse-mortgage loan originators from selling insurance, annuities or other financial products. They may not give or receive incentives from others to sell such products to reverse mortgage borrowers.

(While banks and savings and loan companies like to cross-sell products, reputable institutions have never required borrowers to purchase other products they sell in order to get reverse mortgages.

However, this is true that there have been independent brokers who have hooked up with the sellers of these other products, or brokers who have run, or had an interest in, insurance agencies, or investment companies so they could require the sale of additional financial instruments. This was more common when reverse mortgages were newer and less well understood.

Those lenders, obviously did this to earn even greater fees, and often at the expense of the borrowers. This has been well documented in many other public publications. However, all lenders were required by law to disclose all cross-selling facts to the borrowers. Unfortunately, there are those who don't serve their clients, just themselves.)

The law also places a $6,000 cap on origination fees, which will be adjusted periodically for inflation.

(It has also been suggested by many in the reverse-mortgage field, that the FHA also reduce their 2% upfront mortgage insurance fee, because up to this point there have been relatively few reverse mortgage loans that have needed the FHA to pay off the lender. That may change in the future with the current decline in housing prices vs the past reverse mortgages that were given based on higher home prices and equity. At the present time, I have read in various reports covering FHA insurance, the FHA fee account from reverse-mortgages carries a surplus, that looks mighty good to some regulators as a way to pay for services to homeowners, other than the reverse-mortgage homeowners.)

Note: One of the most important provisions in the Housing Bill (not mentioned in this article) is that it raises the lending limits on Reverse Mortgages for FHA insured loans. Currently, the loans caps are determined by county and vary from approximately $210,000 - $362,790. In light of today's home prices this has not been adequate for senior to really access their equity. The new Bill will have a national minimum cap of $417,000 to a maximum of $625,000 in high-cost areas. The regulators are working out how to determine high-cost areas, and to determine if there should be a tiered plan that would allow loans to step up to $625,000, depending on the economic cost ratios in given areas.

Q: What other provisions are included in the bill?

A: One provision that has received some attention is the elimination of seller-funded down payment assistance programs for FHA borrowers, which takes effect Oct. 1. The ban will virtually eliminate no-down-payment offers on new homes.

FHA officials have long requested the ban, saying loans issued with down payment assistance carry a default rate three times higher than that of traditional FHA loans.

The housing act also places a one-year moratorium on “risk-based” FHA loan insurance premiums, a program initiated in July to charge borrowers based on the likelihood of loan repayment.

It streamlines the process for issuing FHA-insured loans on condominiums, and reforms the FHA loan process for manufactured homes.

In addition, it authorizes a pilot program to generate alternative credit rating information for loan applicants with insufficient credit history.
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