FHA Reform…Think This Will Affect Boulder Real Estate Mortgages?

Here’s some key Boulder real estate info passed along to me by Nora Ziel at Cherry Creek Mortgage about Higher Mortgage Limits and Down Payments. We’ll see how this affects our local market…

There is much going on in Washington to reform the FHA and bring it into more modern times.  Yesterday the House passed FHA reform legislation that looks to be good news for us.  The Senate Banking Committee also passed their version.  To follow is a little color on the Senate Bill which comes from our friends at America’s Mortgage Coop (AMC).  In a nutshell it looks like we’re going to get higher loan amounts and lower downpayments…

The Senate Banking Committee passed by a vote of 21-1 the FHA modernization legislation.  Senator Dole was the only “no” vote largely in principle over the way FHA is implementing risk-based pricing (administratively without Congressional authorization).  The near unanimous vote virtually guarantees full Senate passage of the bill.  It will then go to conference to reconcile differences with the House bill that was passed yesterday.

The speed with which the bill moved through the Committee demonstrates the political significance of the FHA program in today’s marketplace.  Accordingly, we expect the next steps to move equally fast and it is now likely that there will be an FHA bill ready for the President’s signature in less than 30 days.  We believe that it would be prudent to start planning for these changes.

The key provisions of the Senate bill are:

·        Mortgage limits

The Senate bill will increase the FHA limits as follows:

FHA “floor” – increases from 48% to 65% of the GSE limit (i.e. from $200,160 to $271,050)

The House bill contains the same language virtually ensuring its inclusion in the final bill.  The new “floor” will likely be effective upon signature by the President.

FHA “ceiling” will increase to $417,000

The House bill raised the FHA limit to around $730,000 in high cost areas.  At a minimum therefore, the increase to $417,000 is a certainty assuming the bill passes.  An increase above $417,000 will likely depend on market events.

This provision will likely not be effective immediately.  FHA will need to analyze local markets to determine whether an increase is justified.  We do believe that FHA will move to increase limits ASAP.

·        Lower and more flexible downpayment

The Senate passed the compromise provision that  will require 1.5% borrower cash investment.  There will be a cap of 100% loan-to value ratio.  However, the upfront MIP will  be required to be included in the 100% LTV effectively capping the loan amount at 98.5% assuming an upfront MIP of 1.5%.  At first glance, our thoughts on this provision are:

The House bill still contains the zero downpayment provision.  In this market environment, we believe it will be difficult to include the  no downpayment proposal in any legislation.  We believe the Senate provision will be the more likely scenario. However, lowering of the cash investment requirement is possible but unlikely.

·        No mention of risk-based pricing

There was no mention of risk-based pricing in the bill.  However it will permit a maximum upfront premium of 3% instead of 2.25%.  There will be no increase in the annual premium.  In light of HUD’s preemptive administrative action earlier this week to implement risk based pricing on January 1, 2008, it will be curious to see how this issue unfolds in the coming weeks and months.  In the limited discussion this morning, risk based pricing  was the one issue in which both Republicans and Chairman Dodd expressed concern at FHA’s actions and want FHA to explain what they are planning to do with this change.

·        Condominium improvements

The bill will facilitate the acceptance of Fannie Mae and Freddie Mac approved condominium projects.

There will several amendments accepted unanimously.  They were: 1) much stiffer penalties to fraud (the draft called for 35 years in prison and $5 million in fines), 2) pre-purchase counseling demonstration, 3) expanding counseling to borrowers in trouble and 4) study on reverse mortgages.

·        HECM

There were several HECM improvements.  They are: 1) raising mortgage amount to $417,000, 2) eliminating the cap on volume, 3) permitting use of HECMs for purchase transactions and cooperatives and 4) lowering of the origination fee to 1.5%

What is next and when will the bill be enacted?

As we indicated earlier this week, Senate was/is/will be the key to the enactment of the FHA legislation.  Now that the Senate Banking Committee has moved affirmatively in a very bipartisan way, we are increasingly optimistic about the prospects for an FHA bill.  We would expect the process to be completed and signed by the President in the next 30 days or so barring some unforeseen circumstance.

That being said, there is still the Conference of House and Senate Committee leaders  to reconcile differences in the two bills and there are several thorny issues.  Probably the most controversial are two House proposals.  They are: 1) creation of a housing trust from a portion of the FHA profits and 2) raising the FHA limits in high cost areas above $417,000.

As we have said before, because of the nature of Senate rules (i.e. minority has considerable power), we would expect most controversial provisions to be resolved along the lines of the Senate bill although changes are possible.  However, House Financial Services Chairman Frank is deeply committed to the housing trust found.  Republicans are vehemently opposed to it.  I cannot imagine that a disagreement over this provision will hold up a bill but we’ll have to see.  The other is mortgage limits in high cost areas.  As we noted, the House proposes to raise them to as high  as $730,000.  While the Senate Republicans will oppose such a provision, events in the mortgage industry could result in some type of compromise.

We will, of course, follow this process through the remaining steps that hopefully will end at a bill signing ceremony by the President.  While there are still some issues to be resolved, we do believe that it is appropriate to start planning for implementation of major changes to the FHA program including higher mortgage limits and changes to the downpayment calculation.
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… AND, you can FOLLOW THE LINKS I have for you on the right side of this page to find some great information. Please see my video tour section, to see tours of Boulder real estate for sale, business profiles, neighborhood profiles, and new development profiles. I want you to find exactly what you want, and get all the info you need. Call or email me now to get straight answers, and start the process of finding the perfect solution to your real estate needs.
-Zachary Epps, full-time professional Realtor® and EcoBroker®

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