Bad News for Condo Buyers

Good thing first time buyers are getting that $8000 tax credit, because if you're a first time buyer looking at condos there is some bad news headed your way on April 1. Fannie Mae & Freddie Mac, the government sponsored entities that help keep mortgage rates low for borrowers with loans less than $417,000 (now about to rise to $729K in our area thanks to the stimulus bill), has announced higher fees and tougher credit score requirements. These extra fees are supposed to counter the higher risks and losses associated with certain loans.

Condo borrowers, in particular, have been singled out: unless you have a whopping 25% downpayment, you'll be hit with a three-quarter point add-on penalty regardless of your credit score. Buyers with a FICO score between 700 and 720 will pay an extra three-quarters of a point, too, whether on condos or not (a point = 1% of the loan amount). Below 700? Expect 1.5% in fees. Ouch.

All the more reason to look at FHA, which is less harsh about credit scores and requires just 3.5% down payment. But condo borrowers may still have a tough time: FHA does not mesh well with many condo buildings.

Stimulus Bill To Be Law: First Time Buyers Get $8000 Credit, Conforming Loan Limits Increase

The stimulus bill, having had its original House and Senate versions reconciled in Committee, is now on its way to President Obama's desk in time for his President's Day goal. I'm still wading through the Committee report text, but here is what I can see:

• Credit is $8000 (up from the House version of $7500 but down from the Senate's $15,000)
• Does not have to be repaid as long as you own the house for 36 months from the date of purchase and you purchased in 2009. If you sell before 3 years then you have to repay the entire thing.
  
• Applies to purchases from January 1 through December 1, 2009. (Note: I've seen some other reports saying 12/31, and others saying July or August, but from what I read in the Conference report posted online, it says 12/1) If you bought in 2009 you can elect to treat it as purchased on 12/31/2008 so you can claim it on your 2008 return.
  
• Is a refundable credit - so even if you don't owe $8000 in income taxes then you get the difference back (NB: This is an update from previous post)
• DC buyers cannot claim both this credit and the $5000 DC homebuyer credit.
• Unlike the previous $7500 credit, you can claim the credit even if your mortgage was financed by a mortgage revenue bond (like with VHDA loans) - check with your tax advisor!
• Limitations are similar to the previous $7,500 "credit" (interest free loan) in 2008: income restrictions start at $75,000 (single) and phase out completely at $95,000 or $150,000 (married filing joint) and phase out at $170,000, and have not owned a home in previous 3 years.
  

See page 19 of the Conference Report pdf file here for more.

Here's a handy chart of the old law versus the new law.


Move-up (non first time) buyers -- don't worry, there's something in the Bill for you, too...

There is another important change that hasn't been getting nearly as much press: the temporary reinstatement of the increased conforming loan limits for high cost areas. You may recall that our local Washington, DC, area's conforming loan limits rose from $417,000 to $729,750 last year, giving purchasers of higher end homes an important break on interest rates for loan limits up to that amount. At the end of 2008, the temporary limit expired and it dropped to $625,500. That means any loan above that amount fell into the "jumbo" category--making it very difficult and very expensive for borrowers in that bracket. This stimulus bill reinstates that $729,750, which should make it easier for folks to get these loans which now qualify for Fannie, Freddie (and possibly FHA...unclear at this time) guidelines, which translates to lower rates and greater availability.

Read more about conforming loan limits and how they work here.

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What Does the Fannie & Freddie Bailout Mean To Home Buyers?

Big news over the weekend and today is that the Federal government is 'bailing out' Fannie Mae and Freddie Mac, who lacked enough access to capital to keep the secondary mortgage market going. While buyers and sellers might initially think that this is bad news, it's actually good, as evidenced by the 300 point market rally at the opening bell today. The markets are glad that what was an 'implied' guarantee is now an explicit one and the markets like transparency.

This is critical to the mortgage industry: Freddie and Fannie buy mortgages that are originated by banks, then package those loans up, slaps a guarantee on them, and sell them to investors. This helps transform what would normally be a very illiquid and long-term investment (30 year mortgages) into a very liquid asset: mortgage-backed securities. This keeps access to capital for borrows high, and interest rates low. Both Fannie and Freddie were chartered by Congress for specifically this purpose.

