Duplex Chick

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 I’m mad at President Bush. It isn’t the first time. But never before have I actually agreed with the guy and been mad at him.

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The United states Capitol building in Washington, DC.

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There’s reason for a bit of cautious optimism in Washington. On Tuesday, the House Financial Services Committee, which is chaired by Rep. Barney Frank, will review HR 6694. The bill would allow the Federal Housing Administration to continue to allow the use of seller-funded down-payment assistance on FHA-backed loans through non-profit agencies like Genesis, Ameridream and Nehemiah.

In a tough economy, few first time home buyers have saved the 3.5 percent required for a down payment in order to qualify for an FHA loan. First time home buyers will be the engine that leads the train of any housing recovery, so it would seem at this dark hour the prudent thing to do would be to give them not only a $7500 tax credit, but help in qualifying for the loan in the first place.

The department of Housing and Urban Development (HUD), argues that these programs artificially inflate home prices and ultimately increase the risk of the loan going into default. In 2007, the default rate for seller-funded loans was 28 percent; three times the rate of conventional FHA loans. As a result, these programs are presently scheduled to end on October 1, when the recently passed Housing Bill takes effect.

To compensate for the increased risk, HR 6694’s bi-partisan team of sponsors, Rep. Al Green [D- TX], Rep. Christopher Shays [R - CT], Rep. Maxine Waters [D- CA] and  Rep. Gary Miller [R- CA], drafted the bill to allow HUD to implement risk-based pricing on FHA insurance premiums. In other words, much like more conventional loans, the better your credit score down payment, the better your interest rate. If you have a lower credit score and little to no down payment, it would be reflected in a higher interest rate on the loan.

Two of Minnesota’s representatives sit on the committee; Rep. Michelle Bachmann [R] and Rep. Keith Ellison [D]. Be sure to write or call their offices and express your support for the bill. Believe it or not, they do listen. It is an election year after all.

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The Housing and Economic Recovery Act passed by Congress and signed into law by President Bush on Wednesday is a mixed bag for first time home and duplex buyers.

The most dramatic and immediate impact will be felt by those who needed to avail themselves to down payment assistance programs like Ameridream, Nehemiah and Futures. These programs allowed sellers to make contributions toward a buyer’s down payment, with that contribution folded into the buyer’s loan. Essentially, it was an FHA version of a no money down loan which helped millions of first time home buyers.

Why did Congress do this? Well, the thinking was since most of these transactions involved inflating the purchase price of the property by three percent, then obtaining financing in that revised amount, property values were artificially inflated. This, theoretically anyway, helped create the crisis we are in now.

On a personal note, this has not been my experience.

Most first time homeowners in the Twin Cities are uncomfortable buying a home or a duplex in which their payments are greater than the equivalent of a $150,000 mortgage. Three percent of $150,000 is $4500. Buying a $150,000 house for $154,500 isn’t the kind of grossly inflated pricing that has caused this crisis. Most appraisals fall in a range anyway, and an honest appraiser will be frank as to the property’s true value.

After October 1, 2008, no one with a financial interest in the sale of a property may contribute toward a down payment. It does not, however, prohibit buyers to receive assistance from other programs provided by nonprofit agencies or gifts from family members. In other words, until the smoke clears, no raising the purchase price by three percent for the down payment. The buyer will need to have that money saved.

However…

The new requirements for an FHA loan will raise the required down payment for all borrowers (FHA loans are available to all buyers, not just those purchasing a home for the first time) from three to 3.5 percent.

Historically, FHA loans have been capped at an amount roughly equivalent to the median home price of an area. The bill makes permanent the temporary FHA loan limits which were increased earlier in the crisis. These loan limits are the greater of $271,050 or 115 percent of the local median home price, which cannot be greater than $625,000. This should help more owners and buyers take advantage of FHA loans, which typically are easier to qualify for and at a lower interest rate than a jumbo loan.

A bit of good news in the bill is it contains a Homebuyer Tax Credit of $7500 which would be available for first time buyers who purchase a home between April 8, 2008 and June 20, 2009. This credit is repayable over 15 years.

Of course, the hope is that this helps stimulate the lower end of the market, the momentum of which would help pull the rest of the housing train forward.

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President George W Bush signed into the law The Housing Stimulus Bill yesterday. Within five minutes, I received countless emails and phone calls inquiring as to what it all means.

I’ll address as many as I can over the next several days.

First, will it end the foreclosure crisis this year? Probably not.

The program won’t take effect until October 1, though being a government endeavor, it’s likely it won’t be fully operational until next year. And, not everyone who’s in trouble is going to qualify for assistance. The program will help up to 400,000 troubled borrowers. Some economists feel millions of homeowners may in fact be at risk.

Eligible recipients must have spent 31 percent of their monthly income on their mortgages. The loan needs to have originated before January, 2008, and of course, the borrower still needs to have the income to qualify for the loan. And, the relief is limited only to properties that are the borrower’s primary residence.

The bill will also allow those who do to cancel their old mortgages and replace them with a 30-year-fixed-rate loan for as much as 90 percent of the property’s appraised value. The lender would have to agree to write down the amount of the loan to 85 percent of its current value. This loan, would in turn, be guaranteed by the FHA.

In exchange, the lender would get to share half of the home’s appreciation over time. So, if the property goes up in value $100,000 over the next few years, the bank would get half of that profit.

Of course, the decision as to whether or not to do the loan still remains with the bank.

For more comprehensive highlights of the housing bill, please see the National Association of Realtors synopsis.

