Houston Realtor Highlights Proposed Legislation

With the ever changing housing and mortgage regulation, as industry professionals and concerned homebuyers and homeowners, we must be aware of laws that could considerably help or hamper our ability to either sustain our profession or sell or purchase a home. In a response to events over the last few years, HUD and the Treasury Department have put out some very alarming suggestions in their recent report titled

REFORMING AMERICA’S HOUSING FINANCE MARKET: A REPORT TO CONGRESS. My reflections on these proposed changes are not intended to criticize our government or spark a political debate. My opinions are only to alert homebuyers and homeowners to laws that could greatly impact their buying/selling ability under the proposed laws. The excerpts from the report are in italics.

To start on an optimistic note, I found the language below which I think most of the country would agree with. We have all seen the effect that very loose lending guidelines have had on our economy and the housing market. While I believe that this is vital language to include in financial reform, it is a policy or belief that should have always been implemented.

Stronger underwriting standards, including requiring lenders to verify ability to pay. Under rules to be prescribed by the CFPB, lenders will be required to make a reasonable and good faith determination that all borrowers have a reasonable ability to repay their mortgage, including by verifying a borrower’s income.

Since their formation, Fannie Mae and Freddie Mac have played a vital role in helping standardize loan guidelines and more importantly, providing better liquidity in the market by providing a secondary market to purchase loans. Until their policy change of accepting sub-prime loans, they were both very strong financial cornerstones of the housing industry. It seems as though while now posing a risk to taxpayers, the role both of them play in the market is still vital. Unfortunately, it seems as though they both will be closed down. While this is in an effort to shift lending to smaller, private institutions, this will drastically reduce the availability of capital in the market and reduce the borrowing power of the average consumer.

Fannie Mae and Freddie Mac strayed farthest from their core business in 2006 and 2007 – the very moment the housing market was extending credit to the riskiest borrowers and home prices were peaking. When home prices began to fall and adjustable-rate mortgages with low teaser rates reset to higher rates, the Alt-A mortgages that Fannie Mae and Freddie Mac had accumulated started to default at alarming rates.

The Administration will work with the Federal Housing Finance Agency (“FHFA”) to develop a plan to responsibly reduce the role of the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) in the mortgage market and, ultimately, wind down both institutions. We recommend FHFA employ a number of policy levers – including increased guarantee fee pricing, increased down payment requirements, and other measures – to bring private capital back into the mortgage market and reduce taxpayer risk.

This is probably one of the most restrictive sections of the proposal, an increase in the minimum down payment to 10%. This will have a significant effect on the economic recovery and the future of the housing market. Under conventional lending guidelines, the lowest down payment has always been 5%. By doubling this requirement, there is no doubt that this will mean less potential buyers will be able to achieve the American Dream of owning a home.

Increasing private capital ahead of Fannie Mae and Freddie Mac guarantees. In addition to increasing guarantee pricing, we will encourage Fannie Mae and Freddie Mac to pursue additional credit-loss protection from private insurers and other capital providers. We also support increasing the level of private capital ahead of Fannie Mae and Freddie Mac’s guarantees by requiring larger down payments by borrowers. Going forward, we support gradually increasing the level of required down payment so that any mortgages insured by Fannie Mae or Freddie Mac eventually have at least a ten percent down payment.

The language below would mean that the size of the loans these two institutions would be able to guarantee would be reduced which would either render homes in certain price ranges to be priced as “Jumbo” loans with higher interest rates and qualification guidelines or just make them unattainable completely.

Reducing conforming loan limits. The conforming loan limit is the maximum size of a loan that Fannie Mae and Freddie Mac are allowed to guarantee. In order to further scale back the enterprises’ share of the mortgage market, the Administration recommends that Congress allow the temporary increase in limits that was approved in 2008 to expire as scheduled on October 1, 2011 and revert to the limits established under HERA. We will work with Congress to determine appropriate conforming loan limits in the future, taking into account cost-of-living differences across the country. As a result of these reforms, larger loans for more expensive homes will once again be funded only through the private market.

Since its’ inception, the FHA has provided down payment loans to millions of qualified buyers and enabled them to purchase a home by slightly reducing the income and qualifications of conventional loans. FHA loans remain a vital crutch in the nations housing recovery and provide greater access to credit to many deserving citizens. The proposed legislation will not only reduce the maximum loan size but also raise the cost of FHA loans.

In addition to winding down Fannie Mae and Freddie Mac, FHA should return to its pre-crisis role as a targeted provider of mortgage credit access for low- and moderate-income Americans and first-time homebuyers. (Today, FHA’s market share is nearly 30 percent, compared to its historic role of between 10-15 percent.) As Fannie Mae and Freddie Mac’s presence in the market shrinks, the Administration will coordinate program changes at FHA to ensure that the private market – not FHA – picks up that new market share. To accomplish this objective, we recommend decreasing the maximum loan size that can qualify for FHA insurance – first by allowing the present increase in those limits to expire as scheduled on October 1, 2011, and then by reviewing whether those limits should be further decreased moving forward. As we begin to pursue increased pricing for guarantees at Fannie Mae and Freddie Mac, we will also increase the price of FHA mortgage insurance. We have already acted on this front, raising premiums two times since the beginning of this Administration. And we will put in place another 25 basis point increase in the annual mortgage insurance premium that is detailed in the President’s 2012 Budget. This will continue the ongoing effort to strengthen the capital reserve account of FHA, and put it in a better position to gradually shrink its market share.

In closing, let me reiterate that this is not meant to be a criticism of our government of their efforts for financial reform. My purpose was to bring awareness to some of the legislation I believe will hamper the economic and housing recovery. To read the proposed legislation in its entirety, please click here