Before you start slamming this as another taxpayer funded bailout, remember that Congress has control of both their charters and heavily regulates what they can buy and sell. Both companies, though publicly traded, have many restrictions on how they operate their businesses. (The government, for example, sets the conforming loan limit of $417,000, now $729,750 in our area, but due to drop back down to $625,000 at year end). If the governments wants the right to legislate how a publicly traded company--presumably accountable to shareholders--is going to operate, then it's only fair that when things get mucked up the government needs to help out.

In terms of rates, we should expect to see conforming/jumbo-conforming rates drop in the coming weeks by as much as a percentage point.

If you're on the fence about buying, this means the (possibly temporary) return of rates in the 5.5% range! For those of you who recently purchased, keep a close eye on rates -- if rates drop to a full percentage point below what you have, it may actually be worth it for you to refinance. Discuss this with your lender.

Housing Bill: Buyer Credits, Loan Limit Increases, FHA Changes

Breaking news on the latest version of the Housing Bill, now on a fast-track to a vote and onto the President’s Desk, where he has signaled he will sign it. The newest developments:

• Permanently increase the conforming loan and FHA loan limits (previously $417,000, and increased to $729,750 in the Washington, DC, area in 2008) to 115% of the median home value - $625,000 in our area, effective 1/1/09
• Increase the FHA down payment from 3% to 3.5%
• Provide a first time home buyer “credit” (really, more like an interest-free loan, to be repaid over 15 years by the buyer) of up to 10% of a home’s price, to a maximum of $7500. The refund is gradually reduced for single filers with AGI above $75K ($150 for joint). It applies to home buyers who purchased between April 9, 2008 and July 1, 2009.
• Bar down payment assistance programs like Nehemiah
• Allows the Treasury to offer Fannie and Freddie an unlimited line of credit over the next 18 months to serve as a ‘backstop’ and provide liquidity. The bill also creates a regulator for the two companies.
• Gives $4 billion in grants to states to buy and rehabilitate foreclosed homes
• Create an FHA program which will help strapped homeowners who are upside-down. The program will require lenders to write down loans to 90% of the appraised values and pay an FHA fee in exchange for an FHA guarantee. Lenders and FHA would then share in any future price appreciation.

Update 8/10/08: Here are some FAQs, including one important for our answer -- can a DC homebuyer claim both the DC credit as well as the non-interesting bearing loan ("credit")? Unfortunately, no.

What is the State of The Housing Market? (Multiple Choice)

What is the State of the Housing Market? Please choose the best answer.

A. Looks like the start of a recovery. NAR Q3 2007 Report indicates roughly half of US markets show an increase in median home prices.

B. About flat, plus or minus 1%...OFHEO reports Home Prices down 0.4% in Q3 2007

C. We have years of decline ahead of us…start keeping cash--strike that, better make it Euros--in your mattress, folks! Case Shiller reports “The Sky is Falling, The Sky is Falling!” (Ok, that wasn’t really a headline attributed to them, but that’s basically the message in all of their press releases…pick which ever press release you want.)

Ok, pencils down. You all get a gold star. No matter which one you choose, you're correct. Why? It comes down to the methodology.

The National Association of REALTORS® statistics captures the median value of home transactions that come from all of the Multiple Listing Services nationwide. They cover all home sales at all price points, and release data in a relatively timely manner.

OFHEO, the government agency that works with Fannie Mae and Freddie Mac, also releases its quarterly analyses. They cover 287 markets, but because they are primarily concerned with the conforming loan market, the track only resales that meet that criteria (until recently, loans under $417,000. See my post on Conforming Loan Limits.) It also includes refinancings, which arguably have more generous appraisals. FYI, OFHEO does typically include an attempt at reconciling their numbers to Case Shiller. Because CS is a privately owned index, the exact methodology is impossible to duplicate.)

Case-Shiller, which is probably the most widely quoted analysis, covers only 20 US markets BUT includes ALL price points and loan types—exotics, sub-prime, and limited documentation. Of course the 20 metro areas covered are very large ones, which typically have more expensive homes (anyone ever compare a 4BR colonial on an acre in North Arlington to a 4BR colonial on an acre in Cleveland?) It excludes 13 states completely and has limited information on 29 others—so incomplete or missing data from 42 states! It also weights transactions—a $700,000 home gets weighted twice as heavily in their index as a $350,000 home. But isn’t a 10% decline a 10% decline, regardless of the baseline? Apparently not.