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One of the biggest hurdles buyers face when considering a foreclosure property is the amount of repairs many require simply to be inhabitable. After making the down payment, where does the cash come from to replace the blown radiators or copper pipes, or even to simply paint?

It’s hard to believe, but the FHA is coming to the rescue with what has been christened a 203K Streamline Renovation loan.

Basically, the product is for owner-occupied 1-4 unit properties. It allows buyers to include and finance the cost of up to $35,000 in repairs right into their mortgage.

The loan is included in a single mortgage on the property, which can be for up to 110% of the value of the property after the repairs have been completed. For example, if a property is purchased for $100,000, and after repairs are made an appraiser feels it will be worth $120,000, the buyer can obtain financing for the repaired value.

What can be included? Almost anything: heating and cooling systems, plumbing, appliances, painting, kitchen remodels and a plethora of normal improvements one would make to a home.

Is it only for the neighborhoods where revitalization projects like City Living are an option? No. The loan can be used anywhere.

There are only a couple of restrictions to the loan. Basically, the improvements must begin within 30 days of closing, and be completed within six months.

The work must be performed by licensed contractors. The contractor is given one half of the money when the job begins, and the balance upon completion. The FHA wants to be sure the contractor is legitimate and isn’t going to run off with the funds without doing the work. Therefore, they do require the homeowner to use a contractor they’ve approved. Home Depot, Lowes and Sears are all nationally approved contractors.

These loans should help a lot in getting some of the foreclosure properties sold. So why isn’t everybody aware of and using them? Nobody knows  about them.

While others are working on it, to date, the only lender in the Twin Cities who offers the 203K Streamline Renovation loan is Wells Fargo.

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Back in the olden days — when gas was cheap and property went up in value…as long as 18 months ago…the federal government’s department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA) implemented “anti-flipping” rules to help stem fraud during the housing boom.

Under these rules, neither agency would insure mortgages on properties that had been owned by the seller for less than three months.

The purpose was to prevent people from using low-down payment FHA loans to buy foreclosures at incredibly low prices, then resell them within days for enormous profits.

According to Realty Times, the FHA is temporarily suspending its moratorium through June, 2009.

Of course, investors will still have to be able to qualify for the loan. But the resale buyer will not be prohibited from buying the property using an FHA loan simply because it sold within the previous 90 days.

Let’s hope this temporary reprieve helps absorb some of the excess foreclosure inventory. 

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A contract for deed is a type of owner financing. It usually requires the buyer to make payments over time, with interest on the unpaid balance; just like a bank. After the loan iis paid in full, the owner gives the buyer a deed to the property.

There are several advantages to buying property this way:

1. There are no loan origination fees, therefore closing costs are lower.

2. The purchase can close quickly.

3. The seller may accept a smaller down payment.

4. There is no limit to the number of properties that can be purchased this way.

5. The seller may be willing to accept a note from a buyer with a less than perfect credit score.

Of course, there are caveats too. The disadvantages of buying a property on a note include:

1. Typically a higher interest rate than a bank held mortgage

2. Shorter foreclosure period. The seller may begin foreclosure if you are 60 days behind in payments.

3. Sellers aren’t always familiar with a contract for deed, and may be reluctant to carry a note.

4. The buyer may face a balloon payment down the line.

Of course, it is crucial to do the numbers before you buy so you are certain you can cover the note in the event of any loss of revenue.

And it is always wise to seek the counsel of either a real estate attorney or Realtor who is familiar with the process before you buy.

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With each day’s basket full of negative, I’m increasingly convinced the banking industry doesn’t want any of us to buy property ever again. OK, so maybe it’s not quite that dramatic, but…

First it was the end of stated income programs. 

Then it was word that as of August 8, Freddie Mac will restrict lending for investors who own more than four properties.

And there’s the looming threat of the end of gift programs for seller down payments like Ameridream, Nehemiah and Genesis.

Regardless of market conditions, people will always need to buy and sell property. There are countless circumstances other than short sales or foreclosures that necessitate a sale. Perhaps a seller faces a job transfer, an addition to the family, a divorce, or has simply happened upon a better investment opportunity.

So how are those with less than perfect credit, who own five or more properties or work for themselves going to finance real estate?

My guess is we’ll see the re-emergence of the contract for deed, which is also known as a land contract.

With the impossibly low interest rates and readily available loans of recent years, this way of financing fell out of style. (Except in the case of farm land which is often difficult to obtain conventional financing for.) However, it was not an uncommon way to finance property in the late 1970’s, when interest rates hovered in the high teens and low 20s.

Quite simply, when a property is purchased on a contract for deed, the seller becomes the bank.

How does this benefit the seller?

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We’ve all read the headlines about real estate scams in the recent boom years resulting in many of the foreclosures in the marketplace today.

And, we’ve all heard about mortgage fraud.

The extent of the problem has become so vast that, according to Bloomberg News, the FBI has ordered many field offices to stop investigating other financial crimes so agents can spend their energies on the sub prime mortgage crisis.

The FBI considers 12 markets rife with fraud: Arizona, California, Florida, Georgia, Illinois, Indiana, Michigan, Minnesota, Nevada, New York, and Ohio.

We’ve all heard the big stories about this; how the woman who earned $24,000 got a stated income loan where she qualified for a house she could never afford. How buyers and appraisers artificially inflated prices to receive kickbacks at closing, then never made a payment…

But I have to say, sometimes even something that seems like an innocent and logical solution to a problem is considered mortgage fraud.

What do I mean?

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