There will be a vote on the housing bill this week-FHA mortgage loan financing might be forever impacted.  If you want to continue to use DPA-down payment assistance funding in it's current format, you NEED-MUST contact your congressman/woman today!

As Realtors, we know how the housing market works.  The progression of home sales within the housing market is dependent on first time home buyers starting the domino affect.  Their home purchases are the catalysts that allow people to sell their existing home and then move into a new property such as a larger home, condo or townhouse. In order to keep the housing market moving forward, we need to encourage homeownership at the beginning of the cycle.  Mortgage programs that are underwritten with greater flexibility regarding credit, income and down payment will create more homeowners. We need mortgage loan programs that allow you to buy a home with as little money down as possible.   

As recently as March of 2008, there were conventional loans that allowed for 100% financing such as the Home Possible, My Community, and 80/20 combination first and second mortgage programs. Declining property values coupled with high mortgage delinquencies in all real estate markets have all but eliminated investors for these types of high LTV loans.  In addition, due to large losses by private mortgage insurance companies (PMI) there is an unwillingness of mortgage insurers to insure these loans.  Hence these loan programs have either been eliminated or now require a down payment.  With Fannie Mae and Freddie Mac's current financial problems and the overall state of the mortgage markets, don't expect that they will be creating any new high loan to value zero down mortgage products anytime soon.

Herein lies the problem.  Most first time home buyers lack sufficient resources for the down payment and closing costs. They often have good credit and the ability to make a payment. Until they save enough money, they are left out the housing market.  FHA loans currently allow buyers to obtain down payment assistance (DPA) from a relative or from a qualified down payment assistance provider.  This means that buyers without enough current resources may be able to obtain enough funds to buy a home today. There are a number of approved down payment assistance providers-some of the largest names are Nehemiah, Genesis, and Ameridream.  In a nutshell, these non-profit organizations issue down payment assistance to a prospective home buyer and then collect funds from the seller of a home who has agreed to participate in this program at the time of closing.  The non-profit charities charge an administrative fee of between $300 and $500 to facilitate with the assistance of this funding. FHA sometimes refers to this arrangement as seller funded down payment-which they don't allow.  Although the funding is coming from a non-profit, the FHA perception is that it is actually from the seller, albeit indirectly.  The problem stems from losses.  According to FHA, they have experienced larger losses on portfolios of loans that were funded with DPA funds. 

In fact, FHA hopes to eliminate these programs altogether through the fast tracked housing bill going through congress now. Time is of the essence!  The senate version-which is the supported version-will eliminate DPA.  What would this mean?  Let me make this clear-if this bill passes fewer houses will be sold.  More qualified homeowners will remain as renters.  More homes will stay on the market and the real estate and mortgage crisis will get worse.  DPA funding offers a solution to our crisis by making homeownership possible.  If there are problems with the way things are being done within the current DPA program then let's work on modifying them.  Let's identify solutions-such as raising the minimum required credit score on DPA funded loans.  This would probably lower the defaults and match the underwriting to the risk.  Elimination or outright banning of DPA programs that are currently helping our ailing housing market is foolish.  As a Minnesota FHA mortgage broker who works in the market on a daily basis, I can tell you about clients who are good people who want to become homeowners.  Their shot at owning a home depends on these programs.  Get involved and learn more.  The consequences of making the wrong decision about the fate of DPA’s will affect our entire economy.

Unless you are in the mortgage industry, you probably haven't heard about the Mortgage Insurance Industry is experiencing HUGE losses.  Public company MGIC Investment Corp-symbol MTG just announced today that they lost 1.5 BILLION DOLLARS LAST QUARTER ALONE.  PMI Group-symbol PMI and Radian Group Inc-RDN might be next.  They haven't announced their earnings yet.  Since they are all in the same business it might be a logical inference to assume they will be announcing less than positive news.

What PMI did do this week is send out a letter to mortgage broker clients like myself with a guideline change effective for March 1st.  Basically, they are not going to be insuring the all the same loan programs at the higher loan to value 100% limit that they once did.  They are also raising their cost of insurance.  What does this mean to a consumer?  YOU need to buy now before the programs change. Most companies will allow you to close on an older approved program at the lesser cost mortgage insurance, as long as you are approved with a mortgage certificate by a certain date.  PMI told me when I called them that I needed to have my client's mortgage insurance certificate in hand by March 1st.  Some area of the country are also being designated as declining areas, this too is a reason the insurance companies are stopping to provide insurance for high loan to value loans.  If you are a first time buyer-it's time to take action.

The higher cost of MI and greater down payment requirements are defensive measures put in place because of all the foreclosures and defaults in mortgage loans.  I can't blame the mortgage insurance companies, in fact I commend them for being proactive and protecting their business.  At the same time, if you are a buyer who needs the maximum amount of financing-such as 100%-you might not be able to get it.  Not all programs are affected by this change and not all mortgage insurance companies have changed their guidelines-YET.  The window of opportunity is here and now.  This lack of liquidity will remove more potential buyers from the real estate marketplace and make the inventory of unsold homes that much worse.  That in turn will put more pricing pressure on the existing inventory of homes.  What a viscous cycle. 

We have been in this business since 1986.  We've seen something similar in the real estate and mortgage markets back in 1989-1991 during the Resolution Trust days and the first Gulf War.  This time it seems a little more severe in nature.  If you are contemplating buying, NOW really is the time to buy, especially if you need underwriting flexibility or a low down payment program.  Visit my Minnesota real estate site to begin an online search for a new home.