Dramatic headlines sell papers--remember all the 2004-2005 headlines screaming Buy! Buy, Before You're Priced Out Forever! Doesn't sound like a great idea in hindsight, does it?) While I’m definitely not saying that those in the industry can’t spin stats better than a Maytag, I did find this little tidbit from the NAR pretty interesting:

“Another factor that rarely gets attention is that Dr. Shiller, a Yale professor, has a side business in Chicago. His index is used at the Chicago Mercantile Exchange for hedging housing futures values. The more hedging of bets that occur, the more profits go into Dr. Shiller’s bank account. And more hedging of the bets will take place if people believe there will be a crash in housing values. So naturally he has a financial incentive to “scare” the market.”

So what’s a buyer to do? Whom to believe? First, understand the methodology and if one matches up with your situation, pay closer attention to that one. Are you in one CS’s 20 markets and looking to use a no doc loan for a $600K home? CS may be the better measure for you. Are you looking to buy below $417,000? OFHEO may be a better report for you. Want the broadest measure possible? Use NAR. I find that with statistics, perception is reality, and no one calls a market bottom until it’s months behind us, and in the meantime, life goes on. If you’re buying a home, as opposed to an investment property, then do what's best for you, pick a time that works with your life, plan to stay there at least 3-5 years, and buy only what you can afford.

Read more: See my post from last year on Yes, the Market is Down 7% AND up 1%

Read more: from one of my favorite mortgage blogs on spin in the mortgage industry headlines: How Ignoring Adjectives Can Improve Your Understanding of Mortgages

Read more in the Carnival of Real Estate, which included this post. They make the extremely important observation that all real estate is local, so national trends don't mean very much in the first place! Read my posts making similar points here and here. This one is also interesting to look at the very different foreclosure stats, even from county to county, in our area.

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Conforming Loan Limit Increase

In conjunction with the stimulus package on its way to the President's Desk, a new conforming loan limit is on its way in our area. The final legislation effectively limits the increase to certain high cost areas including California, Boston, NY, and metro DC. In our area, the limit will be $562,500, up from $417,000, for the remainder of 2008 only.

The impact of this generally will mean lower rates, and perhaps easier refinancing, for loans between the old limit and the new one. However, the actual rate differential between this new "tier" and "original" conforming loans (still below $417K) remains to be seen; the rates likely won't be equal because of some market constraints. Namely, the temporary nature and limited geography means lower volume and lower trading liquidity, which equals lower demand for these types of securities. So will it help? Yes. Dramatically? We'll see.

Read more: Why Didn't the Fed Cut Impact Mortgage Rates More?

What's Going On With Increasing the Conforming Loan Limit?

Update 2/12/08: See my post with more recent information here.

Original Post:
The mortgage market is in a state of flux, with multiple proposals floating around Congress regarding a potential increase in the conforming loan limit. That limit, currently $417,000, is the congressionally mandated maximum loan size that Fannie Mae and Freddie Mac--the largest players in the secondary mortgage market--can purchase. That helps keep rates lower for buyers in that bracket because there's an active place for banks to sell those loans. However, as many of you know, in this area that amount doesn't always buy much. An increase in the limit would make higher priced properties more affordable because a new and liquid secondary market would exist. (Jumbo rates, i.e., loans for more than $417K, run about 1% higher than conforming, though all rates change all day, every day, according to market conditions.

So what's all this about raising the limit, and what are they raising it to?

Nancy Pelosi first published that the limit would increase to $625,000 as part of the stimulus package. Then immediately she clarified to say that the new limit would be $729,750, an a similar (but permanent) increase for FHA limits. The difference is that the higher limit would be restricted only to certain high cost areas. Rep. Barney Frank then later added that the limit would be the lesser of $729,500 or 125% of the median home price, and only until the end of 2008, but for FHA any changes would be permanent. (FYI, the median home price for Washington's MSA according to OFHEO is $438,000, meaning our new limit would be $547,500 under that proposal) Other variations of the bill are floating around, disputes are ensuing, and some in Congress are saying any change needs to be part of a GSE reform bill.

The bottom line is that nothing is final yet, just as with the entire stimulus bill.

In related news, there have been several Fed rate cuts this month; first a 75bp emergency cut, followed by another 50bp cut this week. For those playing rate roulette, this last cut actually caused rates to increase, though they are still lower than a year ago. Read about why Fed cuts don't directly impact mortgage rates in my blog post here.