Realtors are up in arms over a plan by Fannie Mae to more than double its charges for some high-risk loans. Read the rest of this entry »

Happy New Year to first-time buyers! Now, unless you have perfect credit and a solid application, get your butt to a housing counselor. In 2009, Fannie Mae will require counseling for first timers using non-traditional credit to qualify or getting a MyCommunityMortgage loan. You already have to undergo pre-purchase counseling and landlord training if you want to buy multi-family property (like a duplex or four-plex) with a MyCommunityMortgage loan.

Only  independent and certified third-party agencies or counselors are accepted, and your education will include budgeting and credit, choosing a home, and obtaining a mortgage. Homebuyers receive custom assessments of their financial positions aincluding their readiness for homeownership, and an analysis of their finances and credit history. Click HERE to find a list of accredited counselors.

Most mortgage borrowers know that underwriters look at their debt-to-income ratios when determining how much home they qualify to buy. But most don’t know that Fannie Mae and Freddie Mac give them “extra credit” for any non-taxable income they receive. According to Fannie Mae and Freddie Mac underwriting guidelines,this income can be “grossed up” or increased by 25%. Because it’s not taxable it’s worth more to you–and more to your underwriter. So whether it’s a government pension, interest on muni bonds, Social Security, child support, or whatever–make sure you tell your loan officer that the income is tax-free. And be prepared to supply documents proving it. You might find yourself able to afford more than you thought.

There’s an old saying that it’s an ill wind that blows nobody any good. It applied this week, as the whirlwinds on Wall Street had an unexpected benefit for mortgage shoppers.

• Insurance giant AIG became the latest addition to the string of financial failures, the taxpayer cost of which is rapidly rising
• Leading economic indicators declined by more than expected in August
• Along with a slowing economy, inflation also backed off rapidly in August
• Lower inflation gave interest rates room to fall, so mortgage rates took another impressive step downward over the past week

While mortgage shoppers should not ignore the gathering economic and financial clouds, those lower mortgage rates should remain their primary focus.

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30-year mortgage rates fell sharply over the past week, extending a sustained move into more affordable territory. Two key factors were behind the change:

• The high-profile government bail-out of Freddie Mac and Fannie Mae increased lender confidence
• Interest rates in general have been falling, responding to easing inflation worries

Is this reason to be optimistic about the housing market? As always, optimism about housing should be tempered with a healthy dose of caution, but this does spell opportunity for certain buyers and home owners who want to refinance — especially those with strong credit histories.

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Speculation abounds about the government takeover of ailing mortgage giants Fannie Mae and Freddie Mac. Who wins and who is left hanging? Forbes.com offers a succinct analysis:

BAILED OUT!

The largest banks especially those like Bank of America with large mortgage lending capabilities, which may get to take over some of the Fannie and Freddie business.

Homeowners may be able to refi their existing Fannie or Freddie mortgages at lower rates and avoid foreclosure.

New home buyers who might obtain lower rates if the government chooses to inject more liquidity into the mortgage market.

Short sellers of Fannie and Freddie common stock–the companies’ shares slid more than 80 percent on Monday after the weekend’s announcement.

Holders of Fannie and Freddie debt, including foreign governments and central banks. They are more likely to be repaid now.

Homebuilders and home improvement companies if the bailout stabilizes the housing markets.

TWISTING IN THE WIND!

Fannie and Freddie’s stockholders who may lose their entire investment.

Taxpayers who will foot the bill for bailing out the companies and repaying their debts.

U.S. Treasury debt owners as prices have fallen because of an increased government debt burden.

Fannie and Freddie employees, facing even more uncertainty about their futures.

Lobbyists, who will lose Fannie and Freddie as clients.

Politicians and others who received financial and other backing from Fannie and Freddie.

The CEOs of Fannie and Freddie who are now unemployed and probably deserve it.

Commercial banks that hold Fannie and Freddie preferred shares.

Banks are famous for being willing to lend only when you don’t need it. Like the guy who hands you an umbrella when it’s nice and sunny–only to take it back at the first sign of rain–banks are unwilling to extend credit when it’s needed to restore economic stability. Why? Because the system is designed to reward behavior that is bad for society and punish conduct which is good.

For example, when money was cheap and pentiful, anyone who could fog a mirror was granted mortgage financing. Lenders couldn’t write loans fast enough, and the ones who wrote them fastest and loosest earned the most. Then, when economic conditions turned sour and money was most needed to restore order in financial markets, lenders took it all away and pulled back. Which made things worse and perpetuated the cycle. Because banks are businesses, and businesses owe a duty to their stockholders to make as much money as legally possible, current law reinforces this behavior.

So like it or not, government has to step in when the best decision for business isn’t the best for society. An article in the LA Times explains why we should care about the takeover of the two mortgage giants Fannie Mae and Freddie Mac. Experts predict that government control of Fannie and Freddie will ensure a certain level of liquidity in mortgage financing, keeping money available for those who should be granted mortgages and supporting the housing markets. Right now, banks and other mortgage lenders have no downside–when times are good they can lend early and often–and rashly. Then, when the bad loans come back to bite, taxpayers are asked to shoulder the losses. So a company doing its duty by its shareholders is pretty much obligated to exploit this loophole. It needs to be closed so that taxpayers can get out of the mortgage business.

The past week saw more symptoms that the mortgage crisis is likely to drag on: 

• Stocks in mortgage financers Fannie Mae and Freddie Mac took a tumble, as investors questioned their long-term viability
• The problems of Fannie Mae and Freddie Mac are already evident to mortgage borrowers in the form of higher fees, tougher approval standards, and higher interest rates
• Mortgage experts warned that the impact of so-called “liar loans” has yet to fully play out
• Not surprisingly, with these and other woes, mortgage application volume continued to slip

For prospective homebuyers, these symptoms of long-term consequences of the mortgage crisis signal that waiting for the storm to blow over may not be the best strategy.

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Mortgage news was dominated by two items this week:

• President George W. Bush signed the mortgage relief bill, designed to help troubled home owners stave off foreclosure
• A prominent home price index reported a 15.8% decline for the year ending May 31, 2008, the biggest year-over-year decline so far

On the surface, the first would seem to be a highlight, and the second a lowlight, of the week’s mortgage and housing news. Reading between the lines, though, reveals that the first item may not be as good as it’s been reported, but the second item may not be as bad.

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For once, “It’s a Great Time to Buy!” isn’t just a bunch of real estate industry hype. Remember, these people were crowing, “It’s a great time to buy!” right up to the moment the housing market crashed and proved that salespeople are not the best industry forecasters, duh. But current economic and market conditions are in fact creating an environment for buyers that may be extremely favorable but not long-lived.

Incentives created by the newly-signed housing bill HR 3221 are designed to provide a quick shot to the housing market and may not be around long. Effective immediately, there is a first-time buyer credit (which others not technically “first-time” buyers may qualify for as well) of $7500, but it expires July 1, 2009. Conforming, FHA, and VA loan limits, which were raised as part of the economic stimulus package, will drop in many areas, although the new law raises the limits somewhat higher than limits in place before the stimulus package passed.

In addition, interest rates have been inching up. While still relatively low, many economists feel that rates are far more likely to increase than decrease in the coming years. And while buyers can’t be absolutely certain that the housing market has completely bottomed out, most experts say that the only way you know prices have hit bottom is when they rebound–and at that point its too late to take advantage of it.

What today’s buyers can take advantage of are lower home prices, fairly low mortgage rates, tax relief, and higher loan limits (meaning lower prices and greater availability for financing). If you can afford it and home ownership makes sense, you may never find a better time than the present to make a solid investment.