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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Should I Refinance?

I'm getting a lot of questions lately about whether or not to refinance. I'm looking into it myself, actually, so thought I'd share some thoughts.

First, let's talk about rates and the elusive 4.5% that some government agencies announced, then recanted, as a 'target'. First, that rate may never get here. Second, it may have restrictions around it (like only available to purchases) if it does get here. Third, rates are bouncing really darn close to that number now. Note that the rate also applies only to the conforming limit (currently $417K). "Jumbo conforming" (loans between $417K and $625K) will be higher, and regular "jumbo" above $625K are higher still. (As an aside, if your current loan balance is near one of these breakpoints, you should think about paying the difference down to get into the 'better' loan category.)

So, personally, I'm right on the verge of pulling the trigger. A bird in hand, as they say. Best thing to do is calculate the break even number of months where your closing costs equal the savings in your monthly payment. If you're going to be in the new loan that number of months, then you should seriously think about locking in that savings.

Historically, a rule of thumb is that if rates are 1% lower than what you’re currently paying, you should at least look into it. Remember rates change several times each day, so don’t be surprised if you call one day and then the next day rates are back up again. The decision of whether refinancing makes sense for you -- even with a 1% drop in rates -- can get complicated very quickly given our recent market conditions though.

First thing to think about is the current market value of the home and your equity in it. That’s important because if you got a loan a few years ago, credit conditions have changed dramatically and you may not be happy with the loan options available to you right now, even if the rates are low. For example, if you have two trusts on your current home loan (popular a few years ago in order to avoid paying Private Mortgage Insurance) then that option is no longer available. Banks are requiring private mortgage insurance for anything higher than 80% Loan-To-Value (LTV) – in other words, unless you have 20% equity in your home, you will be required to get one loan and pay the PMI. Second trusts are no longer available in almost any situation. In fact, it’s rare to find a bank willing to lend more than 90% of the current market value of the home, which becomes an issue if your home has depreciated in value. So if you have two trusts it may not be as lucrative for you to refinance as you think, even with lower rates. Similarly, if the home has depreciated at all then you may run into issues as well because your LTV has changed and you will have to pony up some big cash to make up the difference in your "underwater" home.

Let’s take an example: Let’s say you bought a home at $400K with $20K down. Let’s say further that now it’s worth $390K. (The bank will require you to pay for a non-refundable appraisal, which costs about $350-400, to justify the current value of the home before you refinance. And the bank has to choose the appraiser, so don’t bother paying for one on your own and then shopping it around.) The bank may only be willing to lend 90% of that amount (depending on your credit and other factors), or $351K. But you only have $20K equity in the property and still owe $380K. That means in order to finance you have to come up with the difference of $380K-$351K = $29K PLUS your closing costs (similar to costs when you first purchased, and includes county fees, lender fees, title fees, etc.)

Even if your property hasn’t depreciated at all, but the bank’s new policy could very well be to lend no more than 90%, then you still can only borrow $400K * 90% = $360K, leaving you to still come up with $20K (= $380 you owe less the $360 the new bank is willing to lend) PLUS closing costs.

Finally, even if the property hasn’t depreciated, and even if the bank is still willing to lend you 95% of the value—in this example the entire $380K you owe—then your payment still may not be as low as you expect because now you’re required to have a single loan at 95% LTV which requires PMI (rather than your current two trusts at 80% + 15%).

Closing costs can generally be rolled into the loan amount if you have enough equity to meet the LTV requirements. But unfortunately a lot of people will have to come up with significant cash if they want to refinance. But if your property has held it’s value, and/or you have sizable equity in it, then it’s almost definitely worth it to re-fi. So the bottom line is that there are a lot of variables to determine whether or not it’s worth it to refinance. It’s best to talk to a lender to figure out your specific situation. Contact me if you want my recommendations on lenders I would (and do) personally use.

Closing costs, by the way, vary by lender and by settlement company, just like with a purchase. When a lender gives you a good faith estimate, you should focus first on the 800 section “Lender Fees” to see what they’re charging you, and compare that across lenders to find the best deal. Those fees are always negotiable. But banks need to make money too, so don't expect them to charge nothing. Also look at the settlement company fees in the 1100 section, also somewhat negotiable. You do NOT need to use the settlement company the bank recommends. Contact me if you want a recommendation on who I personally would use.

Paying Points: Whether or not to pay points to get a lower rate is a judgment call, and depends on how long you’re going to stay in the property. A point equals 1% of the loan amount. So you might get a quote for 5.125% (no points) and 4.875% (1 point). If you have a $380K loan then that means you pay $3800 at closing to get the 4.875%. So you just calculate the savings in payment, divided by the $3800, and that gives you the number of months you need to keep that loan in order to make it worthwhile to pay the point.

So as you can see there are a LOT of variables in the decision of whether or not to refinance, so the best advice I can give is to (1) have a realistic idea of what your home is worth and (2) talk to a lender. Even if you start down the re-fi road and one of these scenarios ends up being bad news for you, the worst case is that your out the $400ish for the appraisal and you keep your current loan.

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.

5% Down Payments Coming Back?

