OK, so yesterday I finally finished my first reading of HR
3221. I always read a law at least twice, taking massive amounts of notes,
before creating a class to deliver the law in an understandable form to my
clients. This law is pretty wild, and yet it makes tons of sense. Below is a
basic breakdown of the changes. I anticipate a couple groups will use my
material to create their own summaries to sell you, so hopefully you get it
here for free first.
1.
First off, the Fannie Mae (FNMA)/Freddie Mac
(FHLMC) change is significant to everybody. Basically, the “Oversight” has gone
from OFHEO to a new board called the Federal Housing Finance Agency. That board
has some pretty high powered leadership. The director of the Agency will be
appointed by the President for a 5 year term. Meanwhile, the OFHEO head will
lead that group. Interestingly enough, that group will actually be responsible
for making a ton of quick changes, so if the leader does not get appointed
quickly then we have the same guy running the show for all of the initial
changes. This guy, James B. Lockhart III was appointed by George W. Bush,
hereby referred to as Dubbleya, in 2006. He will most likely be replaced with a
new appointment.
2.
The most significant thing about the change for
the GSE’s is that they will now have their money, their products, their u/w
engines, and everything they have strictly monitored. They can’t decide on CEO
compensation without approval by the FHFA. Their product will be regulated in a
way that it will be impossible for them to do certain types of loans again.
They will not have the ability to get outside of safe and sound practices. For
those of you who don’t know, they were the ones who were purchasing a great
amount of the Sub Prime and Non-traditional product. It is always annoying for
me to hear people refer to this problem as a “sub-prime” meltdown when Fannie
Mae and Freddie Mac blurred so much of their product on the secondary market.
3.
One fascinating tiny little line in the law
requires FNMA and FHLMC to “develop loan product and flexible underwriting
guidelines to facilitate a secondary market for mortgage on manufactured homes
for very low, low, and moderate-income families.” This is interesting because
loans on manufactured homes in any areas have typically underperformed when
compared to stick built single family homes. This will force them into a
product that performs worse than sub-prime. Interesting. In addition, they must
now create aggressive rural products for these markets. Let’s not forget though
that the Agencies were actually chartered to increase liquidity and the
availability of funds in underserved markets. If you ever have a chance, read
their original charter. It will blow you away to see how far away from that
they got…. Which leads me to loan limits.
4.
Loan limits will be increased in some markets.
The limits will go up in some markets. You would think that this would be the
easy part to understand because it is just numbers, but they phrase it in the
craziest way. From what I read the loan limits will still be adjusted as OFHEO
used to do (Study in October gives us the numbers for January) although they
put a floor in. It used to be that the Loan Limits could decrease. Now, they
cannot do that. They can either rise or stay the same. The current limit is
$417,000 for a single family home. In high cost markets you can now go up to
the lower of 150% of the limit or 115% of the median home price for the area. This
is good for FHA loans as well.
5.
There is a bit on affirmative action that is
brought into this bill. Bids need to go out evenly, and people need to be hired
evenly with a requirement of going to job fairs specifically built for minority
communities. I just found that to be interesting.
FHA Modernization
1.
The FHA changes seem to be pretty vast. The biggest
changes to FHA are the increase to the mortgage insurance premiums, the change
of down payment requirements from 3% to 3.5%, and the elimination of the down
payment assistance programs (DPA’s). It would take me roughly 17 seconds to
utilize statistics to show you why there was such a need to eliminate DPA’s. I
will blog later on that at www.brokerknowledge.com
2. A
new insurance company is being created to handle the Mortgage Insurance on FHA
loans. I am still looking into why this was and what the impact will be.
3. One
major change in the FHA world is a moratorium on risk based premiums. This is
weird because HUD was just given the right to factor MI off of credit score,
and now that right is being taken away.
HOPE Initiative
1.
The HOPE program is probably one of the more
fascinating programs I have seen in quite some time and it looks to be pretty
well thought out. The basic deal is
this… The program will be available to anybody who is on their way into foreclosure
on their only home. This isn’t for investors. This is just for people who
cannot afford their payments but would love to stay in their house through a
modification. The best way to understand this is to think of it like a
“Short-Refi” because it is very similar to a short sale. In a situation where a
borrower signs an affidavit promising they will go into foreclosure if they
receive no help. Then, they prove that they cannot pay their mortgage by
showing their tax returns or a transcript for the previous two years. If they
meet the debt ratio requirements which only take into account the borrowers
“Top” ratio (Just housing bills vs. income) then they may qualify for this
program. In the program a new appraisal is ordered. Then, the borrower refinances
into a new loan and the excess balance is waived. The MAX LTV is 90% which means some borrowers may be looking at an 80%
loan depending on how this all shakes out. Here are the hitches…
a.
