President Obama on Housing Affordability and Stability

After the largest spending bill was signed into law yesterday in Denver, President Obama turned his attention to his second major proposal, a $75 billion homeowner stability initiative. Included in this plan are:

1. A loan modification plan to reach 3 to 4 million homeowners with a shared effort with lenders to reduce interest payments coupled with incentives to servicers and borrowers. In addition, opportunities to refinance for 4 to 5 million homeowners and reducing monthly payments were also outlined.
2. New guidelines for loan modifications that focus on clarity, including an increased role for judicial modification of home mortgages during a bankruptcy.
3. Requires participation by financial stability plan participants
4. A focus on increasing confidence in FHA loan programs
5. A focus on local communities and help to renters

What is missing is a clear plan to increase capital for home purchase. What would you suggest to President Obama to increase homeownership opportunities aside from the $8,000 tax credit signed into law?

Comments

[Chris Chambers]

Brian,

The new $75B package from Fannie and Freddie is much needed because credit-worthy and responsible people cannot get a loan due to the twin forces of the tightest lending guidelines in 50 years (per the Federal Reserve Board) plus a dramatic drop in home values, which causes even more tightening of guidelines. Since Fan/Fred already own the mortgages (the loans are serviced by the banks), it does none of us any good for Fan/Fred to foreclose on these people, which is mostly caused by Fan/Fred's much tighter guidelines. Fan/Fred can modify their rates and get paid back monthly from the homeowner, rather than foreclose and lose, on average, 41% of the loan balance. It is a good business decision, in my opinion.

This action will allow people who are current on their mortgages to stay in their homes and stabilize neighborhood property values. Again, this is not for people who are bad credit risks. The only part of the package that I do not like is paying people $1000 per year for 5 years if they remain current on the newly modified rate (which can be a s low as 2%). That is the wrong message, in my opinion, because the modified rate and payments, plus the removal of a looming foreclosure for one's family, ought to be reason enough to stay current on your home's mortgage.

Re your question as to "what is needed to increase homeownership opportunities", I re-iterate what I wrote on my blog "Fix Housing First" earlier this month:

1. Bring back the less restrictive underwriting guidelines of pre-August 2007 for only Full Doc loans purchased by Fannie and Freddie. Such guidelines permitted investors to have 10 loans with FICOs of 660, 80% LTV, and pay 1.5 points to acquire 1-4 non-owner occupied units;

2. Remove loan pricing add-ons that have been added by Fannie and Freddie since August 2007 to make Full Doc loans too expensive and cost-prohibitive;

3. Provide funds to lenders to finance the Alt-A loans as they were originally intended, priced, and underwritten: for the self-employed borrower who presented 680 FICOs, 80% or less LTV, reserves of 6 months of PITI, no lates on mortgages, and was self-employed in the same business for 2+ years per a business license or CPA letter, either for owner-occupied or non-owner occupied loans;

4. Provide PMI companies the financial backing to underwrite and insure loans at 95% LTV, and especially condos, to buyers who want 30 yr fixed loans.

5. Revise the $8000 tax credit so that it a) applies to all buyers of a primary, second home, or investment property regardless of income or (1st time) homebuyer status; and b) is NOT refundable, which means if you do not pay income taxes before being eligible for the credit, you should not get the tax credit. I personally think that also sends the wrong message.

These items, more than lower rates, are needed, in my opinion.