Just when you thought that FHA (which requires only 3% down) was the only way to get away with less than 10% down, it appears that Fannie Mae is changing its policy. Fannie had recently slapped a 'declining market' label on the entire Washington, DC, area, which had the effect of increasing the minimum down payment of 5% to 10% for most buyers. But according to the Wall Street Journal, as of June 1 that policy will end.

This is huge news for easing credit conditions for new buyers, many of whom have trouble getting together 10% plus the closing costs. FHA, which requires only 3% down, had seen a huge uptick in activity in recent months as a result. Where Fannie goes, Freddie is likely to follow, so look for improved credit conditions and more loan options in the near future.

FAQ: Mortgage Loans - Conforming, Jumbos, FHA, Jumbo Lights

Although I’m not a mortgage broker or lender, I get a lot of questions from my clients and in my first time homebuyer classes about interest rates, points, and fees. There’s a lot of confusion out there right now about what the conforming limits are, how FHA works, and what the stimulus package impact will be. The short answer is that we don’t have all the answers yet—the mortgage market changes by the minute. I always recommend to my clients that they choose a lender they trust and then stick with him/her (I’m happy to make a recommendation or two if you contact me.) An online mortgage calculator will never keep up with the pace of change and options (both coming and going) in today’s market. In my opinion they are nearly worthless if you're seriously thinking of buying a home (though if someone has found a good one, by all means, let me know!)

Here are some of the basics, including some basic economics on risk and reward (I admit these are over simplified, but I think will suffice to give buyers an idea.) You have to think of your mortgage as an investment product. Somewhere out there is an individual investor with a million dollars to invest; He can invest in the stock market, in gold, in CDs, are in mortgages, for example. The higher the risk he takes with his money, the more reward he will expect. These are some of the “flavors” of mortgages and rates:

• “Conforming” Loans. Until recently this meant ONLY loans less than $417,000 that met Fannie and Freddie underwriting guidelines. Fannie and Freddie are government sponsored entities that purchase loans from banks, package them up, and sell them off. Because the bank has a “guaranteed” buyer for your loan, it lowers their risk and hence lowers the interest rate (low risk for a bank = low reward for a bank.) Fannie and Freddie also slap their own guarantee on these products, so the people they sell them to are willing to earn a lower return because there is less risk. These loans have the most competitive rates. All Fannie and Freddie loans are subject to their underwriting guidelines, including their downpayment restrictions. Because both entities have slapped a "declining market" label on our area, downpayment requirements are higher now than they were a year ago to the tune of 5%. So if previously you were the quality of borrower that could have qualified for a 95% loan-to-value (that is 5% downpayment), this new label means that you now only get 90% (a 10% downpayment) if you want a Fannie- or Freddie- backed loan.
  
• “Jumbo” Loans. Loans that are above $417,000. They carry a higher rate because Fannie and Freddie are prohibited from buying them, and hence the risk to your bank is higher—they need to find a buyer out there, or they need to keep it in-house.
• “Jumbo light” or “jumbo conforming” Mortgages. These are new in 2008 as a result of the stimulus package. Fannie and Freddie are temporarily allowed to buy loans up to 125% of the median purchase price of an area. For the Washington, DC, area, that means $729,950. So this new layer represents a loan that meets Fannie and Freddie’s guidelines and is between $417K and $729,950. Rates on these loans are still in flux, but chances are that it will be somewhere between “conforming” and “jumbo.” Fannie and Freddie put some limitations on which ones they will buy though, so expect some hoops: at least 10% down, or 20% if your FICO score is less than 700, among others; Below 660 and you’re out of luck altogether. One thing the market (our individual investor out there) doesn’t like about this new layer is that it’s temporary, so he’s not sure what will happen to it in the future. Investors don’t like uncertainty, so even though there’s a theoretical “buyer” out there in Fannie and Freddie, he nonetheless wants a premium for it in the term of a higher rate of return.
• FHA Loans. Once the stepchild of the mortgage industry, it’s quickly coming back in favor because of its low down-payment (3%) requirement. FHA loans are guaranteed by the government, so risk to an investor is low. Low risk = low reward, or in other words, lower rates charged to borrowers. FHA until recently had a very low limit, so was not widely used in this area. But Congress recently approved an upper limit of $729,950 in our area (same as the “jumbo lights”). Similar to that scenario, rates on that mid-tier (between the old limit of $362K and the new limit of $729K) will likely carry a small premium over “regular” FHA loans below $362K. FHA comes with its own set of hoops to jump through; for example condos must be on the FHA approved list.

Again, I highly recommend speaking to a mortgage professional if you’re not sure which product is right for you – they all have advantages and disadvantages, and programs and guidelines are changing daily. In a future post I’ll try to touch more on FHA loans, the Nehemiah program (a roundabout way for a seller to “gift” your downpayment!), and the rates/points/fees tradeoffs (the best rate isn’t always the right answer!)

If you’re interested in learning more, I encourage you to attend my first time home buyer class. Details are here, and you can email me to register.

Are you ready to begin your home search? I’d be happy to speak with you about some of the advantages and disadvantages of loan programs and how they impact your negotiating ability in a transaction. Just drop me an email or call and we’ll set up some time to talk about your search.

Read more: Why Don't Fed Cuts Always Cause a Drop in Mortgage Rates?

Read more: What is Private Mortgage Insurance (PMI)?

Want to learn more or have more questions? Attend a free first time home buyer seminar that I teach.

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.