The lender has to agree to waive their losses on
the current loan just to cut their losses and run.
b.
If the house is sold or refinanced down the road
for a profit the profit will be split and HUD will receive money. That will be
done according to a scale which gives HUD a 90% equity split if you sell within
12 months to a 50% after 5 years. Get this…. Everything I have read shows that
the split of equity will be between HUD and the borrower. This means the
original lender is left out in the dust. So, HUD takes little risk and gets the
greatest return. Awesome!
c.
The max loan amount for the HOPE program is 132%
of current FNMA/FHLMC loan limits.
2.
Analysis: I believe they did a fairly good job
making this program only appealing t o the borrower who really is just trying
to save their house. This program has been ratcheted down so that the investors
who just made bad decisions will not be able to take advantage of this
opportunity, and they have added special fraud detection measures in to ensure
it is done legitimately.
Tax incentives for first time homebuyers
1.
This is a piece that was added to the bill in
order to assist first time homebuyers in order to increase homeownership among
the renter community. In order to qualify for the $7,500 max incentive you must
not have owned a home in the past 3 years. Buyers will qualify for this tax
incentive if they buy a house between April 9, 2008 and July 1, 2009. This is
not a government gift program. This is a government loan that must be paid back
unless you die within about 15 years. Thus, the hard part. I spent some quality
time on the phone with my CPA who says this will be an enforcement nightmare. A
credit will be great, but the credit must be paid back each year for 15 years
or when the house is sold. So, she worries that borrowers won’t know to report
this each year and thus the money doesn’t get paid back. She also worries about
the burdens placed on CPA’s to ask even more questions to determine if the
borrower wants the credit for their purchase or if they have a cr5edit to pay
back. Interesting. I think there may be some room for me to offer a continuing
education class for CPA’s on this one.
SAFE Mortgage Licensing Act
1.
This one is my personal favorite, although there
is still plenty that needs to be worked out in a very short amount of time. The
licensing law will require the licensing and/or registration of all
originators. There is a clear difference created between federally regulated
banks and state regulated banks and brokers. Banks that are regulated federally
will not be required to have any education. State banks and brokers will be
required to be licensed, background checked, and educated. Here are the general
elements of Title 5:
a.
Loan originators who are required to be educated
will need 20 hours of entry level education and a 100 question test. The
education and test will be administered by the National Mortgage Licensing
System (NMLS). The interesting thing here is that there is currently no grandfathering.
The way the law is written everybody must take the test that is developed by
the NMLS, and must take classes approved by the NMLS. Being that no classes are
currently approved by the NMLS as of today all originators will need to go
through entry level education and testing. This will be particularly maddening
to loan originators in states that already have this type of education
requirement.
b.
State licensed loan originators will also need 8
hours of approved continuing education each year. For some states this will be
the first time the LO’s have ever received education. I believe this is a win
for everybody. Unfortunately, federally regulated institutions will still have
no education requirement.
c.
The background checks will be required so that
we can flush out the felons. A loan originator may not have a felony in the
last 7 years. If they do have a fraud or misrepresentation felony then they can
never work in the business again. The interesting thing is that if you have
ever had your license revoked in any state you will not be allowed to work again
as a loan originator. So the punishment for revocation is worse than a
non-fraud related felony.
2.
The NMLS has its work cut out for it this year.
Each state has just one year to implement their licensing. They need to get
their licensing and education laws through their respective legislatures. Many
changes must be made still to allow for this. If a state does not make the
necessary changes then HUD must force the licensing and education from a
federal level.
Overall Summary
Overall this is a fascinating law. I didn’t mention that
there are some energy efficient pieces to the legislation, some tax and funding
changes, some veteran changes, and more. It should be interesting to see how
quickly everybody is able to act to be compliant within the timeframes mandated
by congress. There is not much time to do quite a bit. It makes me wonder if
maybe RESPA reform goes to the back burner until HUD catches up with all of
these changes. State and federal governments seem to always have the same
problem, tons to do and no staff to or funding to do it. As if last year was
not interesting enough, it should be an action packed regulatory year. Stay
tuned…